US Bancorp Community Development Corporation

1
US Bancorp Community Development Corporation

• Historic and New Markets Tax Credits for the
  Armory
• Investor Reflections
• (or lack thereof)
• Robert Wasserman
• Western, Southern and GO Zone Region Manager
• New Markets Tax Credit and Historic Tax Credit
  Investments
• [phone]
• robert.wasserman_at_usbank.com

2
USB CDC

• Created in mid 1990s
• Subsidiary of US Bancorp
• Primarily equity investors whose return is a
  stream of tax credits. Yields are computed in
  after-tax returns.
• Headquartered in St. Louis with offices in Los
  Angeles, KC and Denver
• Two divisions
• LIHTC (Low-Income Housing Tax Credits)
• New Markets Tax Credits (NMTC) and Historic Tax
  Credits (HTC)
• Mission-oriented All credit memos include a
  community impact section
• VOLUME
• Received 135mm in NMTC allocation in June 2006.
  All earmarked for or deployed in projects
• Over 140 NMTC transactions Average investment is
  6-20 million
• National investor outside of footprint
• Ability to do leveraged and non-leveraged
  transactions
• Over 2 billion in total development costs Deal
  size 5-60mm
• HTC Active, national investor with over 30
  investments in the past 2 years.
• LIHTC Footprint investor. Both a fund investor
  and direct investor Approximately 400 million in
  equity invested per annum.

3
Historic-NMTC Real Estate Transaction Investments

• Office
• Retail
• Mixed-use with Housing
• 20/80 Requirement
• Entertainment/Theater
• Hotel
• Community Facilities

4
Why would US Bank invest in the Armory?

• Mission Oriented
• Community Involvement and Commitment to Arts and
  Culture
• Invested in three historic theaters
• Portland Armory
• Atlas Theater, Washington DC
• Fox Theater, Spokane, Washington
• Currently evaluating two more historic theaters
• Broaden our involvement in the markets we serve
• Ability to serve our core banking business
• Profit
• All investors have return requirements and this
  was no different than any other deal
• However, our goal is to invest in projects that
  sink the subsidy into the project
• View our return in the form of tax credits, tax
  losses, cash return (priority return) and put
• Here we isolated each one of the benefits and
  analyzed the risk and the determined an amount of
  equity

5
NMTC requirements imposed on the Armory and the
CDE

• Recapture
• Redemption Test
• CDE cannot distribute investment capital to the
  Investment Fund or the Investor
• We pre-funded QEIs and if there was a
  construction bust, our money would have to be
  deployed into another project
• Receive reports from the CDE and annual testing
  by the accountants
• Substantially-all Test
• Up to 85 of the investment must deployed at all
  times after the first 12 months of the investment
  (and not including any re-investment situations)
• We pre-funded QEIs so we were needed to ensure
  that the money would be deployed within 12 months
• Risk Construction bust or delay
• Solution Find another project or sink the money
  into the project prematurely so long as the
  leveraged debt is in place
• Receive reports from the CDE and annual testing
  by the accountants
• CDE Status
• CDE is ultimately responsible for its status

6
Primary concerns for the Armory

• Structure and Risk
• Armory required flexibility
• Armory 1 HTC investment passed through the
  structure
• HTC bridged by USBCDC
• Armory 2 HTC Investment was outside of the
  structure
• Uncertain costs
• Mitigated by experienced developer, GC,
  guarantees
• Uncertain operations
• Mitigated by the team, reserves, guarantees
• Uncertain exit
• Dont account for the exit in our underwriting

7
Financial Analysis of the Armory

• NMTC Investment
• Minimal underwriting as the leveraged fund was
  guaranteed
• Hold out for 7 years in order to protect NMTC
  investment
• HTC Investment
• Significant economic risk
• Underwriting
• NOI analysis
• Evaluate theater market on high level
• Is there a captive sub-tenant? Theater, symphony,
  ballet, etc
• Protected leap of faith
• Staged pay-in
• Sizing of the debt
• Pledges, capital contributions, fundraising to
  buy down the debt over its term
• Guarantees
• Inability to underwrite brought about need for a
  strong guarantor
• Reserves established
• Tax opinion concerns

8
How the NMTC Works Funding the Project
LEVERAGE LENDER (USB CL) Provides loan
NMTC INVESTOR (USBCDC) Provides equity for TCs
INVESTMENT FUND To fund 10mm QEI
CDFI FUND (Dept of Treasury)
SUB-CDE 10mm Allocation (need to fund QEI)
CDE ALLOCATEE Receives NMTC Allocation
Sub-allocates
QALICB Project Entity
Not all structures are the same
9
How the NMTC Works Servicing the Loan(s)
LEVERAGE LENDER
NMTC INVESTOR Receives tax credits
INVESTMENT FUND
SUB-CDE
CDE ALLOCATEE
QALICB Project Entity
Not all structures are the same
10
How the NMTC Works Exit at end of 7 year
compliance period
LEVERAGE LENDER
NMTC INVESTOR
INVESTMENT FUND
SUB-CDE
CDE ALLOCATEE
Sinking Fund (USB Account)
QALICB Project Entity
Not all structures are the same