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 (213)

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 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 CDFI FUND (Dept of Treasury) CDE ALLOCATEE: Receives NMTC Allocation Sub-allocates SUB-CDE: $10mm Allocation (need to fund QEI) INVESTMENT FUND: To fund $10mm QEI LEVERAGE LENDER (USB CL): Provides loan NMTC INVESTOR (USBCDC): Provides equity for TCs $3mm Equity = 30% of QEI 39% of $10mm * $.77/credit $7mm Loan= 70% of Market interest rate $10mm QEI 8% CDE Fee: $800,000 (varies) QALICB: Project Entity QLICI Loan A: Market interest QLICI Loan B / QLICI Equity: $2mm low interest rate loan or invested as equity (some loans are forgivable) DEVELOPER: Manager Transaction Costs: $200,000 (varies) Legal and Accounting * Not all structures are the same

9 How the NMTC Works: Servicing the Loan(s) CDE ALLOCATEE SUB-CDE INVESTMENT FUND LEVERAGE LENDER NMTC INVESTOR: Receives tax credits $3.9mm Tax Credits: Received over 7yrs plus 5% exit fee of equity Leverage Loan/ Loan A Interest Loan B Interest: Pays annual management fees and CDE/IF costs QALICB: Project Entity P+I - QLICI Loan A: Matches leverage loan debt service I/O - QLICI LOAN B / Equity: *Low interest rate loan or *Equity treated similarly with possible small annual return Leverage Loan/ Loan A Principal Sinking Fund (USB Account) * Not all structures are the same

10 How the NMTC Works: Exit at end of 7 year compliance period CDE ALLOCATEE SUB-CDE INVESTMENT FUND LEVERAGE LENDER NMTC INVESTOR TC Investor Put = ~5% of TC equity paid 100% of leverage loan principal balance Sinking fund plus LOAN A principal LOAN B principal - CDE exit fee QALICB: Project Entity Principal - QLICI Loan A: (Less sinking fund balance) Principal - QLICI Loan B / Equity: * Either equity remains in the project or Loan B is 1) forgiven or 2) repaid Balance of sinking fund Sinking Fund (USB Account) Remaining LOAN B principal or reserves * Not all structures are the same