How Credits Become Capital: When and How to Syndication

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How Credits Become Capital When and How to
Syndication

• Incentives for Historic Preservation in Seattle
  Conference
• Thursday, July 12
• Seattle, WA

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How Credits Become Capital When and How to
Syndicate
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What is Syndication?

• Syndication is the process by which the owner
  of a building brings an investor into the
  ownership structure of the building so that the
  investor can claim the credits (and other
  economic and tax benefits), typically in exchange
  for providing equity to the project.

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What is Syndication?

• Federal Historic Tax Credits are not sold
  directly to an investor.
• Investors become owners of the property as
  limited partners in a limited partnership or as
  members in a limited liability company.
• Some State Historic Tax Credits can be
  certificated and sold to investors.

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Single Entity Structure
End User
End User
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Master Lease/Credit Pass-ThroughLessee Claims
Credit
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Should the Owner/Developer Syndicate?

• Factors to Consider
• Does the Developer have limitations on claiming
  the credit for itself?
• Is the Developer a tax exempt entity or have
  insufficient taxable income to be able to use tax
  credits?
• Business Tax Credit Limitations (25K 75)
• Passive Activity Rules Apply

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Should the Owner/Developer Syndicate? Contd

• Factors to Consider
• Net Economic Benefits
• Equity raise versus lost cash and (sometimes)
  lost depreciation.
• Transaction Costs (both closing and on-going).

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Should the Owner/Developer Syndicate? Contd

• Factors to Consider
• Is additional equity needed during construction
  (i.e. prior to completion of the rehabilitation)?

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Should the Owner/Developer Syndicate? Contd

• Factors to Consider
• Control Are you willing to have a partner?
• Loss of control issues.
• Disclosure and Reporting.
• Unwind concerns.

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Finding Investors

• Does your bank or its CDC make HTC investments?
• Referral sources
• State Historic Preservation Office (SHPO)
• State and local preservation organizations
• Other developers
• Experienced accountants and lawyers

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Soliciting Investment Proposals Things
Investors Want to Know

• Proposed Budget and Timing
• Financing Commitments
• Property Acquisition Status
• Real Estate issues including title and
  environmental issues, zoning, parking and other
  permitting

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Soliciting Investment Proposals Things
Investors Want to Know contd

• Leasing Commitments/Market Study
• Part 1 and Part 2 Status
• Development Teamwho they are, their experience
  and financial capacity

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Key Syndication Business Issues Picking The
Best Offer

• Pricing
• Equity Pay-In Schedule
• Reserves
• Cash Flow, Fees, and other items that reduce the
  net economics to the developer

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Key Syndication Business Issues Picking The
Best Offer contd

• Exit Strategy (Put and Call Options)
• Guarantees
• Structure
• Due Diligence Requirements
• Experience/Reputation and Closing Process

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Successful Negotiation and Closing
Strengthening the Developers Position

• Reducing Risk of Recapture
• favorable debt terms
• high debt coverage ratio
• significant developer equity
• Leasing Commitments/tenant strength
• Guarantor Strength/Scope

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Successful Negotiation and Closing
Strengthening the Developers Position

• Reducing Construction Risk delayed pay in
• Team Coordination and due diligence follow
  through

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More Information?

• Andrew S. Potts, Esq.
• [phone] apotts_at_nixonpeabody.com
• David F. Schon, Esq.
• [phone] dschon_at_nixonpeabody.com

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