New Markets Tax Credit

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New Markets Tax Credit

• Program of the US Department of Treasury
  Community Development Financial Institutions Fund
  (CDFI)

Beth Davis, Managing Director and Steve Baker,
Rural Development Associates
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Dakotas America LLC

• Serves North and South Dakota
• Collaboration
• South Dakota Rural Enterprise
• Rural Development Finance Corporation

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Dakotas America LLC

• For profit corporation
• Certified Community Development Entity (CDE)
• by the U.S. Treasury Department
• Accountable
• to residents of the LICs that they serve

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Dakotas America LLC

• 130 Million in two allocations
• 35 Million has been placed
• 95 Million available
• 16 Million restricted for Minor-Urban

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Overview of NMTC Program

• Purpose
• Attract investment capital into economically
  distressed communities to finance community
  development projects, stimulate economic growth
  and create jobs

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It all starts with the census tract
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Low Income Community

• Census tracts with at least 20 poverty
• or
• Median family income
• At or below 80 of States median family income
• or
• Below 85 if population drop of 10 1980/2000
  

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OR

• A High Migration Rural County
• 10 out-migration during the 20-year period
  ending with the year in which the most recent
  census was conducted.

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Distressed Criteria

• Dakotas America Must meet one of the following
  criteria
• Poverty rates gt 30.
• Rural Area, median family income does not exceed
  60 of statewide median family income
• Unemployment rates at least 1.5x national average.

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Distressed Criteria continued

• If one of the criteria on the prior slide cannot
  be met, then DA must meet two or more of the
  following criteria
• Rural census tract (any LIC outside the MSAs)
• Federally designated Native American reservations
• Brownfields redevelopment areas
• Federally designated medically underserved areas
• High Migration Rural County
• CDFI Hot Zones
• HUB business
• State or local tax-increment financing districts,
  enterprise zone programs, state/local programs
  targeting distressed communities

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to determine eligibilitywww.dacotasamerica.com
Qualifying Communities Note Outmigration
is not factored on this site.
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Qualifying Project Criteria

• Geography
• Low-Income Community
• Must also meet distressed criteria
• Qualifying Business
• Economic Impact

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Project Criteria

• 5 million minimum project size
• Majority of project financing identified
• Gap financed
• 50 or less of the project
• 4 million or more
• Major community economic impact

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What are Qualified Businesses?

• 50 of gross income derived from conducting
  business in Low Income Community (LIC)
• 40 of tangible property located in LIC
• 40 of services performed by employees in LIC
• 5 of property collectibles not held for sale
• art, antiques, rugs, stamps, coins, etc.
• 5 of property non-qualified financial property
• debt, stock, etc., except working capital and
  debt with a term of lt 18 months therefore, most
  banks and financial institutions are not
  qualified businesses

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Ineligible Businesses

• Residential rental property with gt 80 of income
  from residential units
• Any rental property without substantial
  improvements
• Farms gt 500,000 in assets
• Development of intangible assets for sale or
  license
• Certain Businesses
• Golf Courses, Race Tracks and Gambling
  Facilities, Liquor Stores, Massage Parlors, Hot
  Tub Facilities and Suntan Facilities

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Tax Credit Amount

• Tax Credit taken by investor in the CDE
• 39 of the amount of the original investment
• Rate over 7-year period
• 5 in years 1 3
• 6 in years 4 7
• May be applied to other income

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Ability to Claim NMTCs

• Investors seeking tax credits typically
  corporations or financial institutions
• Total amount invested must remain invested in the
  same CDE for a seven-year period
• Must be an unrelated entity

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Qualified Low-Income Community Investments

• Any capital or equity investment in, or loan to,
  any Qualified Active Low-Income Community
  Business (QALICB)
• Any equity investment in, or loan to, any CDE

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What are Economic Impacts?

• Real Estate Development
• for lease/rent to third party for business or
  housing to benefit low-income persons/areas
• Business Development
• job creation, business creation/expansion to
  benefit low-income persons/areas
• Financial Counseling or other services
• to benefit low-income persons/areas/businesses

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Key Questions

• What is the corporate structure of the project?
• What are the total sources and uses of funds for
  the project?
• From what source is the primary cash coming from
  to fund the project?
• Are there any stipulations on how that cash must
  be used?

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Typical Deal Structures

• Investment equity or debt must pass through shell
  entity (SPV) to redeem credits
• Each entity project specific to avoid
  joint/several liability
• The SPV entity makes loan or investment into
  project

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Example of a NMTC Structure
Tax Credit Investor
Lender Entity
4,387,500 Equity
10,612,500 Loan
Special Purpose LLC 100 owned by Tax Credit
Equity Investor DA, Managing Member

15MM equity investment
Interest payments on loan
Subsidiary , LLC 99.99 owned by HIF .01 owned
by DA
600K Org Fee to CDE
A Loan 10.612,500
B Loan 3,637,500
Project 15.9MM or more of qualified assets
Legal Fees 150K
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Recapture Risks

• Recapture can occur if
• CDE loses certification
• CDE redeems investment prematurely
• CDE does not keep assets appropriately invested
• Penalty
• repayment of all credits
• interest to US Government

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For More information

• www.dakotasamerica.com
• Call 605-978-2804
• Email investment_at_dakotasamerica.com