how credits become capital: when and how to syndication incentives for historic preservation in...
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How Credits Become Capital:
When and How to Syndication
How Credits Become Capital:
When and How to Syndication
Incentives for Historic Preservation in Seattle Conference
Thursday, July 12Seattle, WA
How Credits Become Capital: When and How to SyndicateHow Credits Become Capital: When and How to Syndicate
What is Syndication?What is Syndication?
• “Syndication” is the process by which the owner of a building brings an investor into the ownership structure of the building so that the investor can claim the credits (and other economic and tax benefits), typically in exchange for providing equity to the project.
What is Syndication?What is Syndication?
• Federal Historic Tax Credits are not sold directly to an investor.
• Investors become “owners” of the property as limited partners in a limited partnership or as members in a limited liability company.
• Some State Historic Tax Credits can be “certificated” and sold to investors.
Single Entity StructureSingle Entity Structure
End UserEnd User End UserEnd User
Owner(LP or LLC)
Owner(LP or LLC)
InvestorInvestorGP/ManagerGP/Manager
DeveloperDeveloper
PropertyProperty
0.1% Management Fees, etc.
DevelopmentFee
99.9% Tax Credits
Lease Lease
Fee Ownership
Master Lease/Credit Pass-ThroughLessee Claims Credit
Master Lease/Credit Pass-ThroughLessee Claims Credit
DeveloperDeveloper
Master Lessee(LP or LLC)
Master Lessee(LP or LLC)
InvestorInvestorGP/ManagerGP/Manager
PropertyProperty
End UserEnd User End UserEnd User
0.1%
Development
Fee
99.9% Tax Credits
Lease Lease
Owner/Lessor(Affiliate of GP/Manager)
Owner/Lessor(Affiliate of GP/Manager)
MasterLease
Funds
Should the Owner/Developer Syndicate?
Should the Owner/Developer Syndicate?
• Factors to Consider:
– Does the Developer have limitations on claiming the credit for itself?
o Is the Developer a tax exempt entity or have insufficient taxable income to be able to use tax credits?
o Business Tax Credit Limitations ($25K +75%)
o Passive Activity Rules Apply
Should the Owner/Developer Syndicate? Cont’d
Should the Owner/Developer Syndicate? Cont’d
• Factors to Consider:
– Net Economic Benefitso Equity raise versus lost cash and
(sometimes) lost depreciation.
o Transaction Costs (both closing and on-going).
Should the Owner/Developer Syndicate? Cont’d
Should the Owner/Developer Syndicate? Cont’d
• Factors to Consider:
– Is additional equity needed during construction (i.e. prior to completion of the rehabilitation)?
Should the Owner/Developer Syndicate? Cont’d
Should the Owner/Developer Syndicate? Cont’d
• Factors to Consider:
– Control: Are you willing to have a partner?
o Loss of control issues.
o Disclosure and Reporting.
o Unwind concerns.
Finding InvestorsFinding Investors
• Does your bank or its CDC make HTC investments?
• Referral sources: – State Historic Preservation Office (SHPO)
– State and local preservation organizations
– Other developers
– Experienced accountants and lawyers
Soliciting Investment Proposals —
Things Investors Want to Know
Soliciting Investment Proposals —
Things Investors Want to Know
• Proposed Budget and Timing
• Financing Commitments
• Property Acquisition Status
• Real Estate issues including title and environmental issues, zoning, parking and other permitting
Soliciting Investment Proposals —
Things Investors Want to Know cont’d
Soliciting Investment Proposals —
Things Investors Want to Know cont’d
• Leasing Commitments/Market Study
• Part 1 and Part 2 Status
• Development Team—who they are, their experience and financial capacity
Key Syndication Business Issues —
Picking The Best Offer
Key Syndication Business Issues —
Picking The Best Offer
• Pricing
• Equity Pay-In Schedule
• Reserves
• Cash Flow, Fees, and other items that reduce the net economics to the developer
Key Syndication Business Issues —
Picking The Best Offer cont’d
Key Syndication Business Issues —
Picking The Best Offer cont’d
• Exit Strategy (Put and Call Options)
• Guarantees
• Structure
• Due Diligence Requirements
• Experience/Reputation and Closing Process
Successful Negotiation and Closing — Strengthening the
Developer’s Position
Successful Negotiation and Closing — Strengthening the
Developer’s Position
• Reducing Risk of Recapture:
– favorable debt terms
– high debt coverage ratio
– significant developer equity
• Leasing Commitments/tenant strength
• Guarantor Strength/Scope
Successful Negotiation and Closing — Strengthening the
Developer’s Position
Successful Negotiation and Closing — Strengthening the
Developer’s Position
• Reducing Construction Risk: delayed pay in
• Team Coordination and due diligence follow through
More Information?More Information?
Andrew S. Potts, Esq.
• (202) 585-8337; [email protected]
David F. Schon, Esq.
• (202) 585-8778; [email protected]
