Integrating New Markets and Historic Tax Credits North Carolina Affordable Housing Conference September 16, 2010

Fundamentals of Federal Historic Tax Credits HTC program has been in existence over 20 years. Provides dollar for dollar federal income tax credit for rehabilitation of historic income producing properties (commercial, industrial, agricultural, or residential rental). National Park Service and State Historic Preservation Officer approve and monitor (i) qualification of building for HTC and (ii) development of and compliance with plans and specs for rehabilitation to ensure historic character is maintained. HTC is equal to 20% of “qualified rehabilitation expenditures.” Qualified rehabilitation expenditures must exceed the acquisition costs of the “Historic Building.” HTC is not competitive, but National Park Service must certify that building qualifies for credit and that rehabilitation was completed in accordance with approved plans and specs.

Fundamentals of Federal Historic Tax Credits (cont.) Building must be listed on the National Registry of Historic Places or be located in and add to the significance of a registered historic district. HTC is taken all at one time when the project is placed in service. Subject to recapture for 5 years. Less technical than LIHTC, but requires substantial interaction with National Park Service on Plans and Specs. As with LIHTCs, some states have state HTC programs, many of which “piggy- back” on Federal HTC programs. Allocation of HTCs among partners follows profits.

Historic Tax Credit Project – Single Tier Structure Diagram Developer General Partner .01% Services Cash Services Developer Fee Property Owner Cash 99.99% Interest (including 99.99% of HTCs Profits and Losses) Investor Lender(s) Property must be located in a qualifying area or be listed on National Register of Historic Places. (Part 1) Developer/GP work with National Park Service on satisfactory plans and specs for qualified rehabilitation of Historic Building. (Part 2) HTC based on 20% of qualified rehabilitation expenditures. HTC claimed on date project is placed in service. No significant future monitoring by National Park Service after building receives certification that rehabilitation was completed in accordance with agreed upon plans and specs. (Part 3) Five year compliance period during which Property Owner must remain owner of property and Investor must remain partner in Property Owner in order to avoid recapture. Tax basis in historic building is reduced by amount of HTC.

Historic Tax Credit Project – Lease Pass-Through Structure Diagram Developer General Partner 85% Interest Services Cash Services Developer Fee Cash & Services .01% Interest Property Owner / Landlord 15% Interest Cash Cash Rent 99.99% Interest (including 99.99% of HTCs, Profits and Losses) Master Tenant Investor Lender(s) Master Lease & “Pass-Through” of HTCs Rent Sub Tenants Substantially similar to single tier structure on technical points, with addition of Master Lease and Master Tenant between Investor and Property Owner. HTCs are allowed to be passed through to Master Tenant upon Property Owner/Landlord and Master Tenant making valid Pass-Through Election. Important to maintain integrity of Master Lease. No reduction in tax basis of historic building, instead Master Tenant must include HTC amount in annual income pro rata over term of lease.

Historic Tax Credit Project Structures Comparing Advantages and Disadvantages Single Tier Lease Pass-Through Advantages Simplicity – fewer entities, fewer documents required No mandatory basis reduction in property or HTC Investor’s partnership interest GP receives higher tax basis and depreciation with respect to property Minimizes HTC Investor’s participation in property owner’s cash flow Disadvantages Investor has potential to receive higher distributions of cash flow and losses Mandatory basis reduction of depreciable property and HTC Investor’s basis in partnership interest More complex, leading to higher transaction costs and higher on-going administrative costs Master Tenant recognizes income in amount of HTC via amortization over term of Master Lease (Note: this result may be attractive to some Investors)

Diagram of Combined LIHTC and HTC Project with Lease Pass-Through Structure Cash Services .01% Interest General Partner Developer Developer Fee Property Owner/ Landlord 10% Interest .01% Interest Cash Cash Master Lease and Pass- Through of HTCs Cash Rent LIHTC Investor 89.99% Interest (Including 99.99% Special allocation of Depreciation & LIHTCs) Master Tenant HTC Investor Cash (99.99% Interest Including 99.99% of HTCs) Lenders

Combined LIHTC and HTC Project with Lease Pass-Through Structure Comments LIHTC Investor holds 89.99% limited partner interest in Property Owner receiving 99.99% special allocation of depreciation on property. Lease Pass-Through Structure avoids reduction in basis of property and accordingly no reduction in LIHTC. Can dismantle HTC Structure at end of 5 year HTC compliance period. Can have different investors for LIHTCs and HTCs.

Fundamentals of New Market Tax Credits NMTC program has been in existence for almost 10 years. Provides dollar for dollar federal income tax credit for investments in community development entities (“CDEs”) that use substantially all the invested funds to make investments in qualifying low-income community businesses (“QALICBs”). QALICBs must be located in low-income communities designated by census tract. Certain businesses are excluded (e.g. residential rental activities, golf courses, country clubs, horse tracks and other gambling businesses, massage parlors, stores where principal business is sale of alcohol for consumption off-premises). The U.S. Treasury through the Community Development Financial Institutions Fund (“CDFI”) allocates to CDEs the dollar amounts on which NMTC can be claimed through highly competitive process.

Fundamentals of New Market Tax Credits (cont.) CDEs are domestic corporations, limited liability companies or partnerships certified by the CDFI. They must demonstrate a primary mission of servicing or providing investment capital for low-income communities and maintain accountability to residents of low-income communities (representation on governing or advisory boards). CDE must invest substantially all of the QEI in QALICBs through “Qualified Low-Income Community Investments” (“QLICIs”). Can be debt or equity (but not a “grant”). QLICIs must stay “invested” during 7 year compliance period to avoid recapture. NMTC = 39% of QEI taken over 7 years (5% first 3 years and 6% last 4 years). Requirements for qualification as QEI, CDE, QLICI and QALICB are very technical with primary burden on CDE.

Sample Structure New Markets Tax Credit Structure QEI triggers credit delivery period. Total NMTC = 39% of QEI delivered over 7 years. Loan A = Qualified Low Income Community Investment (QLICI) based on market rate interest. Interest-only with balloon payment at end of 7 year compliance period. Loan B = Also a QLICI. Typically has below market interest rate (e.g. 2%) and, provided all other requirements are met (e.g. debt service on Loan A and Loan B paid, no violations of NMTC requirements by QALICB), final payment generally reduced to fraction of principal outstanding (but QLICI must be characterized as “bona fide debt” versus a “grant”). Investor $10M Qualified Equity Investment (QEI) 100% Interest in CDE, NMTCs, Profits, Losses and Cash Flow Community Development Entity (CDE) Loan A Loan B $7M $3M Qualified Low Income Community Business (QALICB)

The Tax Credit Marketplace Federal North Carolina South Carolina Low Income Yes Refundable No Historic / Mill New Markets Renewable Energy Brownfields 12

Which Credits Work Well Together? Low Income and Historic Low Income and Renewable Energy New Markets and Historic New Markets and Renewable Energy 13

HTC Funding HTC Investor Managing Member: Project Lender NTCIC Investment Fund X, LLC Managing Member: NOLA Manager, LLC HTC HTC Equity Project Lender Local/Regional Bank Lessor (Landlord) NOLA Operating Co., LLC 89% Man. Member: NOLA Mgr, LLC 10% Member: NOLA Operating Co., LLC 1% Member: State HTC Investor, LLC Master Lease Master Tenant NOLA Operating Co., LLC 99.99% Man. Member: NTCIC IFX, LLC .01% Member: NOLA Manager, LLC HTC Lease Payment State HTC Investor LA State Credit Fund HTC Equity Developer Tenants

HTC & NMTC Funding Affiliated Developer Entity Leveraged Lender Local/Regional Bank Equity Repay SHTC Bridge Loan Repay HTC Bridge Loan HTC & NMTC Investor NTCIC Investment Fund X, LLC Equity Bridge Loans Constr./Perm Loans Project Investment Fund NOLA Investment Fund, LLC 100% Member: NTCIC IFX, LLC NMTC State HTC Investor LA State Credit Fund NMTC Equity HTC QEI NMTC QEI NMTC SHTC NTCIC Sub-CDE NTCIC Investment Fund X, LLC Second Sub-CDE NOLA Investment Fund III, LLC HTC Equity QLICI 1 QLICI 2 Master Lease Lessor (Landlord) NOLA Operating Co., LLC 89% Man. Member: NOLA Mgr, LLC 10% Member: NOLA Operating Co., LLC 1% Member: State HTC Investor, LLC Master Tenant NOLA Operating Co., LLC 100% Member: NTCIC IFX, LLC HTC SHTC Equity Lease Payment Managing Member: NOLA Manager, LLC HTC Equity Developer Tenants

Combining The Tax Credits Federal Historic Tax Credits: Total Qualified Costs: QREs $12 M Tax Credit Percentage 20% Federal Credits $2.4 M Federal Credit Price $1.00 Total Equity to Developer $2.4 M

Combining The Tax Credits New Markets Tax Credits: NTCIC CDE Allocation $ 11 M 2nd CDE Allocation $ 5 M Total QEI $ 16 M Tax Credit Percentage 39% New Markets Credits $6.24 M New Markets Credit Price $.70 NMTC Equity to Project $4.37 M

Combining The Tax Credits Total Tax Credit Investment: Federal Equity $2.40 M NMTC Equity $4.37 M TOTAL EQUITY $6.77 M

What Makes a Project Attractive to Investors Tell a good story Project Economics (low loan-to-value, strong debt service coverage ratios, pre-leasing) Minimize risk of something going wrong High level of Community Impact Job creation Grocery or other services Developer Experience Market (CRA)

Issues for Lenders with NMTC Lack of direct security interest Forbearance 7 years, interest-only Limited reserve accruals

Sponsor as Leveraged Lender Sponsor receives grants, pledges or other funds and loans them through the new markets structure Caveats Understand the restrictions on the money being enhanced Some grants only fund on a % of completion basis, Some grants/loans need to be secured by mortgage on property (AHP) Labor Intensive for Sponsor Set up new entity to act as QALICB Annual reporting requirements Need to have cash at closing for leveraged loan

Legislative Update & Current Bills Codification of Economic Substance – impact on Tax Credit Transactions HR 4213 Extend LIHTC 1602 for 9%, extend NMTC program, extend GO Zone Deadlines for LIHTC and GO Zone HTC S 3326 5 year carry-back provision for LIHTC investments, extend 1602 for a year and expand 1602 to 4% credits HR 2628 / S 1583 Multi-year extension of NMTC program, increase the annual funding and exempt NMTC from AMT HR 3715 / S 1743 Several enhancements to the HTC program HR 2336 Energy retrofits for real estate owners HR 4868 Affordable Housing preservation bill

Contact Information Robert L. Mendenhall 704.444.3520 rmendenhall@mayerbrown.com Marshall Phillips 704.295.9394 marshall.phillips@reznickgroup.com Kirk Carrison 919.688.5600 kirk_carrison@ntcicfunds.com Leigh Ann Smith 980.386.3855 leigh.ann.smith@baml.com