Rural Nebraska Funding Opportunities Workshop 1
Presentation Roadmap • Brief Overview of Community Development Resources • Overview of the Nebraska Community Capital Fund • Overview of the New Markets Tax Credit Business Loan • Overview of New Markets Tax Credit program 2
Community Development Resources (CDR) Rick Wallace, Ex. Dir Nebraska Community Capital Fund (NCCF) Mark Koller, Ex. Dir. Nebraska New Market Resources, LLC (NNMR) Mark Koller, Ex. Dir. 3
Community Development Resources (CDR) • 1994 – Started as Self Employment Loan Fund (SELF) • 2001 – Re-formed as an independent 501(c)(3) non-profit • 2002 – Achieved Community Development Financial Institution (CDFI) certification by the U. S. Treasury • 2003 – Name changed to Community Development Resources • 2006 – Formed two subsidiaries: Ø Nebraska Community Capital Fund. Ø Certified Community Development Entity (CDE) & Formed Nebraska New Markets Resources, LLC 4
What We Do CDR is introducing three new financial products to Nebraska: Nebraska Community Capital Fund: (1 st Qrtr 2007) NMTC Business Loans (Immediate) New Markets Tax Credit (NMTC) Program (Immediate) 5
Presentation Roadmap • Brief Overview of Community Development Resources • Overview of the Nebraska Community Capital Fund • Overview of the New Markets Tax Credit Business Loan • Overview of New Markets Tax Credit program 6
N C C F Nebraska Community Capital Fund (NCCF) • • • A ‘Community Collaboration Model’ for Nebraska In process of being formed, with expected roll-out date in 1 st quarter of 2007. Based on Minnesota Community Capital Fund. NCCF members will include cities, counties, electric utilities, and regional development organizations. Members pool their limited local development financing resources together to access significantly more loan capital through a specialized national community development finance secondary market, which is operated by the Minneapolis-based Community Reinvestment Fund, USA (CRF). 7
N C C F Nebraska Community Capital Fund Why Build a Statewide Community Capital Fund? • • • Unequal distribution of ED resources. Undercapitalized & idle revolving loan funds. No mechanism to pool limited local resources. Lack of cooperation among communities. Limited local commercial lending expertise. Inefficient access to national capital markets. 8
N C C F Nebraska Community Capital Fund Design Features • • • Member escrow deposits capitalize loan fund. Any economic development organization can join. Gap financing source for business developments. 3 membership levels: $25, 000, $50, 000, $100, 000. 3 year commitment with money back guarantee. Interest income assigned to fund manager for administration. • No annual or any additional fees paid by members. 9
N C C F Nebraska Community Capital Fund Design Features • • 10 -1 leveraging of member funds. Minimum loan: $50, 000. Maximum loan: $1, 000. No limit on number of loans. Fixed rate, subordinated loans with flexible terms. Local financial institution participation required. All loans sold to secondary market on same day as loan closing— continuous loan fund recapitalization. • We always have money to lend! 10
N C C F Nebraska Community Capital Fund Allowable use of Loan proceeds • Real Estate. – Purchase of land, buildings, and business assets. – Building construction and renovations. • Machinery and equipment. – Acquisition, renovation or moving. • Working capital loans. – Secured by fixed assets with fixed repayment schedule. 11
N C C F Nebraska Community Capital Fund Financing Example Manufacturing Building Expansion Project Value $1, 200, 000 Bank $600, 000 1 st REM— 20 year amortization with 10 year balloon NCCF $420, 000 2 nd REM (same terms) Equity $ 50, 000 In NCCF Pool 12
N C C F Nebraska Community Capital Fund Financing Example Grocery Store Building Purchase Project Value $360, 000 Bank $150, 000 1 st REM (20 / 10) NCCF $156, 000 2 nd REM (20 / 10) Equity $ 25, 000 In NCCF Pool 13
N C C F Nebraska Community Capital Fund What’s in it for your community? • 10 to 1 leveraging of your funds. • No limit on the number of loans you can sponsor. • Source of subordinated, fixed-rate financing to support local economic development. • Reduced or no risk. • Professional fund manager and loan officer services at no additional cost. 14
N C C F Nebraska Community Capital Fund Next Steps • Goals: – Reach membership pool of $1, 000 – Make first loan before end of 1 st quarter 2007 We are currently seeking ‘Letters of Interest’ from organizations that are interested in joining the Nebraska Community Capital Fund. Our contact information is included at the end of this presentation. 15
Presentation Roadmap • Brief Overview of Community Development Resources • Overview of the Nebraska Community Capital Fund • Overview of the New Markets Tax Credit Business Loan • Overview of New Markets Tax Credit program 16
New Markets Tax Credit Business Loan The New Markets Tax Credit Business Loan offers qualifying borrowers yet another business financing option that may be the best financial choice. Eligible borrowers can obtain loans with lower interest rates and terms up to 25 years, creating a lower monthly payment and allowing borrowers to keep more cash in their businesses. The New Markets loan enables borrowers to expand renovate their existing properties, buy the properties outright, or purchase additional property for business expansion. 17
New Markets Tax Credit Business Loan • Term sheet for the NMTC Business Loan that can be found on our web site: www. cdr-nebraska. org 18
New Markets Tax Credit Business Loan • NNMR Loan Size: – Minimum: $50, 000. – Maximum: $1, 500, 000 unless otherwise specified with NNMR. • Loan Interest Rate: Minimum initial rate to the borrower must be based on 7 -year Treasury plus 240 basis points. Actual loan rate to the borrower will typically be set two days prior to loan closing. Rate is reset at 7 -year anniversary, based on 10 -year Treasury plus 300 basis points plus any additional servicing fee. 19
New Markets Tax Credit Business Loan • Loan Fees: – A 1. 00% origination fee. – Loan Documentation fee of $250 for loans of $250, 000 or less. – Loan Documentation fee of $500 for loans greater than $250, 000. • Transaction costs may include accountant, legal and/or appraisal fees reflecting the complex structure and compliance requirements of the program and/or the transaction. 20
New Markets Tax Credit Business Loan • Prepayment Penalty: No partial prepayments are allowed. Upon a full prepayment prior to the seventh anniversary date, a prepayment penalty will be due which will be calculated as follows: • The then current principal balance of the note times initial rate times [(one hundred twenty minus number of months from note date to date of prepayment) divided by twelve] times 0. 10. Example of Pre-Payment Penalty: • $500, 000 loan – 25 yr. term – 7. 00% rate. • Pre-Pay in 20 th month • (($442, 375. 29 x 0. 07 x (120 -20)) / 12) x 0. 10 = $25, 805. 23 21
New Markets Tax Credit Business Loan • Payments: All borrowers must agree to remit loan payments by automated payment/debit. • Security: Loan must be secured by a first or second lien on the real estate or equipment being financed. • Owner-Occupancy: Operating Company must occupy at least 51% of the real estate financed. 22
New Markets Tax Credit Business Loan 23
Presentation Roadmap • Brief Overview of Community Development Resources • Overview of the Nebraska Community Capital Fund • Overview of the New Markets Tax Credit Business Loan • Overview of New Markets Tax Credit program 24
New Markets Tax Credit NMTC Program Background • Enacted on December 21, 2000 • Part of the Community Renewal Tax Relief Act of 2000 • June 10, 2002 – First issue of Notice of Allocation Availability • March 14, 2003 – The Fund announces that 66 organizations were selected to receive $2. 5 billion of tax credit allocations under the 1 st round. • Final original Act allocation application period is 2007. • Act was extended another year (through 2008) on Dec-8 -06. 25
New Markets Tax Credit Overview of NMTC Program • Provides a credit against Federal income taxes for investors that make Qualified Equity Investments (OEIs) into Community Development Entities (CDEs) • CDEs in turn use the proceeds of these investments to make Qualified Low-Income Community Investments (QLICIs) • QLICIs include, among other things, investments in businesses and real estate projects in low-income communities. 26
New Markets Tax Credit Amount • The credit is taken over a 7 -year period • The credit rate is: – In each of the first three years, 5% of the original investment amount – In each of the final four years, 6% of the original investment amount • Equals 39% of amount of original investment 27
New Markets Tax Credit Example The Fund awards an allocation of $1 million to a CDE. The CDE offers the tax credit to a single investor in exchange for a $1 million equity investment. How much can the investor claim as a credit on its Federal taxes? Years 1 – 3 Tax credit at 5% Value $50, 000 per year Years 4 – 7 Tax credit at 6% Value $60, 000 per year TOTAL VALUE OVER 7 YEARS $390, 000 28
New Markets Tax Credit What is a CDE? • A domestic corporation or partnership that is an intermediary vehicle for the provision of loans, investments or financial counseling in “Low-Income Communities” (LICs) • CDEs are required to demonstrate that they: – Have a primary mission of serving, or providing investment capital for LICs or Low-Income Persons, and – Are accountable to residents of the LICs that they serve Ø Community Development Resources is a certified CDE 29
New Markets Tax Credit What is a “Low-Income Community? ” 1. With at least 20% poverty rate; or 2. Where the median family income does not exceed 80% of the area median family income; or 3. That have a population of less than 2, 000, are contained within a Federally designated Empowerment Zone, and are contiguous to at least one other LIC; or 4. Where the median family income does not exceed 85% of the area median family income, provided the census tract is located in a high migration rural county. 30
New Markets Tax Credit Low-Income Communities (cont’d) • Projects not located within LICs, but that otherwise serve Targeted Populations, may also qualify for NMTC investments. • Targeted Populations include: 1. 2. • Low-income persons, to the extent the project is located in a census tract with a median family income at or below 120% of the applicable area median family income; or For Gulf Opportunity (GO) Zone allocations, individuals that have been displaced from their homes and/or have lost their principal source of employment in the wake of Hurricane Katrina. Refer to IRS and CDFI Fund guidance for additional details. 31
New Markets Tax Credit Business Loan 32
New Markets Tax Credit Qualified Equity Investment (QEI) • NMTCs are offered to investors for “Qualified Equity Investments” (QEIs) in the CDE. • QEI is: – – The equity investment must be acquired by the investor at its original issue solely in exchange for cash. – The equity investment must meet the substantially-all requirement, and – • An equity investment in a CDE – an equity investment is stock in a corporation or any capital interest in a partnership. The equity investment must be designated by the CDE. QEIs must remain invested in the CDE during a 7 -year credit period – Investors claim credits as of the date a QEI is initially made. 33
New Markets Tax Credit Timing of Investments • CDEs must offer NMTCs to investors within 5 years of receiving an allocation. • CDEs have 12 months to invest their QEI proceeds into Qualified Low-Income Community Investments (QLICIs). • Generally, CDEs that receive returns of capital will have 12 months to reinvest those funds in QLICIs. – Reinvestment is not required in the final year of the 7 -year credit period. 34
New Markets Tax Credit CDE Use of NMTC Proceeds “Substantially All” of the QEI proceeds must be invested in QLICIs within 12 months. Years 1 – 6: Substantially All = 85% of the amount paid by investor at original issue Year 7: Substantially All = 75% At all times, 5% of the original QEI issue amount may be used for certain reserves by the CDE and count towards meeting the substantially all requirement. 35
New Markets Tax Credit CDE Use of NMTC Proceeds (Cont’d) • A CDE may demonstrate that it has satisfied the Substantially-All requirement in 2 ways: – Direct tracing: • Under direct tracing, CDE is required to trace at least 85% of the QEI proceeds to specified QLICIs. – Safe harbor: • Under a safe harbor, a CDE must demonstrate that 85% of its aggregate gross assets are invested in QLICIs. 36
New Markets Tax Credit Qualified Low-Income Community Investments (QLICIs) Eligible Investments (QLICIs): 1. Any capital or equity investment in, or loan to, any “Qualified Active Low-Income Community Business” (QALICB) 2. Purchase of a loan from another CDE if the loan is a QLICI 3. “Financial Counseling and Other Services” (FCOS) to businesses located in, or residents of, LICs; and 4. Any equity investment in, or loan to, any CDE. 37
New Markets Tax Credit Qualified Low-Income Community Investments (cont’d) Requirements: – QEI proceeds must be invested in QLICIs through out the 7 year credit period. – CDE reinvestment requirement: • Years 1 – 6: – – • Generally, returns of equity, capital or principal must be reinvested within 12 months. Periodic loan repayments may be aggregated for up to 24 months before reinvestment is required. No reinvestment required in year 7 38
New Markets Tax Credit Qualified Active Low Income Community Business (QALICB) What is a typical QALICB? – Loans to or investments in operating businesses located in LICs. – Development of commercial, industrial, retail and mixed-use real estate projects in LICs. – Development of community facilities, such as charter schools and health care centers, in LICs. – Development of for-sale housing located in LICs. 39
New Markets Tax Credit Qualified Active Low Income Community Business (QALICB) To be a QALICB 1. At least 50% of the total gross income is from the active conduct of a qualified business in Low-Income Communities (LICs); 2. At least 40% of the use of tangible property of the business is within LICs; and 3. At least 40% of the services performed by the business’ employees are performed in LICs; 40
New Markets Tax Credit Qualified Active Low Income Community Business (QALICB) To be a QALICB (cont’d) 4. Less than 5% of the average of the aggregate unadjusted bases of the property is attributable to collectibles (e. g. art and antiques), other than those held for sale in the ordinary course of business (e. g. , inventory); and 5. Less than 5% of the average of the aggregate unadjusted bases of the property is attributable to nonqualified financial property (e. g. , debt instruments with a term in excess of 18 months). 41
New Markets Tax Credit Qualified Active Low Income Community Business (QALICB) To be a QALICB (cont’d) – The gross income test is deemed to be met if either the use of tangible property or the use of services performed test is met at 50% or higher. – If a business has no employees, it can meet both the services performed and gross income tests if it meets the use of tangible property test at 85% or higher. 42
New Markets Tax Credit Ineligible Activities • • Residential rental property: – Buildings or structures which derive 80% or more of its gross rental income from renting dwelling units Certain types of businesses: Golf Courses Massage Parlors Race Tracks Hot Tub facilities Gambling facilities Suntan facilities Certain farming businesses Stores where the principal business is the sale of alcoholic beverages for consumption off premises Country Clubs • Refer to IRS regulations for additional details. 43
New Markets Tax Credit Recapture NMTCs may be recaptured from investors during the 7 -year credit period if: – The QEI fails the Substantially-All requirement • Failure to invest 85% as allowed • Failure to meet QALICB requirements; or • Failure to meet one-year investment requirement – The CDE ceases to qualify as a CDE; – The CDE redeems the investment. It is not an event of recapture – and an investor may continue to claim NMTCs – if a CDE files for bankruptcy. 44
New Markets Tax Credit CDEs must make QLICIs within 12 months of receipt of Investor QEIs Summary Graphic Allocates Tax Credits Investing in or Lending to QALICBs $ CDFI Fund CDE must offer credits to investors within 5 years Private Investors Community Development Entity (CDR) TC $ QEI must stay invested in CDE for 7 years $ $ $ Purchasing Loans from CDEs Financial Counseling Investing in or Lending to CDEs 45
How to contact us: Rick Wallace, Ex. Dir. CDR Mark A. Koller, Ex. Dir. NCCF, NNMR 285 S. 68 th Street Place Suite 520 Lincoln, NE 68510 Office: 402. 436. 2387 Fax: 402. 436. 2439 www. cdr-nebraska. org 46
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