Transaction terms vary greatly by investor, deal size, competitiveness and risk, and the overall supply and demand conditions in the tax credit marketplace.
Typical Ranges and Options
|Pricing||What investors will pay for ownership interests and associated tax benefits in an HTC transaction is very deal specific. Pricing can vary from the low $.80s for a transaction under $1 million in tax credits to a high of $1.05 or more for a larger competitive deal with strong economics, an experienced developer and guarantor strength.|
|Developer Guarantees||The risks of the transaction must be shared by the developer and investor. Tax credit recapture guarantees are typically capped at 80-90% of the credit amount. Full construction completion guarantees are expected from the developer. Operating deficits will be capped and burn off with property performance.|
|Equity Pay-In Schedule||Pay-in benchmarks often include construction closing, placement in service, Part 3 approval and a performance benchmark such as lease up or achievement of debt service coverage. Since the Historic Boardwalk Hall (HBH) decision, pay-in schedules have been more accelerated including at least 20% paid in at construction closing to demonstrate investor risk.|
|Investor Exit||Voluntary investors “puts” are no longer used. Some form of a fair market sale of investor interests will be negotiated.|
|Investor Return Requirements||Again, reflecting the HBH decision, priority returns of 2-3% with an opportunity for a variable upside are typical in today’s transactions.|
|Reporting Requirements||Most Investors will require frequent reporting during construction, annual reports after placement In service and annual audited financial statements for each transaction entity.|
|Transaction Costs||Investors expect HTC developers to include the investor’s legal and accounting costs in the development budget.|
Master Tenant Structure
NTCIC typically employs the industry standard “Master Tenant” or “credit pass through” ownership structure. While it is relatively complex, and costs more to close, the Master Tenant legal model offers a better deal for both the investor and the developer. Nonprofits may also use the Master Tenant ownership structure, as shown below. The for profit subsidiary must make the 168(h) election under the IRC to avoid the creation of tax-exempt use property and a disallowance of the credit.
Sample Master Tenant Structure Diagram (click to enlarge):
Leveraged Transaction Structure with NMTC and HTC
Transactions involving the New Markets Tax Credit are increasingly using leverage structures to maximize the amount of NMTC allocation available to a project. While each leverage transaction often requires a unique structure, the basic premise is that multiple project sources — such as developer equity, conventional loans, and any grants or fundraising — are pooled together by lending them as a series of Senior and Subordinate Leverage Loans to a Leverage Investment Fund. The Tax Credit Investor also contributes the NMTC tax credit equity generated by these sources to this Investment Fund and becomes the 100% owner, thus entitling the Investor to 100% of the tax credits that will be passed through the structure. The aggregated funds are contributed as a Qualified Equity Investment (QEI) to the CDE, which enables the Leverage Investment Fund to claim the NMTC. The CDE then passes the QEI on to the QALICB as Qualified Low-Income Community Investments. Typically, there will be a number of QLICIs, including one or more loans directly to the Owner or Lessor (the QALICB) and an equity investment through the Master Tenant ownership model discussed above, enabling the pass-through of the historic tax credits through the structure, as well.
Sample Leverage Structure Diagram (click to enlarge):