Increasing Shareholder Value for ABC Company

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New Markets Tax Credits Partnering Economic
Development Housing Hutchinson, KS Thursday,
September 6, 2007 300 430 PM
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PART ONE

• NMTC Basics

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NMTC Overview

• A 19.5 billion federal tax initiative
  established as part of Community Renewal Tax
  Relief Act of 2000 and administered by the
  Department of Treasurys CDFI Fund
• Designed to stimulate private investment capital
  into underserved markets
• Geographically-based program eligibility with
  activities limited to qualified census tracts
• 80 of applicable area median income
• 20 poverty
• Targeted Population eligibility based on
  connection between the business low-income
• Customers / clients
• Employees
• Owners
• NMTCs to be allocated annually between 2002 and
  2007 through a competitive process

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Eligible Uses of NMTCs

• Applies to a wide range of economic development
  and business activities
• Commercial real estate
• Community facilities
• Business financing
• Ownership operation of rental housing is
  specifically excluded
• Mixed-use projects are permissible if less than
  80 of gross revenue is from dwelling units (or
  if the project is separated into residential and
  nonresidential components)
• The development of housing to rent or sell is
  permissible, although it presents some
  significant NMTC financing challenges

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NMTC Application

• Business Plan
• Investment criteria
• Products type(s)
• Favorable financing terms
• Community Impact
• Targeting areas of higher distress
• Economic impact
• Community support
• Management Capacity
• Raise deploy capital
• Manage investments
• Comply with program
• Be accountable to communities
• Capitalization
• Percentage of QEIs to be used for QLICIs
• Distribution of NMTC benefits

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Additional Distress Criteria

• Commitment to Invest in Areas of More Severe
  Economic Distress
• CDFI Fund has established areas of more severe
  economic distress
• Project must located in an area that meets (see
  next slide)
• One of three demographic criteria or
• Two of ten programmatic criteria
• Most applicants committed to invest in areas of
  more severe economic distress

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Demographic Distress Criteria

• Poverty rate (greater than 30)
• Median Income (no greater than 60)
• if located within a non-Metropolitan Area, median
  family income does not exceed 60 of statewide
  median family income or
• if located within a Metropolitan Area, median
  family income does not exceed 60 of the greater
  of statewide median family income or Metropolitan
  median family income
• Unemployment rate (at least 1.5 times the
  national average)

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Programmatic Distress Criteria

• Empowerment Zones, Enterprise Communities or
  Renewal communities
• HUB Zones, to the extent that QLICIs will support
  businesses that obtain HUB Zone certification
• Brownfields
• Encompassed by a HOPE VI redevelopment plan
• Federally designated as Native American or
  Alaskan Native areas, Hawaiian Homelands, or
  redevelopment areas by Tribal or other authority
• Areas designated as distressed by the Appalachian
  Regional Commission or Delta Regional Authority
• Colonias areas as designated by HUD
• Federally designated medically underserved areas,
  to the extent that QLICI activities will support
  health related services
• Located in a Hot Zone designated by the CDFI Fund
• State or local tax-increment financing districts,
  enterprise zones programs, or other similar state
  / local programs
• Certain counties designated by FEMA

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PART TWO

• Transaction Examples

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LISC NMTC Transactions

• 26 Funded Projects (as of 7/15/07)
• 11 office and / or retail
• 7 historic
• 5 mixed-use residential
• All historic
• 6 community facilities
• 2 industrial
• 1 hotel
• 1 for-sale housing

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LISC NMTC Community Impact (as of 7/15/07)

• Capital Raised
• Over 278 million
• Capital Deployed
• Over 218 million
• Transactions
• 26
• Commercial Community Space
• Over 2 million square feet
• Housing
• 677 units
• Jobs
• 4,700 permanent
• 5,700 construction

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Closed LISC NMTC Investments
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Closed LISC NMTC Investments (Contd)
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LISC NMTC Transactions

• Office - Retail
• Grocery Store Anchored Shopping Centers

Shops at Park Village (18.5 M) First grocery
store in Congress Heights, east of the Anacostia
River in Washington, DC, in over a decade.
Tangerine Plaza (9.2 M) Part of the
redevelopment of a historic African-American
business district in St. Petersburg, FL.
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LISC NMTC Transactions

• Office - Retail
• Office Retail Community Space

Mexicantown Mercado Plaza (5.0 M)
CDC-developed retail / office building and
Mercado / public plaza in the Mexicantown
neighborhood of Detroit, MI, at the base of the
Ambassador Bridge to Canada, which will house a
state of Michigan welcome center and retail space
for latino entrepreneurs.
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LISC NMTC Transactions

• Office - Retail
• Historic Office Retail

Plaza Verde (4.2 M) CDC-developed
entrepreneurship project in ethnically diverse
section of Minneapolis, MN. 1st floor retail,
2nd floor entrepreneur support, 3rd floor
community puppet theatre.
Midtown Global Market (8.9 M) Follow-up
project to develop an 80,000 SF public market.
Summit Place (7.5 M) Adaptive reuse of
tractor factory in West Allis, WI, an inner-ring
suburb of Milwaukee, WI, into office space that
can compete with green field development.
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LISC NMTC Transactions

• Mixed-Use Residential

Martineau (7.8 M) CDC-developed historic
renovation to create artist / live work space,
with commercial space rented by arts department
of local college and a caterer. Part of an
art-related redevelopment of a distressed
commercial corridor leading into Grand Rapids, MI.
New Central (7.6 M) Mixed-use (rental housing
office retail space) historic rehabilitation
that provides 28 units of affordable housing for
seniors and 24,000 square feet of commercial
space, much of being leased to nonprofit social
service agencies.
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LISC NMTC Transactions

• Community Facilities

LaSalle Hotel at Pike Place Market (4.1 M)
Renovation and expansion of commercial space to
permit the relocation of a local senior center.
Achievement Academy (5.7 M) Development of a
charter school in Albany, NY.
Center for Creative Urban Solutions (12.1 M)
Purchase and renovation of office space in East
Harlem to house nonprofit provider of services to
the homeless and mentally ill.
Northwest Harvest Food Bank (14.4 M) Purchase
and renovation of a warehouse in Kent, WA, to
house food storage and distribution center for
food banks throughout the state of Washington.
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LISC NMTC Transactions

• Industrial Facilities Hotel

SS Cycle (5.5 M) Financing to permit the
manufacture of high-performance motorcycle parts
to remain and expand its operations in rural
Wisconsin.
Canal Street (4.5 M) Development of a light
industrial facility on one of few available
inner-city sites in Milwaukee, WI, designed to
provide good jobs to city residents.
Sheraton Grand (16.5 M) Hotel development in
support of the decision of major employer
(hospital) to remain in the city of Duluth.
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PART THREE

• NMTC Structure

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NMTC Investment Structure

• Uses Community Development Entities (CDEs) as a
  flexible structure to channel capital into
  qualified investments
• To receive an allocation of NMTCs, an entity must
  first be certified by the CDFI Fund as a CDE
• To qualify, an entity must
• have a community development mission
• must have community accountability through
  governing or advisory board

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NMTC Investment Structure

• CDEs raise
• Qualified Equity Investments (QEIs) on
  favorable terms
• Because they pass NMTCs to investors
• CDEs make
• Qualified Low-Income Community Investments
  (QLICIs) to
• Qualified Active Low-Income Community
  Businesses (QALICBs) to
• Generate Community Benefits
• According to the business plan in their NMTC
  applications

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General NMTC Structure
CDFI Fund
NMTC Award
Reporting
Payments Distributions / Interest
NMTC Investment Returns
CDE
CDE / QALICB
Investor
85 of proceedsmust remain inQALICBs during
first6 years, 75 in 7th
No return ofprincipal for 7 years
Cash Equity QEI
QLICI, i.e. Equity Investment, Loan
QALICB Qualified Active Low-Income Community
Business QLICI Qualified Low-Income Community
Investment
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NMTC Investment Considerations

• Shallow subsidy 39 tax credit over 7 years on
  Investor equity (much less valuable than LIHTCs)
• Investor claims NMTCs of 5 in each of years 1-3
  and 6 in each of years 4-7 on its investment
• In addition, Investor will probably require cash
  flow and other economic benefits from CDE
• Investor provides cash equity investments
• Investor cannot redeem investment for 7 years but
  investors can transfer interests to successors
• NMTC is subject to federal tax on capital gains

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NMTC Recapture

• Investors subject to risk of recapture if
• CDE loses certification
• CDE redeems equity investment
• CDE proceeds fail to meet the substantially-all
  test (85 of investment proceeds must be in
  QALICBs during the first 6 years and 75 during
  year 7)
• Amount recaptured equals all of NMTCs claimed
  plus interest, which is much harsher than LIHTC
  recapture

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Distribution of NMTC Benefits

• NMTC benefits shared by investor, CDE, and QALICB
• Investor is induced to provide capital because of
  the additional NMTC return
• CDE fees cover costs of obtaining NMTCs and
  implementing its program
• QALICB receives more favorable financing terms

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NMTC Product Types

• Clearly Defined Products
• Most Common
• First mortgage loans with below-market rate
• Often with a 7-year term
• Enhanced historic tax credit equity
• Subordinate Loans with terms less than 7 years
• Less Common
• Cash-on-cash equity

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NMTC Product Types

• Customized Products
• A / B Loans, in which the A loan mimics a
  conventional loan and the B loan mimics a
  historic tax credit equity contribution that may
  be cancelled after seven-years
• Enhanced historic tax credit equity with / or
  without an accompanying A loan that mimics a
  conventional loan
• Estimated to represent two-thirds of transactions

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NMTC Financing Products

• Clearly Defined Products
• Allocatee characteristics
• Somewhat more likely to be a financial
  institution or
• Nonprofit loan fund
• Often this takes the form of
• Interest rate reductions of 200 300 BP below
  market
• historic tax credit equity contributions
  increased by 20
• May not require the QALICB to understand the
  financial interplay between NMTC investors, CDEs,
  and QALICB
• QALICB knowledge of NMTC Program may be limited
  to issues relating to satisfying maintaining
  QALICB requirements

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NMTC Financing Products

• Customized Products - Leveraging
• Generally employ a leveraged structure in which
  loans are made to an Investment Fund
• Loans may include financing that would have been
  provided directly to the project, including
• Commercial financing
• Concessionary loans from governmental or
  philanthropic sources
• Developer equity or grants loaned to the
  investment fund
• Loans to the Investment Fund generate NMTC
  equity
• NMTC equity can equal up to 1/3 of the amount of
  the loans to the Investment Fund
• NMTC equity can be provided as a B Loan
  Component that
• Bears a low rate of interest
• Can be cancelled after 7 years

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NMTC Financing Products

• Customized Products QALICB Involvement
• QALICB may be more likely to have some level of
  involvement in structuring the leveraged
  financing where
• Sponsor / developer are making loans to the
  Investment Fund
• Some portion of the B Loan will be cancelled

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Customized Products A / B Example

• Key Assumptions
• Total Project Costs of 10.0 million
• Project cash flow can support 7.5 million in
  commercial debt
• Nonprofit developer has no source of owner equity
• Project has 2.5 million development budget gap
• Projected NMTC closing costs of 150,000
• NMTC Purchase Price 0.76

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NMTC Transaction Structure
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NMTC Sources Uses
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NMTC Financing Terms

• Key Terms for the QALICB/Borrower
• NMTC Loan - First Mortgage Component 7,500,000
• Interest-only for 7 years
• 7.0 interest rate (current market rate)
• Sinking fund payments (calculated on a 30-year
  schedule)
• Full principal repayment
• Loan B 2,650,000
• Interest-only for 7 years
• 3.34 interest rate
• 2.38 million of debt subject to cancellation
  after payment of
• CDE Exit fee of 106,842 (1.0 of QEI)
• Investor Exit Fee of 159,211 (5.0 of Equity
  contribution)

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PART FOUR

• LISCs NMTC Program

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Local Initiatives Support Corporation

• Founded in 1979
• Nation's largest community building organization
• Local offices, supporting 33 urban areas
  encompassing over 100 cities and counties
• National Rural Program, supporting 77 Community
  Development Corporations in 36 states
• Headquartered in New York City
• For more information, visit the LISC website
  www.lisc.org

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LISCs NMTC Basics

• LISC received
• 65 million Round I NMTC Award (March 2003)
• 90 million Round III NMTC Award (May 2005)
• 140 million Round IV NMTC Award (June 2006)
• LISC created New Market Support Corporation
  (NMSC), a wholly owned subsidiary, to manage its
  NMTC activities
• NMSC contracts with National Equity Fund, Inc.
  (NEF) to perform NMTC services

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LISCs NMTC Program

• LISC brings the value of the NMTCs to communities
  served by LISC
• LISCs NMTC activities build on its core
  competency in real estate financing for
  commercial space and community facilities
• LISC finances ventures that advance the community
  development strategies of LISCs local programs,
  National Rural Program, other national programs
  and affiliates
• Generally using 4-15 million in NMTC financing
  per transaction

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Economic Development Activity

• LISC is using NMTCs to support real estate
  development, such as
• Office space
• Supermarkets or other retail projects
• Industrial facilities
• Community facilities, including
• Childcare facilities
• Charter schools
• Health-care facilities
• Under certain circumstances, NMSC may provide
  business financing
• NMSC may also use NMTCs to support
• Home ownership real estate developments
• Working capital financings

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NMTC Project Selection Criteria

• Business Programmatic Information
• Venture type
• Business
• Real Estate
• Venture location
• NMTC eligible
• Meets distress criteria
• Anticipated community impact
• Square footage of commercial real estate
• Housing units
• Jobs
• Construction
• Permanent
• Number of people receiving community services

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NMTC Project Selection Criteria

• Financial Timing Information
• Type of advantageous NMTC financing sought
• Construction v. permanent
• Lower interest rate v. additional capital
• Impact of advantageous NMTC financing on venture
• Need for advantageous NMTC Financing
• Financial feasibility of venture with
  advantageous NMTC financing
• Financing timeline
• Real estate issues (e.g., site control, permits,
  environmental review)
• Status of non-NMTC financing

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NMTC Financing Activities

• Most Common
• Commercial Real Estate, including
• Community facilities
• Mixed-use residential / commercial
• Historic tax credit equity
• Business Financing Secured by Real Estate
• Less Common
• Venture Capital
• Small Business Financing
• Homeownership
• Working Capital

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LISC NMTC Staff
Kevin Boes NEF, Senior Vice President / CFO120
South Riverside Plaza, 15th Fl.Chicago, IL
60606-3908Phone [phone] E-mail
kboes_at_nefinc.org
En Jung Kim NEF, Acquisition Manager501 Seventh
Ave., 7th Fl.New York, NY 10018Phone (212)
455-9385 E-mail ekim_at_nefinc.org
Miosoty DeJesus NEF, Associate Asset Manager501
Seventh Ave., 7th Fl.New York, NY 10018Phone
[phone] E-mail mdejsus_at_nefinc.org
Robert Poznanski NEF, Vice President, New
Markets119 N. Church Street, Suite
201 Kalamazoo, MI 49007-3744 Phone (269)
343-5472 x 3 E-mail rpoznanski_at_nefinc.org
Matt Huber NEF, Vice President, New Markets /
Fund Accounting 120 South Riverside Plaza, 15th
Fl. Chicago, IL 60606-3908 Phone (312)
697-6131 E-mail mhuber_at_nefinc.org