NH

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New Markets Tax Credits Revisited Origins and
Current Developments May 6, 2008 Herbert F.
Stevens, Esq. Gregory N. Doran,
Esq.

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NMTC
CDE

Youre a CDE
NMTC
CDE Certification Application
Allocation Application
Qualified Equity Investment
Application

• NMTC

NMTC
Community Development Entity
Qualified Low-Income Community Investment
(Substantially ALL)
Qualified Active Low-Income Community Business
Low-Income Community
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Program Overview

• Enacted on December 21, 2000
• Part of the Community Renewal Tax Relief Act of
  2000
• Creates a tax credit for qualified equity
  investments (QEIs) in Community Development
  Entities (CDEs)

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Process Overview

• Step 1 Entities apply to the Fund for CDE
  certification
• Step 2 Entities apply to the Fund for an NMTC
  allocation
• Step 3 The Fund competitively selects CDEs to
  receive NMTC allocations
• Step 4 CDEs use allocations to offer NMTCs to
  investors for cash
• Step 5 CDEs use proceeds to make Qualified
  Low- Income Community Investments (QLICIs)

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Amount of NMTC Investment Authority Available

• 2001 1.0 billion
• 2002 1.5 billion
• 2003 1.5 billion
• 2004 2.0 billion
• 2005 2.0 billion
• 2006 3.5 billion
• 2007 3.5 billion
• 2008 3.5 billion
• Total 18.5 billion (not including 1 billion
  GO Zone)
• Unallocated investment authority may be carried
  over from year to year until 2014.

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Credit Amount

• Equals 39 of amount of original investment
• Invest 100 and Receive 39 Tax Credit
• Credit taken over a 7-year period
• Credit rate
• 5 in each of the first 3 years
• 6 in each of the final 4 years

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CDEs

• Definition
• Community Development Entities (CDEs) must
• Have a primary mission of community development
• Maintain accountability to residents of
  low-income communities through their
  representation on any governing board or advisory
  board
• Be certified by the CDFI Fund
• Be a domestic corporation or partnership
  (including LLCs)

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Substantially All QEIs

• Qualified Equity Investment (QEI)
• Requirements
• Investment in a CDE
• Either stock or a capital interest
• Acquired at original issue solely in exchangefor
  cash
• Substantially all of such cash must be used to
  make Qualified Low-Income Community Investments
  (QLICIs) and
• CDE must designate the investment as a QEI and
  report it to the CDFI Fund.

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Substantially All QEIs

• Timing of Investment
• Investment must be made in the CDE within5 years
  of allocation of NMTCs.
• Once the CDE receives cash from an equity
  investment, it has 12 months to make a qualified
  low-income community investment (QLICI) with the
  equity.

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Substantially All QEIs

• Substantially All Test
• 85 of Qualified Equity Investments (QEIs),
  received by the CDE, must be invested in
  Qualified Active Low-Income Businesses (QALICBs)
  to be considered Qualified Low-Income Community
  Investments (QLICIs).
• Continuously invested

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QLICIs

• Qualified Low-Income Community Investment
• Any capital or equity investment in, or loan to,
  any QALICB in a Low-Income Community
• The purchase by a CDE (the NMTC CDE) from another
  CDE of any loan that is a QLICI
• Financial counseling and other services to (e.g.,
  advice regarding organization and operation) to
  businesses located in, and residents of,
  low-income communities and
• Any equity investment in, or loan to, any CDE
  (second CDE) by a CDE (primary CDE), to the
  extent the second CDE uses the proceeds in a
  certain manner.

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QALICBs

• Any corporation or partnership (including
  nonprofits) engaged in the active conduct of a
  qualified business that meets all 5 requirements
• Gross Income
• Tangible Property
• Services Performed
• Collectibles
• Nonqualified Financial Property

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QALICBs

• Qualified Businesses
• Rental real estate
• Cannot be IRC 168(e)(2)(A) residential rental
  property (building which derives 80 or more of
  gross rental income from dwelling units)
• Substantial Improvements must be located on
  property
• No lessee can be a country club, golf course,
  massage parlor, hot tub facility, suntan
  facility, racetrack or other gambling facility or
  liquor store

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QALICBs

• Qualified Businesses
• Excluded businesses
• A business which develops or holds intangibles
  for sale or license
• A business which operates a country club, golf
  course, massage parlor, hot tub facility, suntan
  facility, racetrack or other gambling facility or
  liquor store
• Certain farming businesses

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Low-Income Communities

• Low Income Communities are census tracts where
• Poverty rate exceeds 20 or
• Median income is below 80 of the greater of
• Statewide median income or
• Metropolitan area median income
• Targeted populations
• Census tracts with less than 2,000 people that is
  contiguous to a low-income community and within
  an empowerment zone
• High migration rural counties (use 85 instead of
  80)

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NMTC Structures
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ABC Community Development Fund Non-Leveraged -
Closing
NMTC Investor
Investor Member 99.99
QEI 10,000,000
ABC CDE, LLC
ABC Sponsor
Sponsor Fees 500,000 Loan Loss Reserve
500,000
Managing Member 0.01
9,000,000 Loan Interest 5.5 7 years
QALICB
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ABC Community Development Fund Non-Leveraged -
Compliance Period
NMTC Investor
3,900,000 Tax Credits
3,325,000 Cash Distributions
ABC CDE, LLC
Operating Expenses 140,000, or 20,000 per year
Interest Payments 3,465,000, or 495,000 per year
QALICB
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ABC Community Development Fund Non Leveraged -
Termination
NMTC Investor
9,500,000 Cash Distributions
ABC CDE, LLC
Release of Loan Loss Reserves 500,000
9,000,000 Principal Payment
QALICB
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ABC Community Development Fund Leveraged - Closing
Leverage Fund
NMTC Investor
Economic Lender
3,000,000 Equity Contribution Investor Member
99.99
7,000,000 Loan Interest 6.5 7 years
Investor Member 99.99
QEI 10,000,000
ABC CDE, LLC
ABC Sponsor
Managing Member 0.01
Sponsor Fees 500,000 Loan Loss Reserve
500,000
7,000,000 Loan (A Loan) Interest 6.5 7 years
2,000,000 Loan (B Loan) Interest 1 40 years
QALICB
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ABC Community Development Fund Leveraged -
Compliance Period
Leverage Fund
NMTC Investor
Economic Lender
3,900,000 Tax Credits
3,185,000 Interest Payments
3,185,000 Cash Distributions
ABC CDE, LLC
Operating Expenses 140,000, or 20,000 per year
Loan A Interest Payments 3,185,000, or 455,000
per year
140,000 Interest Payments (B Loan)
QALICB
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ABC Community Development Fund Leveraged -
Termination
Leverage Fund
NMTC Investor
Economic Lender
7,000,000 Payoff of Loan
300,000 Cash Distribution
7,300,000 Cash Distributions
ABC CDE, LLC
ABC Sponsor
2,000,000 B Loan 200,000 Cash Distribution
Release of Loan Loss Reserves 500,000
7,000,000 Payoff of A Loan
QALICB
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Recapture

• Time period for recapture
• Subject to recapture for 7 years after
  equityinvestment is made in CDE
• Amount of recapture is equal to the sum of
• NMTCs allowed for all prior taxable years and
• Interest at the IRS underpayment rate.
• This amount is referred to as the credit
  recapture amount.

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Recapture

• Recapture is triggered if
• CDE ceases to be a qualified CDE or
• Equity investment proceeds no longer satisfy the
  Substantially All requirement (i.e., less than
  85 are used for QLICIs) or
• Equity investment is redeemed or cashed out by
  CDE.
• These events are referred to as recapture
  events.

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Require Additional Information?

Herbert F. Stevens Gregory N. Doran Nixon Peabody
LLP 202-585-8266 gdoran_at_nixonpeabody.com
To ensure compliance with IRS requirements, we
inform you that any tax advice contained in this
communication is not intended or written to be
used, and cannot be used, for the purpose of (i)
avoiding penalties under the Internal Revenue
Code or (ii) promoting, marketing or
recommending to another party any transaction or
matter addressed herein.