Tax Increment Financing and New Markets Tax Credit Incentives for Real Estate Development Materials Prepared for Discussion Courtney D. Pogue, CCIM, CEcD, LEED AP, CPM

development cost front- end costs amount financed

mortgage- financing costs debt service

operating costs cash flow

How to attract developers by using incentives Tax Increment Financing New Markets Tax Credits Low interest financing (i.e. bond financing and subsidized loans Disposition of government-owned land at below market values prices Tax Abatements

What is TIF? Allocates future increases in property taxes in an area to pay for improvements Takes place within a specific area Lasts 23 years after the TIF district is created. TIF District can be extended 12 additional years.

Tax Increment Financing Eligible Costs Property Assembly Costs Site Preparation Rehabilitation existing structures Low-income housing construction (50% of Hard Costs Eligible) Public works or improvements Studies, surveys, planning, legal, financial consultants, and administration Developer’s interest costs Relocation Job training and Retraining Programs Day care Financing costs associated with debt obligations Soft Costs related to TIF Eligible Hard Costs

Uses of TIF in the Capital Stack Replaces mezzanine debt Reduces debt or equity requirements Lowers overall cost of capital Increases project flow due to lower debt requirements

Access to TIF Funds Direct Reimbursement of TIF Eligible Project Costs TIF Supported Bonds – Provides funding upfront and is paid over time from future increment TIF Note – Developer holds TIF note, finances the extraordinary costs upfront and is paid off over time from incremental revenue collections Redeveloper’s Interest Reimbursement

Basic TIF Gap Analysis Project w/o TIFProject with TIF Project Revenue$23,668,297$27,868,297 Total Development Costs (TDC)$25,553,070 Profit/(Loss)($1,884,773)$2,315,227 TIF Amount$0$4,200,000 Profit as % of TDC(7.38%)9.06% TIF Request as % of TDC0.0%15.1%

New Markets Tax Credit Created in 2000 during the Clinton Administration Supports commercial, community, and industrial projects in Qualified Census Tracts Managed by the United States Treasury Can be used in conjunction other private and public funding sources

New Markets Tax Credit NMTCs provide 7 years of federal income tax benefits  5% in years 1-3 and 6% in years 4-7 for a total of 39% federal tax benefit during the 7 year period Investors usually purchases the credit at a discounted price - $.20 to $.30 for the $.39 tax benefit Current federal authorization for 2013 is $3.5 billion in NMTCs. Award announcements for current cycle are expected in April 2013 NMTC are awarded on a competitive basis to (CDEs) that apply.

New Markets Tax Credit Benefits to the Real Estate Developer  Lower capital costs  Loan forgiveness  Additional sources provided to the capital stack 20% to 30% of the capital stack  Can be combined with other capital sources  Fills the financing gap with inexpensive capital Benefits to the NMTC Investor  Equity Investment in Qualified Census Tract  Returns only expected from NMTC tax benefits

Example of a TIF/NMTC Structure

Overview of TIF and NMTC Projects today require multiple financing tools Public-private partnerships have become more common Capital providers are becoming more comfortable with the mixed-finance deal structures Each project and deal structure is unique Developers, financial advisors, and attorneys understand the level of creativity and patience needed to close a transaction NMTC and/or TIF during the economic downturn aided in helping numerous projects being completed.