1. 1 Tax Credit Projects in Distress Mark Bossi Patrick Clisham Alan Weiner Jon Krabbenschmidt abiLIVE webinar series November 19, 2015

2. 2 Historic Tax Credit (HTC) Low Income Housing Tax Credits (LIHTC) New Markets Tax Credits (NMTC) Overview of Tax Credit Programs

3. 3 Provides a tax credit to investors that offset their income taxes dollar-for-dollar Requires investors to be committed to the tax credit for extended period of time: HTC – 5 Years NMTC – 7 Years LIHTC – 15/30 Years Overview of Tax Credit Programs

4. 4 Similarities of Tax Credit Programs –Provide tax credits to investors/owners –Require investors to be owners of the property –Structured with LP or LLC to own the property –Utilize debt to provide sufficient capital to acquire project Overview of Tax Credit Programs

5. 5 Differences in Tax Credit Programs Types of Properties and Credit Periods –HTC – Commercial or Residential – Credits taken first year and with 5 year of recapture –LIHTC – Residential – Credits taken evenly over 10 years with 15 year recapture period –NMTC – Commercial – Credits taken over 7 years with 7 year recapture period Overview of Tax Credit Programs

6. 6 Administration of Tax Credit Programs o LIHTC  State Housing Agency Administers and Monitors Program  Delegated Authority Under Internal Revenue Code  States are allocated credits that are reallocated to projects o NMTC – US Treasury Department Administers and Monitors Program o HTC  10% Credit – Monitored by IRS  20% Credit – Administered by US Parks Department and State Housing Preservation Office Administer and Monitored by IRS Overview of Tax Credit Programs

7. 7 Bankruptcy Usually Triggered by Debtor Violation of Debt Provisions and Desire to Stay Foreclosure Overview of Tax Credit Programs

8. 8 NMTC program encourages investment in low-income communities (LICs) Provides federal income tax credits equal to 39% of Qualified Equity Investments (QEIs) in Community Development Entities (CDEs) that serve as intermediary vehicles for providing financing to LICs 7 years compliance period Investors receive a tax credit of 5% of the QEI for the first three years and 6% for the final four years New Market Tax Credits (NMTCs)

9. 9 Community Development Entities must use... Substantially All of the proceeds from… Qualified Equity Investments to make… Qualified Low-Income Community Investments in… Qualified Active Low-Income Community Businesses located in… Low-Income Communities. NMTC Program Definition

10. 10 Qualified Low-Income Community Investment Qualified Equity Investment Treasury Department Community Development Entity Investors Qualified Active Low-Income Community Business NMTCs Application NMTCs Basic NMTC Transaction Structure

11. 11 $ 10MM QLICI $ 10MM QEIs $7,192,000 $2,808,000 (.72) $3.9MM NMTCs Tax Credit Investor Leverage Lender Investment Fund ($10MM) CDE (or Sub-CDE) QALICB Simple NMTC Leveraged Structure

12. 12 CDE investment/reinvestment requirements pose a challenges to the CDE’s options in dealing with distressed loans: - CDEs required to keep substantially all of their qualified equity investments (QEIs) invested in qualified low- income community investments (QLICIs) for entire 7-year compliance period - CDE must reinvest QEIs into a new QLICI within 12 months - Direct ownership of property by a CDE is not a QLICI - Complicated reinvestment tax issues involved Restructuring/Workout Issues Involving NMTCs

13. 13 Program requirements restrict/complicate: Principal paydowns Taking additional collateral Taking title to collateral: – If CDE takes direct title, its 12-month reinvestment period begins to run immediately, even though it does not yet have cash to reinvest – CDE must establish and qualify a new QALICB to take title to delay the running of its reinvestment period Workout/Restructuring Issues (cont.)

14. 14 Recharacterization/breach of fiduciary duty challenges to “self-leveraged” NMTC financings – Great Northern Paper Company (Maine) – Agri-Best Holdings, LLC (S.D. Ill.) Bankruptcy Issues involving NMTCs

15. 15 Tax Credit Investor Leverage Lender (QALICB Sponsor or affiliate) Investment Fund CDE QALICB Simplified Self-Leveraged Structure

16. 16 Established by Tax Reform Act of 1986 Continuation of Legislative Effort to Encourage Private Sector Development, Acquisition and Operation of Affordable Multifamily Properties Section 42 of Internal Revenue Code Low Income Housing Tax Credits Background

17. 17 Credits available for new construction as well as for acquisition/rehabilitation Credits are awarded on a property-by- property basis Generally administered by state housing agencies Low Income Housing Tax Credits

18. 18 Tax credits are awarded to a property/property developer Credits are to be taken over a 10 year period of time – assuming ongoing compliance with tax credit rules Compliance period, however, is 15 years Significant “recapture” penalties for non-compliance Some properties subject to extended compliance periods Low Income Housing Tax Credits

19. 19 Compliance means units are rented to qualifying low income tenants at qualifying rents Properties must meet minimum set-asides 40% of units rented to tenants earning no more than 60% of area median income OR 20% of units rented to tenants earning no more than 50% of area median income Notwithstanding, credits only received for qualifying units within a property, thus tax credits must be “earned” each year Low Income Housing Tax Credits

20. 20 Low Income Housing Tax Credits Tax credits reduce tax on a dollar-for-dollar basis Utilized by Individuals and Corporations Corporations can also utilize passive losses (i.e. commonly generated by leveraged real properties) Corporations often investors in tax credit properties either directly or through funds General Partners (Developers) have obligations to Investors

21. 21 Low Income Housing Tax Credits Typical Structure General Partner (1%) Limited Partner (99%) Grants/Subordinated Loans Project Partnership Senior Lender Equity

22. 22 General Partner is typically the developer – has minority (1% interest), but total operational control General Partner provides significant guaranties to entice LP investments Completion guaranty Cash deficit guaranty Tax credit guaranty Recapture guaranty Repurchase agreement Low Income Housing Tax Credits

23. 23 Limited Partners are passive investors Either as direct investors or through tax credit investment funds Look for tax credits and passive losses for investment return View investment as low risk Rely upon General Partners to deliver Can withhold capital investments upon General Partner breach of partnership agreement Low Income Housing Tax Credits

24. 24 Limited Partners do not guaranty debt However, bear risk of “tax recapture” During first 10 years, 1/3 of tax credits received plus compounded interest to be repaid to IRS Phases out during years 11-15 LPs look to General partner to indemnify Also, no ongoing tax credits in case of non-compliance Again, LPs look to GP for repayment Low Income Tax Credits

25. 25 Tax Credit Properties Unique Issues Involving Workouts and Restructurings Valuation Issues in Bankruptcy Lewis & Clark; Creekside; Sunnyslope Tax Credit Impairments

26. 26 Tax Credit Properties Unique Issues Involving Workouts and Restructurings Unique Reorganization and Plan Provisions Considerations for Filing Impact on participants Authority to file Separate classification of Unsecured Junior Lenders Interest rates and plan terms Impact of Senior Lender Lien Positions vs. Tax Restrictions

27. 27 Tax Credit Properties Unique Issues Involving Workouts and Restructurings Other Chapter 11 LIHTC Experiences In re American Housing Foundation

28. 28 HTC program encourages rehabilitation of historic and older buildings Two types of HTCs: – 20% credit for the certified rehabilitation of certified historic structures – 10% credit for the rehabilitation of non-historic, no- residential buildings built before 1936 Entire tax credit may be claimed for the tax year in which the rehabilitated building is placed in service Recapture exposure if the building is not held by the owner for 5 years Historic Tax Credits (HTCs)

29. 29 QUESTIONS