new markets tax credits · credits equaling thirty-nine percent (39%) of the investment amount....

NEW MARKETS TAX CREDITS (A QALICB IS NOT AN AUSTRALIAN MARSUPIAL)

Janice E. Hetland Thomas C. Huston

Kathryn C. Murphy1

I. Introduction. In an effort to create jobs and spur commercial investment in low-income

areas, in 2000, Congress enacted the New Markets Tax Credit (“NMTC”) as part of the

Community Renewal Tax Relief Act of 2000. The NMTC Program is codified at Section

45D of the Internal Revenue Code of 1986, as amended (the “Code”). Since its

enactment, the NMTC Program has been popular with developers involved in the

development of commercial buildings in low income census tracts and with small

business owners and nonprofit organizations located in low income areas. Many

developers of low income housing have gotten involved in these NMTC programs to add

commercial developments as support for their low income housing developments – both

to create jobs and to bring retail and office activity into those low income areas. The

current economic situation in the United States has prompted developers which

traditionally use conventional financing to explore the program as a viable financing tool

for gaps in their project financing. Unlike other Federal tax credit programs, such as the

Low-Income Housing Tax Credit (Section 42 of the Code) and the Rehabilitation Tax

Credit (Section 47 of the Code), which are permanent tax credits under the Code, the

NMTC is not a permanent tax credit and extensions enacted by Congress are required to

keep the NMTC Program from sunsetting. In 2010, the NMTC Program was extended

through the end of 2011 pursuant to Section 733 of the Tax Relief, Unemployment

Insurance Reauthorization and Job Creation Act.

1The authors greatly appreciate and acknowledge the use of written materials prepared by Peter Berrie of Faegre & Benson, LLP, 90 South Seventh Street, Minneapolis, MN 55402.

The NMTC Program has been named as one of the top 25 finalists from over 500

applicants in the 2011 competition for the Innovations in American Government Award

to be announced in the fall. The Award is administered by the Institute for Democratic

Governance and Innovation at Harvard University’s John F. Kennedy School of

Government and recognizes creative problem-solving by federal, state and local

governments. Since its enactment and through 2010, the Community Development

Financial Institutions Fund (the “CDFI Fund”), which awards the NMTC allocations, has

made 594 awards, totaling $29.5 billion of investment.

The New Markets Tax Credit is a shallow federal subsidy, intended to encourage

private investment in commercial real estate developments and in businesses located or to

be located in low income census tracts, as designated by the CDFI Fund, by providing

gap financing. For each dollar of NMTC investment made, an investor receives tax

credits equaling thirty-nine percent (39%) of the investment amount. These credits are

claimed over a seven-year period, beginning with the year of the investment. In years

one through three, the investor receives a credit, in each year, equal to five percent (5%)

of the investment. In each of the years four through seven, the investor receives a credit

equal to six percent (6%) of the investment.

To participate in the NMTC Program and receive an allocation of NMTC, an

investor must contribute equity capital (either directly or through an investment fund in

which the investor is, typically, the 99.99% or 100% member) to a Community

Development Entity (“CDE”), which has received an allocation of NMTC from the CDFI

Fund, or to a subsidiary of such CDE (a “Sub-CDE”). To qualify as a CDE, an entity

(and all of its Sub-CDEs) must apply to be certified as a CDE by the CDFI Fund, a

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division of the U.S. Treasury Department which is responsible for allocating NMTC to

CDEs and for the administration of the NMTC Program.

Existing CDEs include for-profit entities, nonprofit entities and entities affiliated

with state and local governments. Once certified as a CDE, the CDE will be able to

apply for NMTC in future allocation rounds, subject to the certification timing

requirements of the CDFI Fund.

Unlike the Low-Income Housing Tax Credit Program, in which allocation of the

tax credits is made at the state level, NMTCs are allocated by the U.S. Department of

Treasury through the CDFI Fund. As part of the application process, each CDE, inter

alia, (i) applies for a defined dollar amount of NMTC, (ii) specifies its intended use of the

NMTC allocation requested (which may include such activities as investment in a

business, development of commercial rental real estate, technical assistance or some

combination), (iii) specifies a service area for its NMTC activities (which may be

national, statewide, within specified states, or within a city or metropolitan area), and

(iv) submits potential projects to use the NMTC allocation, if the CDE is selected. An

allocation award is not a monetary award. Instead, the allocation is equal to the amount

of investment that a CDE can designate as a Qualified Equity Investment. This award of

“allocation authority” by the CDFI Fund permits a recipient CDE to raise investment

capital equal to the NMTC allocation to such CDE. Commencing with the initial year of

allocation in 2001-2002, there have been nine NMTC allocation rounds to date. In 2010,

the CDFI Fund awarded the $3.5 billion allocation authorized in 2010 to ninety-nine (99)

CDEs out of a pool of two hundred fifty (250) applicants. The aggregate of the requested

allocations exceeded $23 billion. In 2011, the number of CDEs requesting allocations

increased to three hundred fourteen (314) applications, requesting aggregate allocations

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approaching $27 billion, with the 2011 allocation authority remaining at $3.5 billion.

The applications for the 2011 allocation round closed in July, 2011, and awards are

anticipated to be announced in early 2012.

II. The Players:

A. CDE: A Community Development Entity certified by the CDFI Fund. A CDE

may apply for and receive NMTC allocations and make loans or equity

investments (directly or indirectly) in NMTC-eligible projects. A CDE is

typically organized as a domestic corporation, limited liability company or

partnership which provides loans, makes investments or provides financial

counseling in Low-Income Communities. To receive certification from the CDFI

Fund as a CDE, the applicant must demonstrate that it and each of its Sub-CDEs

satisfy, inter alia, the following requirements: (i) it is validly formed and legally

existing at the time of application; (ii) it has a primary mission of serving Low-

Income Communities within its specified service area; and (iii) it maintains

accountability to the residents of the Low-Income Communities within its

specified service area. Investors wishing to receive NMTCs must make cash

equity investments in CDEs that have NMTC allocations or, more typically, in

their affiliated Sub-CDEs. Bank of America, Local Initiatives Support

Corporation (LISC), Enterprise Social Investment Corporation (ESIC), U.S.

Bancorp Community Development Corporation, the National Trust for Historic

Preservation, Advantage Capital, PNC Bank, Travois, Inc. McCormack Baron

Salazar, and Wells Fargo Bank are examples of just a few of the entities that have

affiliates which have received NMTC allocations in one or more of the allocation

rounds. A complete list of certified CDEs, including allocation rounds and dollar

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amounts of NMTC allocations received, as well as the applicable service area can

be found on the website of the CDFI Fund at www.cdfifund.gov.

B. CDFI Fund: The Community Development Financial Institutions Fund of the

Department of Treasury, which awards the NMTC allocations and administers the

NMTC Program. The CDFI Fund awards NMTC allocations to CDEs and

monitors the CDEs on an ongoing basis for compliance with the Program.

C. Investors and Investment Funds. Investors make Qualified Equity (not debt)

Investments (“QEIs”) in CDEs or Sub-CDEs. (either directly or, more typically,

through an investment fund, in which the investor is the 99.99% or 100%

member). As part of making the investment, investors will analyze the ability of

the CDE to manage the investment in compliance with the NMTC program, to

avoid recapture of the NMTC during the seven-year NMTC recapture period of

this investment. Investors also need to have a reasonable expectation: (i) that

their investment will be deployed by the applicable CDE or Sub-CDE into

Qualified Active Low-Income Community Businesses (“QALICBs”) located in

Low-Income Communities and (ii) that such QALICBs will be developed and

operated as anticipated during such seven-year NMTC Recapture Period and will

generate revenues within three years of investment in such QALICBs (or, as

regards nonprofit QALICBs, will engage in activities that further their charitable

purposes within such time period). In analyzing these matters and related tax

matters, investors rely on tax opinions and on accountant-prepared financial

projections.

D. Leverage Lender: The entity which makes a leverage loan to an Investment Fund.

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E. QALICB: A Qualified Active Low-Income Community Business. QALICBs are

the entities that may receive loans or equity contributions from CDEs or

Sub-CDEs. The QALICB is the owner (directly or indirectly) of the business in

which the CDE investment is made (whether an equity investment or, more

typically, a loan). The QALICB needs to be located in a Low-Income Community

within the service area of the applicable CDE, needs to document the community

benefit that will result from the NMTC investment (such as job creation and other

community outreach) and needs to satisfy both regulatory requirements for the

type of business to be conducted and financial tests for that business during the

NMTC recapture period. The QALICB regulatory and financial requirements are

discussed in greater detail in Subsection III.D below.

III. Basic NMTC Requirements. A CDE which receives an allocation of NMTC must use

substantially all of the NMTC proceeds from Qualified Equity Investments (the “QEIs”)

to make Qualified Low-Income Community Investments (“QLICIs”) in QALICBs

located in Low-Income Communities (“LICs”), as designated by the CDFI Fund,

pursuant to Section 45D(e) of the Code. The CDE has five years from the date of its

allocation agreement to make such QLICI investments. Set forth below is a listing of

some commonly used NMTC terms and some NMTC requirements respecting NMTC

investment.

A Leverage Loan. A loan made by Leverage Lender to Investment Fund. Such

Loan, together with the equity investment made by the Investor into the

Investment Fund, is invested as a QEI in the CDE or Sub-CDE and used to make

a loan to or equity investment in a QALICB.

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B. Low-Income Communities (“LIC”). A Low-Income Community means any

population census tract if: (1) the poverty rate of the tract is at least 20%, or

(2) (a) for a tract not located within a metropolitan area, the median family

income for such tract does not exceed 80% of the statewide median family

income, or (b) for a tract located within a metropolitan area, the median family

income for such tract does not exceed 80% of the greater of the statewide median

family income or the metropolitan area median family income. The CDFI Fund

website (www.cdfifund.gov) designates which areas constitute LICs. Because

discrepancies can exist in designations between the CDFI Fund website and other

websites, it is important to confirm the designation of the LIC on the CDFI Fund

website, as the CDFI Fund is charged with administering this Program. Investors

will require confirmation of LIC status, as determined by the CDFI Fund, for the

QALICB on the date that the CDE makes each QLICI into the QALICB (i.e., the

Closing Date).

C. Qualified Equity Investment (“QEI”). A “qualified equity investment” is the

purchase of stock or a membership interest in a CDE or Sub-CDE that must

remain invested in the same CDE for at least seven years from the date of each

investment; otherwise there will be a recapture of the NMTC. The exit strategy

for the Investor and the Leverage Lender at the end of such recapture period is

discussed below. The CDE must invest “substantially all” of the QEI (at least

85%, as reduced to 75% in the seventh year of the recapture period) in QALICBs

through one or more QLICIs (see below) within twelve months after receipt of the

QEI. The Investor starts to receive NMTCs on the date of its investment, whether

or not the QEI funds have then been deployed into QALICBs. Because of such

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twelve-month requirement, the investment in the QALICBs must solidify and

fund within certain time parameters.

D. Qualified Active Low-Income Community Business (“QALICB”).

1. A QALICB is typically a corporation (for profit or nonprofit), a limited

liability company or a partnership which engages in a “qualified

business”, which is basically any business other than prohibited businesses

as discussed in Subsection III.D.4 below, that satisfies the following

criteria and is reasonably expected to continue to satisfy such criteria

during the entire seven-year NMTC recapture period:

a. “Gross-Income Requirement.” At least 50% of the QALICB’s

total gross income must be derived from the active conduct of a

qualified business within a Low Income Community, pursuant to

Section 45D(e) of the Code. Alternatively, this test may be

satisfied if the QALICB is able to satisfy a 50% threshold, in lieu

of 40%, respecting either the use-of-tangible-property criterion or

the services-performed criterion, each as described below.

b. “Use of Tangible Property.” At least 40% of the use of the

tangible property of the QALICB (whether owned or leased) must

be located within a Low-Income Community. Property owned by

the QALICB is valued at its cost basis as determined under Section

1012 of the Code. Property leased is valued at a reasonable

amount established by the QALICB.

c. “Services Performed.” At least 40% of the services performed for

the QALICB by its employees must be performed in a Low

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Income Community. If the QALICB has no employees, then this

criterion (as well as the Gross Income criterion) will be met if the

QALICB satisfies the use-of-tangible-property criterion, but

increasing such threshold to 85% of the use of such property, in

lieu of 40%.

d. “Collectibles.” Less than 5% of the average of the aggregate

unadjusted bases of all property of the QALICB must be

attributable to collectibles, as defined in Section 408(m)(2) of the

Code (such as antiques, stamps, coins, gems or alcoholic

beverages), unless they are held primarily for sale to customers in

the ordinary course of business.

e. “Nonqualified Financial Property.” Less than 5% of the average of

the aggregate unadjusted bases of all property of the QALICB

must be attributable to nonqualified financial property (such as

debt, stock, partnership interests, cash and similar property). This

criterion generally keeps banks, credit unions and other financial

institutions from qualifying as QALICBs, as well as business with

large cash reserves and nonprofit organizations with endowments.

Nonqualified financial property does not include reasonable

amounts of working capital, whether held in cash, cash equivalents

or debt having terms of eighteen months or less, and also does not

include proceeds of equity or debt that will be expended for

construction of real property improvements within twelve months

after the date that the investment or loan is made.

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2. Targeted Populations. Besides satisfying the above criteria, businesses

may qualify as QALICBs, even if the business is not located in a

Low-Income Community, if the business serves “targeted populations”,

which are defined as persons earning 80% or less than the applicable area

median family income for metropolitan areas and the greater of 80% of the

area median family income and 80% of the statewide non-metropolitan

area median family income for non-metropolitan areas. To qualify, the

business must: a) be at least 50% owned by targeted populations at the

time QLICI is made; b) have at least 40% of its employees be targeted

populations as of the date of hire, or c) derive at least 50% of its gross

income for any taxable year from sales, rentals, services or other

transactions with individuals from targeted populations.

3. Portion of the Business. A company that has a discrete portion of its

business that would qualify as a QALICB if it were separately

incorporated may qualify by maintaining separate books for the qualifying

“portion” of the business and treating that portion of the business for all

purposes as a separate division. Further, all QLICI proceeds must be used

solely for such QALICB activity.

4. Prohibited Businesses. The following types of businesses are prohibited

from being QALICBs: residential rental property (which is defined in

Section 168 (e)(2)(A) of the Code as property that derives 80% or more of

its gross income from rental income from dwelling units), country clubs,

golf courses, massage parlors, hot tub facilities, suntan facilities,

racetracks or other gambling facilities and stores, the principal business of

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which is the sale of alcoholic beverages for consumption off premises.

Farming (within the meaning of Sections 2031A(e)(5)(A) or (B) of the

Code) is also prohibited if the greater of the sum of the aggregate

unadjusted bases or the fair market value of the assets owned and the

aggregated value of the assets leased by the QALICB which are used by

the QALICB in such trade or business exceed $500,000. If the QALICB

rents space to tenants (such as a retail center, a hotel or an office building),

the tenants of the QALICB are also prohibited from engaging in the above

prohibited businesses.

E. Qualified Low-Income Community Investment (“QLICI”). An equity investment

in, or loan to, a QALICB by a CDE or Sub-CDE from the proceeds of QEIs.

F. CDE Investment Requirements. Generally, CDEs that receive a return of capital

or repayment of principal on QLICI loans during the seven-year NMTC recapture

period will have twelve months to reinvest these funds in alternate QALICBs

within the LIC service area designated by the CDE in its application for the

NMTCs. However, in the seventh year of the recapture period, the funds need not

be reinvested and can be held by the CDE until the end of such recapture period.

Returns on capital (interest, dividends, etc.) are not required to be reinvested in

QALICBs, and are available to be used by the CDE/Sub-CDE and by the

Investment Fund to pay for asset management of the CDE/Sub-CDE and of the

Investment Fund, for costs associated with annual audits and tax returns, and for

the Investment Fund to pay interest on the Leverage Loan from the Leverage

Lender. The accountant-prepared financial projections for each QALICB

investment will document that there is projected to be sufficient cash to pay for all

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of such costs during the seven-year recapture period, assuming that the QALICB

makes the required payments of interest on the QLICI loan to the Sub-CDE.

G. QALICB Recapture Events. Recapture of the NMTC can occur if the QALICB

fails to meet the regulatory requirements to be a QALICB, if its tenants engage in

prohibited businesses set forth in Section III.D.4 above during the seven-year

NMTC recapture period or if it is determined that there was no reasonable

expectation that the QALICB would satisfy the financial criteria discussed above

during such recapture period. Recapture would also generally occur if the

QALICB defaults and the CDE accelerates the QLICI loan during the seven-year

NMTC recapture period and all or a portion of the recovered principal amount of

the QLICI loan is not redeployed as a QLICI to another QALICB within the

CDE’s designated service area within twelve months thereafter. Because the

NMTC Program is designed to encourage investment in commercial ventures

situated in low income census tracts, there is no NMTC recapture if a QALICB

business fails and the QLICI investment in the QALICB is not paid back to the

Sub-CDE.

H. QALICB Tax and Business Issues. As noted above, there are certain tax and

business analyses that are made by the Investor and by the CDE/Sub-CDE upon

the closing of the QLICI in the QALICB. The principal analyses are a reasonable

expectations analysis and a true debt analysis.

1. Reasonable Expectations. The reasonable expectations analysis involves

an analysis of the likelihood that the QALICB will be operated and will

generate revenues within the first three years of receiving the QLICI

proceeds (or, in the case of a nonprofit QALICB, will engage in activities

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which are in furtherance of its charitable purposes within such time

period). This is a facts and circumstances analysis. For instance, if the

QALICB business consists of the development and operation of an office

building, the analysis would involve the likelihood that there would be

sufficient available development financing to complete the building, the

likelihood of the QALICB finding tenants to lease the building space, and

the likelihood that there would be sufficient income generated to pay all

applicable operating expenses and debt service on QALICB debt,

including the applicable interest on the QLICI loan to the QALICB. This

analysis will involve a review by the Investor and the CDE of the standard

real estate due diligence that a mortgage lender would typically review, as

well as an analysis of the accountant-prepared projections for the project.

2. True Debt. Since most QLICIs are made as loans to the QALICB, as

opposed to equity investments, and may be either mortgage loans or loans

not secured by an interest in the real estate, Investors will review the

accountant-prepared projections, as well as financial information from the

QALICB to determine whether, based on reasonable assumptions, the

QLICI debt should be respected as debt of the QALICB. The projections

will need to confirm, based on projected net operating income, that the

QALICB debt (including the QLICI loan and any other debt of the

QALICB) is capable of being repaid or refinanced upon maturity.

The Investor will want a “should” level tax opinion from tax

attorneys acceptable to the Investor with respect to both reasonable

expectations and true debt, among other tax opinions.

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IV. Basic NMTC Financing Structures. Because the NMTC provides a shallow subsidy to

an Investor, resulting in each dollar invested by the Investor generating only $0.39 in

credits over a seven-year period (an estimated 22% return), in the early days of the

NMTC Program, investors were concerned about finding a structure for these

transactions which would give the investor an acceptable return on its investment,

assuming that the investor would not recoup its original investment. The structure that

has developed to address this issue involves the use of Leverage Loan proceeds, where a

Leverage Lender makes a loan to an Investment Fund, and an Investor contributes equity

to the Investment Fund. If the Investor were willing to pay $0.70 for each NMTC benefit

generated by the QEI, then the Leverage Lender would make a loan to the Investment

Fund of the balance, so that a dollar amount equal to 100% of NMTC allocation could be

contributed by the Investment Fund as equity to the Sub-CDE. As an example, if $10

million of NMTC allocation were allocated by the CDE for investment in a QALICB,

and if the Investor were willing to pay $0.70 for each NMTC, then the investment by the

Investor would generate $2,730,000 million in equity ($10 million multiplied by 39%

multiplied by $0.70) and there would need to be one or more Leverage Loans to the

Investment Fund aggregating $7,270,000 million in order to make an aggregate QEI of

$10 million to the Sub-CDE. Leverage Loans may be composed of a variety of funding

sources; however they cannot be secured by an interest in the real estate, so these loans

are a challenge for traditional mortgage lenders, not only because these loans are not real

estate secured, but also because these loans receive only payments of interest, with no

principal amortization, during the seven-year NMTC recapture period. Among the

possible sources of Leverage Loan proceeds are the following: (i) cash equity of the

members of the QALICB which converts into Leverage Loan proceeds; (ii) fund raising

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proceeds, charitable contributions and grants which convert into Leverage Loan

proceeds; (iii) proceeds borrowed by affiliates of the QALICB from conventional lenders

and loaned by such affiliates as Leverage Loan proceeds; or (iv) tax-exempt bond

proceeds and other governmental loan proceeds which do not need to be secured by an

interest in the real estate.

Examples of basic NMTC financing structures are set forth on the pages that

follow. However, these structures can, and usually do, get much more complicated in

practice, with the use of multiple CDEs and multiple allocations. Also, because the

NMTC can be combined with Historic Rehabilitation Tax Credits under Section 47 of the

Code, there may be master tenant entities included in the structure as well.

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NMTC Structure without Leverage Loan

Investor/

Investment Fund

Sub-CDE

$10 million QEI investment 99.99% membership

interest, plus $3,900,000 of NMTC benefits over seven years

QALICB

$9,800,000 QLICI Loan or equity investment

Interest-only loan payments or distributions of cash flow on investment

CDE (NMTC

Allocatee)

Sub-allocation of $10 million of NMTC

0.01% interest and fees (including $200,000 of fees at closing)

Issue: In order for Investor to obtain an acceptable return on investment, Investor would need to be repaid all or most of its investment at the end of the 7 year NMTC recapture period.

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NMTC Structure with Leverage Loan

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Assumptions: 1) $10 million QEI in Sub-CDE and $10 million NMTC allocation 2) $3,900,000 NMTC to Investor 3) Investor equity investment of $2,730,000, based on an assumed purchase price

of $0.70 per NMTC 4) Leverage Loan amount will be $7,270,000 5) Because of fees paid to the CDE from the investment at closing, the net

amount to be loaned to the QALICB is $9,800,000, composed of QALICB Note A ($7,270,000) and QALICB Note B ($2,530,000)

0.01% interest, plus fees (including $200,000 at closing)

Investment Fund

Investor

Leverage Lender

$2,730,000 NMTC Equity

$7,270,000 Leverage Loan

Sub-CDE

99.99% or 100% membership interest in Fund and $3,900,000 of NMTC benefits

$10 million equity investment (“QEI”)

99.99% membership interest

CDE (NMTC

Allocatee)

Sub-allocation of $10,000,000 of NMTC

QALICB

$9,800,000 QLICI Loan

Interest only payments on QLICI Loan during 7 year recapture period

497678.7

V. The Exit. Assuming a successful investment in a QALICB, at the end of the NMTC recapture

period, the goal is for the Investment Fund to withdraw from the Sub-CDE, for the Sub-CDE (now

wholly owned by the CDE) to no longer have a debt or equity investment in the QALICB, and for the

QALICB to own its business free from the QLICI debt or equity financing. It is important for these

expectations to be a part of the business deal at the closing of the QLICI loan to the QALICB and to

be memorialized in the closing documents and the financial projections. As noted above, the QLICI

Loan is composed of two different sources of proceeds: (i) the Leverage Loan (“QLICI Note A”) and

(ii) Investor equity (“QLICI Note B”). Both QLICI Note A and QLICI Note B will have defined

maturity dates.

Generally, the maturity date of the QLICI Note A will coincide with the end of the NMTC

recapture period. Repayment of the QLICI Note A could happen through a refinancing of that

portion of the QLICI loan equal to QLICI Note A. As an alternative, the Sub-CDE could distribute

QLICI Note A to the Investment Fund in redemption of Investment Fund’s interest in the Sub-CDE.

The Leverage Loan will also, typically, mature at the end of the NMTC recapture period and will

need to be repaid by the Investment Fund. Under the redemption scenario, either (i) the Investment

Fund may have the right to “put” its interest in the Sub-CDE to the Leverage Lender in full

satisfaction of the Leverage Loan (and the Leverage Lender may have the right to “call” such interest

at fair market value), or (ii) the Investor in the Investment Fund may have the right to “put” its

interest in a wholly-owned Investment Fund to the Leverage Lender (and the Leverage Lender may

have the right to “call” such interest at fair market value). Upon exercise of the “put”, the Leverage

Lender would become either (i) the 99.99% member of the Sub-CDE, or (ii) the 100% member of the

Investment Fund, which is the 99.99% member of the Sub-CDE, depending on the terms of the “put”

agreement, and the QLICI Note A, in a principal amount equal to the Leverage Loan, could be

assigned to the Leverage Lender in redemption of its interest in the Sub-CDE (pursuant to the “put”

agreement) so that the exit could be a “paper” exit, as opposed to a cash loan refinancing. If the

19 1. 497678.7

original source of such Loan was Leverage Lender members’ funds (such as equity or grants), there

would be no income recognition to the Leverage Lender upon receipt of QLICI Note A because the

Leverage Lender would have basis in the Leverage Loan (which is equal to the principal amount of

the QLICI Note A).

QLICI Note B (the source of which is Investor equity), will also require repayment in full

upon maturity. Many CDEs will condition the allocation of NMTC to the Investor on the

requirement that the CDE receive cash in an amount equal to all or a portion of the principal of

QLICI Note B at the end of the NMTC recapture period. Alternatively, some CDEs will agree to exit

the transaction for a nominal amount (e.g. $1,000). If the agreed upon business deal is that the CDE

be paid an amount equal to all of the principal amount of the QLICI Note B, the agreed-upon exit

would involve the QALICB refinancing the QLICI Note B at the end of the NMTC recapture period

in order to fully repay the principal amount in cash (in which case, the QALICB should have

analyzed its business objective as that of obtaining interest-only debt payments for seven years while

its business gets off the ground and stabilizes). If the required payment to the CDE under the CDE

Operating Agreement is an amount equal to less than the full principal amount of the QLICI Note B,

then the portion of the QLICI Note B in excess of required payments to the CDE could also be

distributed to the Investment Fund (or the Leverage Lender as assignee pursuant to the “put” as

discussed above). If QLICI Note B is ultimately held by the QALICB or an affiliate (which may be

the Leverage Lender), then there would be cancellation of debt income to the QALICB in the amount

of QLICI Note B not repaid in cash. In this scenario, the QALICB should have analyzed upfront its

benefit from this transaction, assuming such cancellation of debt income, which should be factored

into the business assumptions made by the QALICB upon entering into the transaction.

To the extent that the QALICB business is not successful and, accordingly the QALICB loan

goes into default, Investors and CDEs will review QALICB guarantees as to NMTC compliance as

well as any QLICI Loan repayment guarantees. To the extent of cash received in full or partial

20 1. 497678.7

repayment of principal, such proceeds must generally be redeployed within twelve months thereafter;

provided that (i) if such repayment is received within the last year of the recapture period, the CDE

may retain such proceeds, without redeployment and (ii) the CDE may have one additional six-month

period for each QEI in which to redeploy such funds.

There are a variety of potential exit strategies which are employed in these transactions, and

the above discussion only addresses several commonly used structures. In NMTC transactions, it is

very important to analyze, review, and agree upon exit structures upfront and to document such

agreed upon exit structures in the investment documents at closing.

VI. Project Structure Charts. In the pages that follow, we will document and discuss actual projects,

one developed by a nonprofit QALICB and one developed by a for profit QALICB.

21 1. 497678.7

XYZ Commercial Venture – a for profit development

[Description of financing structure to follow]

XYZ Commercial Venture - NMTC Transaction Closing and Funding of NMTC Allocation of NMTC Allocation of Second CDE

497678.7

Investment Fund, LLC

Sub-CDE

QALICB

Leverage Lender (Affiliate of QALICB)

QALICB Members

Equity $15,000,000

$11,750,000 QLICI Loan (Note A = $8,911,200; 1% interest; 7-year term)

(Note B = $2,838,800; 3% interest; 7-year term)

Promissory Notes, Collateral Assignment of Distribution

from Developer

Investor

99.99% Membership

Interest

Promissory Note, Pledge of Fund’s Interest in Sub-CDE

$12,000,000 Qualified Equity Investment

$8,911,200 Leverage Loan; 1% interest; 7-year term

100% membership interest; Reimbursement of $11,500,000 of costs paid

CDE

CDFI Fund (Dept. of Treasury)

NMTC Allocation

.01% membership Interest; $250,000 Fee

$12,000,000 NMTC Allocation

$8,911,200 One-Day Equity (and repayment from

Leverage Loan Proceeds)

$4,680,000 NMTC

First Sub-CDE QLICI Loan

$25,000,000 QLICI Loan

Membership Interests

Developer/ Property Owner

First

$50,000,000 Mortgage Loan

Debt Service Payments

Distributions of 100% of Cash Flow

100% Membership

Interest

Mortgage Loan

$8,911,200 Capital Contribution

$3,088,800 Equity

NOTES:

1. This development obtained two separate allocations of NMTC from separate CDEs. The closing and funding of each allocation happened at different times.

2. The chart depicts the closing of a $12 million allocation of NMTC to a development under construction and in which the QALICB had expended substantial equity which is being reimbursed from QLICI Loan proceeds as part of this closing. A portion of the QLICI Loan proceeds, when returned to the QALICB members, will be contributed by the QALICB members as Leverage Loan proceeds. In order to have the full $12 million QEI available at closing, the NMTC investor made a “one day” equity contribution of the entire $12 million and was reimbursed by the Investment Fund from Leverage Loan proceeds the same day. A sample Flow of Fund Memorandum setting forth the order of payment of funds is attached. Sometimes, this “one day” funding will be structured as a loan versus equity

3. In looking at the two QLICI Notes, Note A is in the same dollar amount as the Leverage Loan, has the same interest rate, and has the same approximate maturity date. Generally the Leverage Loan will mature a couple of days after the QLICI Loan to accommodate the potential exit.

4. QLICI Note B (representing Investor equity) bears interest at 3% per annum. Projections should document that such interest will be sufficient to pay asset management fees, audit costs, tax return preparation costs and other expenses of the Sub-CDE and the Investment Fund. The negotiated business deal with the CDE respecting this transaction is that 50% of Note A will need to be paid in cash at its maturity at the end of the NMTC recapture period as fees to the CDE under the Sub-CDE Operating Agreement. The remainder can be distributed to the Investment Fund, together with Note A, in redemption of its interest in the Sub-CDE pursuant to the terms of the Sub-CDE Operating Agreement.

5. The Owner of the development is a limited liability company wholly owned by the QALICB. Accordingly, while it is a separate entity for state law purposes, it is a disregarded entity for federal tax purposes, so that the operations of the Owner entity and the operations of the QALICB will be consolidated and both jointly must satisfy all of the QALICB regulatory and financial requirements.

6. Neither of the QLICI Loans is secured by an interest in the real estate; instead, those loans are secured by an assignment of cash flow of the QALICB. The two Sub-CDE lenders have an inter-creditor agreement to reflect their relative priorities on distributions.

7. This development has a first mortgage from the Owner entity to a third party lender securing a loan with hard debt service payments; accordingly, QLICI Loan interest payments will be payable following payment of the first mortgage debt service and all operating expenses of the development.

Closing Flow of Funds Memorandum 497678.7

Flow of Funds Closing Memorandum

TO: Investor FROM: Investor Counsel DATE: ____________, 2011 RE: Flow of Funds Closing Memorandum for XYZ Commercial Venture THE FOLLOWING TRANSFERS WILL TAKE PLACE ON ______________, 2011:

I. Investor Transfer No. 1

Capital contribution from Investor, pursuant to that certain Operating Agreement of the Investment Fund dated as of the date hereof (the “Fund Operating Agreement”).

Debit

Name of Account: Investor Amount: $12,000,000

Reference: Equity Investment

Credit Name of Account: Investment Fund, LLC

Amount: $12,000,000 Bank: ABA: Account #:

Reference: Equity Investment

II. Fund Transfer No. 1

Capital contribution from the Investment Fund to Sub-CDE (the “Sub-CDE”), pursuant to that certain Amended and Restated Operating Agreement of the Sub-CDE dated as of the date hereof (the “Sub-CDE Operating Agreement”).

Debit

Name of Account: Investment Fund, LLC Amount: $12,000,000 Bank: ABA: Account #:

Reference: QEI

Credit Name of Account: Sub-CDE

Amount: $12,000,000 Bank: ABA: Account #:

- 2 - Closing Flow of Funds Memorandum 497678.7

Reference: QEI

III. CDE Transfer No. 1

Capital contribution by the CDE as Sub-CDE Managing Member of the Sub-CDE, pursuant to the Sub-CDE Operating Agreement.

Debit

Name of Account: CDE Amount: $1,200

Reference: Sub-CDE Managing Member Capital Contribution

Credit Name of Account: Sub-CDE

Amount: $1,200 Bank:

ABA: Account #: Reference: Sub-CDE Managing Member Capital Contribution

IV. Sub-CDE Transfer No. 1

Advance of QLICI loan proceeds by the Sub-CDE to the QALICB, pursuant to that certain Mezzanine Loan Agreement between the Sub-CDE and the QALICB, dated as of the date hereof (the “QLICI Loan Agreement”).

Debit

Name of Account: Sub-CDE Amount: $11,750,000 Bank: ABA: Account #:

Reference: QLICI Loan Advance Credit

Name of Account: QALICB Amount: $11,750,000

Bank: ABA: Account #:

Reference: QLICI Loan Advance

V. QALICB Transfer No. 1


Distribution to QALICB Member #1, pursuant to that certain Operating Agreement of the QALICB dated as of the date hereof (the “QALICB Operating Agreement”).

Debit

Name of Account: QALICB Member #1 Amount: $8,020,080


Reference: Distribution to QALICB Member #1 Credit

Name of Account: QALICB Member #1 Amount: $8,020,080


Reference: Distribution to QALICB Member #1

VI. QALICB Transfer No. 2

Distribution to QALICB Member #2, pursuant to the QALICB Operating Agreement.

Debit

Name of Account: QALICB Member #2 Amount: $891,120


Reference: Distribution to QALICB Member #2 Credit

Name of Account: QALICB Member #2 Amount: $891,120


Reference: Distribution to QALICB Member #2

VII. QALICB Member #1 Transfer Equity contribution from QALICB Member #1 to Leverage Lender, pursuant to that certain

Operating Agreement of the Leverage Lender dated as of the date hereof (the “Leverage Lender Operating Agreement”).


Debit Name of Account: QALICB Member #1 Amount: $8,020,080

Bank: ABA: Account #: Reference: QALICB Member #1’s Capital Contribution to Leverage Lender

Credit Name of Account: Leverage Lender Amount: $8,020,080

Bank: ABA: Account #: Reference: QALICB Member #1’s Capital Contribution to Leverage Lender

VIII. QALICB Member #2 Transfer

Equity contribution from QALICB Member #2 to the Leverage Lender, pursuant to the Leverage

Lender Operating Agreement.

Debit Name of Account: QALICB Member #2 Amount: $891,120


Reference: QALICB Member #2’s Capital Contribution to Leverage Lender

Credit Name of Account: Leverage Lender Amount: $891,120


Reference: QALICB Member #2’s Capital Contribution to Leverage Lender

IX. Leverage Lender Transfer

Advance of leverage loan proceeds (the “Leverage Loan”) by the Leverage Lender to the Investment Fund, pursuant to that certain Loan and Security Agreement between the Leverage Lender and the Fund dated as of the date hereof (the “Leverage Loan Agreement”).

Debit

Name of Account: Leverage Lender Amount: $8,911,200


Reference: Leverage Loan - 5 - Closing Flow of Funds Memorandum 497678.7

Credit Name of Account: Investment Fund, LLC Amount: $8,911,200

Bank: ABA: Account #: Reference: Leverage Loan

X. Fund Transfer No. 2

Repayment of the One-Day Bridge Equity of $8,911,200 pursuant to the Fund Operating

Agreement.

Debit Name of Account: Investment Fund, LLC Amount: $8,911,200

Bank: ABA: Account #: Reference: Return of One-Day Bridge Equity Credit Name of Account: Investor Amount: $8,911,200 Reference: Return of One-Day Bridge Equity

XI. Sub-CDE Transfer No. 2

Payment of Placement Fee to the CDE, by the Sub-CDE, pursuant to the Sub-CDE Operating Agreement.

Debit

Name of Account: Sub-CDE Amount: $250,000


Reference: Sub-CDE – Allocatee Placement Fee

Credit Name of Account: CDE

Amount: $250,000 Bank:

ABA: Account #:

Reference: Allocatee Placement Fee



XII. QALICB Transfer No. 3


Debit

Name of Account: QALICB Amount: $2,554,920 Bank:

ABA: Account #: Reference: Distribution to QALICB Member #1 Credit

Name of Account: QALICB Member #1 Amount: $2,554,920 Bank:

ABA: Account #: Reference: Distribution to QALICB Member #1

XIII. QALICB Transfer No. 4


Debit

Name of Account: QALICB Member #2 Amount: $283,880 Bank:

ABA: Account #: Reference: Distribution to QALICB Member #2 Credit

Name of Account: QALICB Member #2 Amount: $283,880 Bank:

ABA: Account #: Reference: Distribution to QALICB Member #2

[Signature pages follow]

COUNTERPART SIGNATURE PAGE

FLOW OF FUNDS CLOSING MEMORANDUM

The undersigned hereby authorize and approve the transfers set forth in the Flow of Funds Closing Memorandum. QALICB: By: Name: Title: LEVERAGE LENDER: By: Name: Title: QALICB Member #1: By: Name: Title: QALICB Member #2: By: Name: Title:

Signature Page Closing Flow of Funds Memorandum 497678.7

COUNTERPART SIGNATURE PAGE FLOW OF FUNDS CLOSING MEMORANDUM

The undersigned hereby authorize and approve the transfers set forth in the Flow of Funds

Closing Memorandum. CDE: By: Name: Title: SUB-CDE: By: Name: Title:

Signature Page Closing Flow of Funds Memorandum 497678.7

COUNTERPART SIGNATURE PAGE FLOW OF FUNDS CLOSING MEMORANDUM

The undersigned hereby authorize and approve the transfers set forth in the Flow of Funds

Closing Memorandum. INVESTOR: By: Name: Title: INVESTMENT FUND: By: Name: Title:

11

Metropolitan Community Health Center – a nonprofit development

[Description of financing structure to follow]

12

Metropolitan Community Health Center

Case Study

Metropolitan Community Health Center (“MCHC” or the “Health Center”) is one of

several health centers in the City of Boston serving impoverished neighborhoods. It provides

comprehensive, accessible, affordable and culturally appropriate primary and preventive health

services in six languages to its surrounding “Low Income Community.” It had outgrown its

current facility and was unable to renovate and expand it to meet modern standards. MCHC

decided the solution was a new 49,500 square foot, four-story, mixed-use facility costing

approximately $32 million. The new facility will house a 35,000 square foot Health Center, a

drugstore and a bank branch, together consisting of 14,500 square feet, and parking. The Health

Center is in a qualified census tract and in a Federal Medically Underserved Area which has an

unemployment rate 1.38 times the national average.

The Health Center, as did many other health centers, qualified for stimulus funds in the

amount of $11,550,000.00 made available under the American Recovery and Reinvestment Act

of 2009.The new facility is being built on a brownfield site so the project qualified for some EPA

Brownfield funding ($400,000.00). It also received a grant from the City Medical Center. The

balance of the funding came from a financing structure using New Markets Tax Credits.

A chart showing the structure of the NMTC financing is attached.

Investor Bank invested $5,330,520.00 of equity ($0.68 per dollar of NMTCs) into a fund,

Investment Fund VIII LLC (“Fund LLC”), in exchange for a 100% equity interest in Fund LLC.

The Health Center loaned Fund LLC $15,114,792.00 (the “Leverage Loan”). The sources of the

Leverage Loan (three notes) were a loan to the Health Center by Lender Bank A (to be repaid

from rental income from subleases to the drugstore and bank branch) and a loan to the Health

13

Center by Lender B (to be repaid with Capital Campaign proceeds). The two loans to the Health

Center from Lender Bank A and Lender B are secured by first and second leasehold mortgages,

respectively, on the Health Center’s leasehold interest in the Premises. Lender Bank A also has a

mortgage on the Health Center’s existing facility.

The Health Center also received a one-day loan from Investor Bank acting as lender in

the amount of $8,462,480, which Health Center loaned to Fund LLC. Fund LLC used the

investment by Investor Bank and the Leverage Loan, totaling $20,445,312.00, to capitalize two

CDEs at $20,100,000.00 and to pay placement and administrative fees of $345,312.00. The

investment of $20,100,000.00 in the CDE’s enabled Investor Bank to qualify for tax credits in

the amount of $7,839,000.00.

The Health Center formed a special purpose tax exempt nonprofit corporation,

Metropolitan Health Center Realty, Inc., to be the QALICB. The QALICB’s sole purpose is to

master lease the new health center premises (the “Premises”) to the Health Center. This was to

ensure that the QALICB had as its business the rental of commercial real estate space, to provide

the CDEs with a single purpose entity and to avoid running afoul of the asset tests for QALICBs.

The construction and architect’s contracts and all other project contracts were assigned to the

QALICB by the Health Center. The Health Center subleased the 14,500 square feet of rental

space to the drugstore and bank branch.

The two CDEs made a total of four loans (five notes) to the QALICB, secured by three

mortgages on the QALICB’s fee simple interest in the Premises. The terms of the notes are as

follows:

Note A1: Principal Amount: $5,200,000.00 Term: 15 years Interest rate: 1.35% for 7 years

14

Then 3.25% plus FHLB Eight Year Classic Advance Amortization after 7 years on a 20-year basis Note A2: Principal Amount: $2,100,000 Term: 15 years Interest rate: 1.35% Amortization after 7 years on a 20-year basis Note B : Principal Amount: $2,598,000 Term: 30 years Interest rate: 1.35% Amortized after 7 years on a 23-year basis Note C : Principal Amount: $7,814,792 Term: 30 years Interest Rate: 0.77% Amortization after 7 years on a 23-year basis Note D: Principal Amount: $1,985,208 Term: 30 years Interest Rate: 0.77% Amortization after 7 years on a 23-year basis Total: $19,698,000.00 disbursed to QALICB. Fees were paid to CDE managers and sponsors in the amount of $402,000. The QALICB

had to fund two reserves totaling $681,526 and pay a closing fee of $49,000 to the manager of

one of the CDEs. The QALICB also disbursed $8,462,480 to the Health Center which it used to

repay the one-day loan.

Legal costs for these transactions are very high. Every party has a lawyer. Legal and

accounting bills and other fees paid from the $19,698,000 totaled approximately $1 million.

Together with fees paid to the CDEs and related entities, costs totaled close to $2,000,000,

making the net funds from Investor Bank [i.e., not counting the Leverage Loan] available to pay

project costs approximately $3,330,250.00.

15

The rent paid by the Health Center to the QALICB pays the interest on the QLICI loans.

Fees to accountants and managers are paid from these interest payments. Cash distributions by

the CDEs to Fund LLC pays the interest on the Leverage Loan.

At the end of seven years (the tax credit “holding” period needed to avoid recapture),

Investor Bank has a six-month option to “put” its ownership interest in the Fund LLC to the

Health Center for an amount equal to 5% of the equity in the Fund LLC ($266,526.00—which

amount has been reserved by QALICB).

If Investor Bank does not exercise the put option, then the Health Center has a “call”

option for six months to acquire Investor Bank’s interest in Fund LLC for an amount equal to the

fair market value of the interest. The CDE operating agreements provide for

redemption/liquidation provisions to enable Fund LLC to redeem its interest in the CDEs in

exchange for an assignment of the QLICI Loans.

Real Estate Aspects/Issues of the MCHC NMTC Transaction

1. The loans to the Leverage Lender (the Health Center) and the loans to the

QALICB are all secured by mortgages on the real estate so the usual title and other

due diligence need to be obtained and analyzed and mortgage loan documents drafted

and negotiated. (The Leverage Loan is not secured by a mortgage, but by a security

interest in Fund LLC’s membership interest in the CDEs.)

2. The Master Lease and the subleases need to be drafted and negotiated. The uses

need to be thought through so that the project does not run afoul of the prohibited

uses. (In the MCHC transaction, the drugstore agreed not to sell lottery tickets in

order to avoid the gambling prohibition.) Attention needs to be paid to the insurance

provisions – who carries the insurance and has the responsibility to rebuild?

16

3. Attention needs to be paid to the priority of the Master Lease when, as in the

MCHC transaction, the Lenders to the Health Center as Leverage Lender have a

mortgage on the leasehold interest of the Master Tenant as collateral security for their

loans to the Leverage Lender. Recording order and recognition agreements need to

be negotiated among the fee and leasehold lenders.

4. Intercreditor agreements for the fee and leasehold lenders need to be structured

and negotiated.

5. The title insurance policies need to be carefully prepared to reflect the proper

interests of the lenders as affected by the intercreditor agreements.

CD\0001\292477.2

Day Loan Principal$8,462,480

Day Loan Fee$42,312 Bridge Loan1 (at initial draw) $1,860,000

Interest Rate 7.50%Term 6 Years

NMTCs ($0.68) 100% EquityNet NMTC Equity Interest

$5,330,520 Reimbursement of Lender Bank Loan 2 $5,200,000NMTC Equity Interest Rate 6.79%

Day Loan 8,462,480 $4,669,480 Term 15 YearsDay Loan Fee 0.5000%

Leverage Loan A1 $5,200,000Interest Rate through 3/14/18 1.0000%Interest Rate after 3/14/18 6.7900%Term 15 Years

Equity Reimbursement $8,462,480Cash on Hand $67,312

Leverage Loan A2 $2,100,000 Total $8,529,792UFA Placement Fee Interest Rate 1.0000%$101,000 Term 15 YearsUFA Fund Admin Fee Leverage Loan B 7,814,792 $202,000 Interest Rate 1.0000%

Term 30 Years $475,000

QEI3 QEI$10,000,000 $10,100,000

Sponsor Fee99.99% Equity 99.99% Equity $202,000Interest Interest

0.01% Equity 0.01% EquityInterest InterestSponsor Fee Sponsor Fee$200,000 $202,000

Equity Equity$1,000 $1,010

QLICI Loan C $7,814,792 QLICI Loan A1 $5,200,000Interest Rate 0.770000% Interest Rate Through 3/16/18 1.34616%Term 30 Years Interest Rate After 3/16/18 6.79000%QLICI Loan D $1,985,208 Term 15 YearsInterest Rate 0.770000% QLICI Loan A2 $2,100,000Term 30 Years Interest Rate 1.34616%

Term 15 YearsQLICI Loan B $2,598,000Interest Rate 1.34616%Term 30 Years

Lease Agreement

Reimbursement of Equity$8,462,480

1Bridge Loan will be repaid with the Capital Campaign Proceeds2L Lender Bank A Loan to be paid by subleases of Metropolitan Community Health Center3QEI to NMTC Subsidiary CDE, LLC was made on ________.METROPOI

COMMUNITY HEALTH CENTERFINANCIAL FORECAST

SUPPLEMENTAL SCHEDULE OF FLOW OF FUNDS DIAGRAM - CLOSING

Investor Bank(Tax Credit Investor)

Investment Fund VIII, LLC

Sub-CDE, LLC

Ccmmunity Fund I, LLC(Managing Member)

Metropolitan Community HealthCenter.Realty, Inc. (QALICB)

NMTC Subsidiary VIII, LLC

Investor Bank NMTC

Corporation(Managing Member)

Investor Bank (Day Lender)

UFA Metropolitan

Community

Lender Bank A

Lender

{8B3C8392-CA52-45DE-9D16-26736D5C5749}FLOWCHART - CLOSING See Schedule of Assumptions and Inputs and Accountants' Compilation Report Page 3

shkTypewritten Text

shkTypewritten Text

shkTypewritten Text

shkTypewritten Text

shkTypewritten Text Health Center

shkTypewritten TextManager of CommunityFund I, LLC

shkTypewritten Text

shkTypewritten Text

shkTypewritten Text(Leverage Lender)

shkTypewritten Text

Leverage Loan A1Interest Payments

Tax Credits $360,100$7,839,000 Leverage Loan A2

Interest Payments$145,425

Leverage Loan BInterest Payments

$541,174

Cash Distributions Cash Distributions$522,508 $525,953

Cash Distributions$53

Cash Distributions Asset Management Fee$52 $299,754

Audit and Tax Expense$112,000

QLICI Loan C QLICI Loan A1Interest Payments Interest Payments

$416,704 $484,753 QLICI Loan D QLICI Loan A2

Interest Payments Interest Payments$105,856 $195,766

QLICI Loan BInterest Payments$242,190Expense Reimbursements$15,050

Lease Payments

M COMMUNITY HEALTH CENTERFINANCIAL FORECAST

SUPPLEMENTAL SCHEDULE OF FLOW OF FUNDS DIAGRAM DURING COMPLIANCE PERIOD


Investor Bank(Tax Credit Investor)

Sub-CDE, LLC Ccmmunity Fund

I, LLC(Managing Member)

Metropolitan Health Center Realty, Inc.(QALICB)


Investor Bank NMTC Corporation

(Managing Member)


{8B3C8392-CA52-45DE-9D16-26736D5C5749}FLOWCHART - Period See Schedule of Assumptions and Inputs and Accountants' Compilation Report Page 4

Put Payment$266,526

Interest

Distribution of QLICI Loan A1 Note$5,205,250

Distribution of Distribution of QLICI Loan C Note QLICI Loan A2 Note

$7,819,305 $2,102,120Distribution of Distribution of

QLICI Loan D Note QLICI Loan B Note$1,986,354 $2,600,623

METROPOLITAN COMMUNITY HEALTH CENTER FINANCIAL FORECAST

SUPPLEMENTAL SCHEDULE OF FLOW OF FUNDS DIAGRAM AT END OF COMPLIANCE PERIOD

Investor Bank(Tax Credit Investor) (QALICB Affiliate)


Sub-CDE, LLC Ccmmunity Fund I, LLC

(Managing Member)

Metropolitan Community Health Center.Realty, Inc. (QALICB)



(Managing Member)


{8B3C8392-CA52-45DE-9D16-26736D5C5749}FLOWCHART - EXIT See Schedule of Assumptions and Inputs and Accountants' Compilation Report Page 5

17

METROPOLITAN COMMUNITY HEALTH CENTER NEW MARKETS TAX CREDIT INVESTMENT

NONBINDING TERM SHEET This term sheet summarizes the principal terms and conditions with respect to a potential qualified equity investment into community development entities and qualified low-income community investments by such community development entities. This term sheet (1) does not constitute a binding document, (2) does not constitute an offer to sell or purchase securities, and (3) constitutes confidential information. PARTIES: Developer and Project Sponsor (“Sponsor”): Metropolitan Community Health Center, Inc.

New Markets Tax Credits Investor (“Fund Investor”):

Investor Bank

Investment Fund (“Investment Fund”): Investment Fund, LLC, an entity to be formed by Fund Investor

Manager of Investment Fund (“Fund Manager”): Fund Investor (or its designee)

Fund Lender (“Fund Lender”): A portion of the business of Sponsor

Subsidiary Community Development Entity 1 (“Sub-CDE I”)

Sub-CDE, LLC

Community Development Entity I and managing member of Sub-CDE I (“CDE I”):

Community Fund I, LLC

Subsidiary Community Development Entity II (“Sub-CDE II”):


Community Development Entity II and managing member of Sub-CDE II (“CDE II”)


Qualified Active Low-Income Community Business and Owner of the Project (“Owner”):

Metropolitan Health Center Realty, Inc.

Master Tenant (“Master Tenant”): Sponsor

Accountants (“Accountants”): Accountant, LLC

Counsel to Fund Investor, Investment Fund, CDE II and Sub-CDE II:

Counsel to CDE I and Sub-CDE I:

Counsel to Owner and Sponsor:

Financial Advisor:

Project Manager: DEFINITIONS: CDFI Fund: U. S. Department of Treasury, Community Development Financial Institutions

Fund.

Code: The Internal Revenue Code of 1986, as amended from time to time, or any

18

corresponding provision or provisions of prior or succeeding law.

Compliance Period: The period beginning with the date of the first QEI and ending seven years after the date of the final QEI.

NMTC: New Markets Tax Credit.

QALICB: Qualified Active Low-Income Community Business, as such meaning is ascribed to it in Treasury Regulations Section 1.45D-d(2)(A).

QEI: Qualified Equity Investment, as such meaning is ascribed to it in Treasury Regulations Section 1.45D-b(1).

QI,ICI: Qualified Low-Income Community Investment, as such meaning is ascribed to it in Treasury Regulations Section 1.45D-(d)1.

Treasury Regulations: Means and includes any proposed, temporary and/or final regulations promulgated under the Code, as such regulations may be amended from time to time.

TRANSACTION DETAILS: Project Description: Sponsor is a private, not-for-profit organization that provides medical and

health education services to the residents of the City of Boston. Sponsor’s current facility is functionally and economically obsolete. In order to continue to meet the need for quality health care services for its target populations, Sponsor intends to construct a new, four-story, 49,500 square foot facility that will house a 35,000 square foot health center and 14,500 square feet of retail space for two tenants (the “Project”). The Project will more than double the size of the Sponsor’s current facility, increase the number of medical exam rooms from 9 to18, allow for expanded services and create space for two retail tenants which will serve patients and the community at large and generate over 45 additional full time jobs. The Project is located at _____________________________________ (census tract __________________) in Boston’s _____________ neighborhood. The Project’s location meets the NMTC Program’s criteria for higher distress since it: 1) is in a Federal Medically Underserved Area; 2) is within a tax increment financing zone; and 3) has an unemployment rate 1.38 times the national average. This Nonbinding Term Sheet describes the proposed NMTC financing for: (a) refinancing the acquisition financing, and (b) completing construction of the Project (collectively, the “Financing”).

NMTC Allocation Reservation:

CDE I has made $10,100,000 of its Round ____ 20__ NMTC award available to provide financing to the Owner for the Project subject to the reservation letter dated _______, 2010 (the “CDE I Reservation Letter”). CDE II will make available $10,000,000 of its Round ___ 20__ NMTC award available to provide financing to the Owner for the Project subject to the conditions set forth herein. The CDEs’ allocation commitments are subject to the terms and conditions set

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forth in this Nonbinding Term Sheet. In addition, the proposed investment must meet the requirements of the NMTC program and the CDEs’ allocation agreements with the CDFI Fund as determined by the CDEs’ respective legal counsel. The closing is expected by all parties to occur by ______________ (the “Closing Date”). If the Financing is not completed, as evidenced by signing of final documents, funding of the entire QEIs, funding of the NMTC Loans, and funding of the initial closing draw from the Construction Disbursement Account (collectively the “Closing”; capitalized terms further- defined and described below) by the Closing Date, the CDEs may, in their sole discretion, withdraw their sub-allocation of NMTCs, whereupon the CDEs shall have no further obligations pursuant to this term sheet and in connection with the Financing of the Project. The Owner will make best efforts to achieve the Closing in advance of the Closing Date.

Initial Deposits: In accordance with the CDE I Reservation Letter, Sponsor has deposited $__,000 with CDE I Manager, which, at Closing, will be returned to the Sponsor or applied against any third-party legal or accounting fees incurred by CDE I. In accordance with the CDE II Reservation Letter, Sponsor shall deposit $__,000 with Fund Investor, which will be returned to the Sponsor or applied against any third-party legal or accounting fees incurred by CDE II.

INVESTMENT FUND STRUCTURE: Ownership Structure:

Investment Fund would be a Delaware limited liability company. Fund Investor would own 100% of the Investment Fund.

Management: Fund Investor would manage the clay-to-day operations of the Investment Fund.

Capitalization: As further described in the Funding Waterfall, Investment Fund would receive debt and equity as follows:

• Fund Lender would provide a $15,072,480 fund loan facility (“Fund Loan”) using the following sources of capital:

• A $5,200,000 loan provided by Lender Bank A to the

Sponsor (the “Lender Bank A Leverage Loan”);

• A $2,109,312 loan provided by Lender B to the Sponsor (the “Lender B Leverage Loan”); and

• An $8,200,000 one-day bridge loan provided by

Investor Bank to the Sponsor (the “One-Day Bridge Loan”).

• Fund Investor would make a capital contribution of $5,330,520

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in exchange for 100% of the membership interests of the Investment Fund (“Fund Equity”). The Fund Equity will be priced at $0.68 per dollar of NMTCs; and

NMTC Amount: Fund Investor would be allocated 100% of NMTCs in connection with all QEIs made by the Investment Fund into Sub-CDE I and Sub-CDE II.

Distributions; Allocations

All distributable cash would be distributed in accordance with membership interests. All profits and losses would be allocated in accordance with membership interests.

Fund Loan: Loan Amount: $15,072,480 Loan Term: 30 years. Interest Rate: 1% Payment: Interest only payments during the Compliance Period followed by 23 years of debt service payments based on a 23-year amortization schedule. The entire principal balance plus accrued interest shall be paid in full by maturity. Collateral: The Fund Loan would be secured by a first-position pledge of Investment Fund’s membership interests in Sub-CDE I and Sub-CDE II. Use of Proceeds: The Fund Loan would be used to make the QEIs into Sub-CDE I and Sub-CDE. II, as described below, and pay permitted fees and expenses.

Forbearance: During the Compliance Period, Fund Lender (and any assignee thereof) would be subject to a seven-year standstill agreement whereby such lender would agree to forbear from foreclosing on its pledge or exercising other remedies due to monetary or non-monetary defaults. Should any funds be returned to either Sub-CDE I or Sub-CDE II in connection with any project foreclosure or loan prepayment, Investor and the CDEs shall have the right to redeploy those funds without consent from the Fund Lender.

Distributions Throughout Investment Structure:

Cash net of expenses received by the Investment Fund from the Sub-CDEs would be distributed and used as follows and with the following priority: (a) payment of interest and principal (to the extent permitted) on the Fund Loan; and (b) distribution of cash in accordance with membership interests. All payments and distributions would be subject to NMTC program restrictions on redemptions of QEIs.

Funding Waterfall:

The transactions contemplated by this term sheet would fund as set forth on attached Exhibit A.

SUB-CDE I STRUCTURE: Ownership Structure:

Sub-CDE I is a Delaware limited liability company. Investment Fund would own 99.99% and CDE I would own 0.01% of the membership interests.

Management: CDE I is the managing member of the Sub-CDE I and would manage its day-to-day operations. Subject in all respects to Sub-CDE l’s operating agreements, CDE

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I may only be removed for cause (e.g., an event of default, an act of gross negligence, or an act of intentional misconduct, reinvestment failure as described below); however, the CDE I has customary right to cure such cause prior to being removed.

Capitalization: CDE I would sub-allocate $10,100,000 of NMTCs to Sub-CDE I. Sub-CDE I would receive cash from the following sources:

• Investment Fund would make a QEI of $10,100,000 in exchange for 99.99% of the membership interests of Sub-CDE I; and

• CDE I would make a capital contribution of $1,010 in exchange for 0.01% of the membership interests of Sub-CDE I.

Reinvestment Rights:

With respect to any proceeds received by Sub-CDE I that require reinvestment under the NMTC program during the Compliance Period, Sub-CDE I would make loans to businesses qualifying as QALICBs and located in highly-distressed areas of CDE I’s service area. If reinvestment is required under the NMTC program, each of the Investment Fund and CDE I shall approve the borrower and terms of any loan and shall have the right to suggest reinvestment possibilities. The Fund shall have the right to remove CDE I as Sub-CDE I’s managing member or general partner after 6 months (the “Initial Reinvestment Period”) provided that (i) the Investment Fund has proposed to the managing member one or more replacement investments that satisfy the NMTC program requirements (and meet the 85% test), and the managing member has not approved such replacement investment(s) within a reasonable time; (ii) the managing member has failed to propose one or more replacement investments that met the NMTC program requirements (and the 85% test) and the investor member’s investment criteria (provided such investor criteria are specified prior to Closing).

Indemnity: Each of CDE I Manager, CDE I and Sub-CDE I would indemnify Fund Investor up to the amount required to achieve its targeted IRR for the recapture of NMTCs caused by:

• CDE I or Sub-CDE I failing or ceasing to be a qualified community development entity, as defined in Section 45D(g)(3)(A) of the Code;

• CDE I or Sub-CDE I failing to properly and timely designate the entire QEI to Sub-CDE I as a qualified equity investment as defined in Section 45D(b)(1)(c) of the Code;

• a QEI being redeemed, as described in Section 45D(g)(3)(C) of

the Code, as a result of a distribution being made contrary to the terms of Sub-CDE I’s operating agreement;

• failure of Sub-CDE Ito meet the substantially all requirements, as

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described in Section 45D(g)(3)(B) of the Code;

• Gross negligence, fraud, willful misconduct, misrepresentation, malfeasance, material violation of any law, or material breach of any provisions or representations of Sub-CDE I’s operating agreement.

No liability shall arise to the extent a recapture event results solely from (A) any willful misconduct, gross negligence or fraud of the Fund Investor; (B) the Owner failing to qualify, or to maintain its status, as a QALICB; (C) the failure of any of the NMTC Loans to constitute a QIICI; (D) change of law, if CDE I can establish that it is unable to comply despite all commercially reasonable efforts to do so. Further, no liability under the third bullet point above if (i) prior to the commencement of the Initial Reinvestment Period, the CDE I has proposed one or more replacement investments that meet the investor Member’s investment criteria and the NMTC Program Requirements in an aggregate amount sufficient to continuously satisfy the substantially all requirement, and (ii) the Investment Fund has not either (A) approved such proposed replacement investment, or (B) proposed one or more replacement investments meeting the requirements of Section 45D of the Code and the Treasury Regulations and Guidance and the Allocation Agreement (whether or not such replacement investments meet CDE I’s investment criteria, provided that in the event the Investment Fund has proposed a replacement investment that is not in a “targeted distressed community” as defined in Section 3(11) of the Allocation Agreement, CDE I shall have received written advice from the CDFI Fund or an opinion of counsel with experience in NMTC that such a replacement investment would not be a violation of CDE I’s allocation agreement. CDE I shall make reasonable efforts to obtain promptly such advice and such an opinion.) in an aggregate amount sufficient to continuously satisfy the substantially all requirement. For the avoidance of doubt, the parties acknowledge and agree that there shall be no liability for any recapture pursuant to the third or fourth bullet points above attributable to an IRS determination that the transactions contemplated by the project documents should be recharacterized or otherwise not respected for federal income tax purposes, unless such determination results from the gross negligence, fraud, willful misconduct, material misrepresentation, malfeasance, breach of certain covenants in Sub-CDE I’s operating agreement, on the part of any indemnitor or any affiliate of any indemnitor. Further, in the event that the CDE I is terminated or removed pursuant the operating agreement of Sub-CDE I, there shall be no liability with respect to a recapture event caused solely by any action or omission of a successor managing member of the CDE which occurs subsequent to the date of the termination or removal of CDE I.

Distributions: Cash received by the Sub-CDE I from the Owner (or successor Owner) or from other permitted investments net of expenses would be distributed and used as follows and with the following priority: (a) distribution of funds necessary to make payments under the Fund Loan; and (b) distribution of remaining cash to the members in accordance with membership interests. Notwithstanding the foregoing, during the Compliance Period, proceeds from the sale, disposition or other realization upon the property and proceeds constituting principal of any QL1CI which are required to be reinvested in accordance with Section 45D of the

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Internal Revenue Code would be reinvested. All payments and distributions would be subject to NMTC program restrictions on redemptions of QF.Is.

SUB-CDE II STRUCTURE: Ownership Structure:

Sub-CDE II is a Delaware limited liability company. Investment Fund would own 99.99% and CDE II would own 0.01% of the membership interests.

Management: CDE II is the managing member of the Sub-CDE II and would manage its day-to-day operations.

Capitalization:

CDE II would sub-allocate $10,000,000 of NMTCs to Sub-CDE II. Sub-CDE II would receive cash from the following sources:

• Investment Fund would make a QEI of $10,000,000 in exchange for 99.99% of the membership interests of Sub-CDE II; and

• CDE II would make a capital contribution of $1,000 in exchange

for 0.01% of the membership interests of Sub-CDE II.

Reinvestment Rights:

If reinvestment is required under the NMTC program, reinvestment shall be in the sole discretion of CDE II.

Distributions: Cash received by the Sub-CDE II from the Owner (or successor Owner) or from other permitted investments net of expenses would be distributed and used as follows and with the following priority: (a) distribution of funds necessary to make payments under the Fund Loan; and (b) distribution of remaining cash to the members in accordance with membership interests. Notwithstanding the foregoing, during the Compliance Period, proceeds from the sale, disposition or other realization upon the property and proceeds constituting principal of any QLICI which are required to be reinvested in accordance with Section 45D of the Internal Revenue Code would be reinvested. All payments and distributions would be subject to NMTC program restrictions on redemptions of QEIs.

OWNER STRUCTURE: Ownership Structure:

Owner will be a Massachusetts non-profit corporation and will be a regarded entity for federal tax purposes. The Sponsor will be the sole member of Owner. Sub-CDE II requires that the Owner be treated as a “non-real estate QALICB” under the CDFI Fund rules, which may require that the Owner be a special purpose entity principally owned by the Sponsor set up specifically to lease property back to the Sponsor, and that the Sponsor be the principal user of the property and itself be a non-real estate QALICB.

Management: Sponsor will manage the day-to-day operations of Owner.

NMTC Loans: Owner would receive the following loans (“NMTC Loans”) from the Sub-CDEs:

• Sub-CDE I would make the following loans totaling $9,898,000:

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Sub-CDE I QLICI Loan A1: $6,500,000;

Sub-CDE I QLICI Loan B1: $1,073,734; and

Sub-CDE I QLICI Loan C1: $2,324,266.

• Sub-CDE II would make the following loans totaling

$9,800,000:

Sub-CDE II QLICI Loan A1: $6,430,000;

Sub-CDE II QLICI Loan A2: $1,068,746; and

Sub-CDE II QLICI Loan C2: $2,301,254.

The NMTC Loans are expected to be funded in full at closing to the Construction Disbursement Account (as defined hereinafter) and will be disbursed to pay project costs pari passu (subject to change). Disbursements from the Construction Disbursement Account will be limited to one advance per month. Disbursement requests will be accompanied by necessary documentation including, but not limited to, a copy of sworn contractor and Owner’s statements, mechanic lien waivers for prior draws, property inspection reports, and other information reasonably requested by the Sub-CDEs. With respect to any proceeds received by Sub-CDE I and Sub-CDE II under the NMTC Loans that require reinvestment under the NMTC program during the Compliance Period, Sub-CDE I would receive 50.25% and Sub-CDE II would receive 49.75% of the proceeds. Each of the NMTC Loans must be structured to comply with the respective CDE’s allocation agreement, particularly with respect to favorable rates and terms. A summary of the proposed NMTC Loan amounts (subject to change), and basic terms and conditions for the NMTC Loans is as follows (subject to change). The parties acknowledge that these terms may be subject to additional modification based on legal and accounting review. In addition, owner equity shall constitute no less than 3% of Owner capitalization.

Sub-CDE I QLICI Loan A1:

Loan Amount: $6,500,000; Loan Term: 30 years; Interest Rate: 1.34402%; Payment: Interest only payments during the Compliance Period followed by 23 years of debt service payments based on a 23-year amortization schedule. The entire principal balance plus accrued interest shall be paid in full by maturity. No prepayment during compliance period. Collateral: First-position deed of trust in Project. The Owner will pledge the Interest Reserve Account, the Construction

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Disbursement Account and the Put Option Reserve Account (all as defined below) as collateral for Sub-CDE 1 QLICI Loan A1; such pledge shall be a first priority lien. Use of Proceeds: Proceeds would be used: (i) to pay for acquisition and construction costs related to Project; (ii) to make equity reimbursements; (iii) to pay closing costs; and (iv) to fund reserves. Advances: The NMTC Loans will be funded on a pro-rata basis at Closing.

Sub-CDE I QLICI Loan B1:

Loan Amount: $1,073,734; Loan Term: 30 years; Interest Rate: 1.34402%; Payment: Interest only payments during the Compliance Period followed by 23 years of debt service payments based on a 23-year amortization schedule. The entire principal balance plus accrued interest shall be paid in full by maturity. No prepayment during compliance period. Collateral: Second-position deed of trust in Project. The Owner will pledge the Interest Reserve Account, the Construction Disbursement Account and the Put Option Reserve Account (all as defined below) as collateral for Sub-CDE I QLICI Loan B1; such pledge shall be a second priority lien. Use of Proceeds: Proceeds would be used: (i) to pay for acquisition and construction costs related to Project; (ii) to make equity reimbursements; (iii) to pay closing costs; and (iv) to fund reserves. Advances: The NMTC Loans will be funded on a pro-rata basis at Closing.

Sub-CDE I QLICI Loan C1:

Loan Amount: $2,324,266; Loan Term: 30 years; Interest Rate: 1.34402%; Payment: Interest only payments during the Compliance Period followed by 23 years of debt service payments based on a 23-year amortization schedule. The entire principal balance plus accrued interest shall be paid in full by maturity. No prepayment during compliance period. Collateral: Third-position deed of trust in Project. The Owner will pledge the Interest Reserve Account, the Construction Disbursement Account and the Put Option Reserve Account (all as defined below) as collateral for QLICI Loan C1; such pledge shall be a third priority lien Use of Proceeds: Same as Sub-CDE I QLICI Loan A1. Advances: The NMTC Loans will be funded on a pro-rata basis at Closing; however, in the event the advancement of any portion of the Sub-CDE I QLICI Loan C1 would exceed, or be expected to exceed, any nonqualified financial

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property (as defined in Treasury Regulations Section 1.45D- 1(d)(4)(i)(E)) restrictions, such portion of Sub-CDE I QLICI Loan C1 would be held back pro rata with Sub-CDE II QLICI Loan C2 for no more than eleven months from the date of the applicable QEI until such time when the amount may he advanced without violating such restrictions.

Sub-CDE II QLICI Loan A1:

Loan Amount: $6,430,000; Loan Term: 30 years; Interest Rate: 0.76525%; Payment: Interest only payments during the Compliance Period followed by 23 years of debt service payments based on a 23-year amortization schedule. The entire principal balance plus accrued interest shall be paid in full by maturity. No prepayment during compliance period Collateral: First-position deed of trust in Project. The Owner will pledge the Interest Reserve Account, the Construction Disbursement Account and the Put Option Reserve Account (all as defined below) as collateral for Sub-CDE II QLICI Loan A2; such pledge shall be a first priority lien Use of Proceeds: Same as Sub-CDE I QLICI Loan A1. Advances: The NMTC Loans will be funded on a pro-rata basis at Closing.

Sub-CDE II QLICI Loan A2:

Loan Amount: $1,068,746; Loan Term: 30 years; Interest Rate: 0.76525%; Payment: Interest only payments during the Compliance Period followed by 23 years of debt service payments based on a 23-year amortization schedule. The entire principal balance plus accrued interest shall be paid in full by maturity. No prepayment during compliance period. Collateral: Second-position deed of trust in Project. The Owner will pledge the Interest Reserve Account, the Construction Disbursement Account and the Put Option Reserve Account (all as defined below) as collateral for QLICI Loan B2; such pledge shall be a second priority lien. Use of Proceeds: Same as Sub-CDE II QLICI Loan A1. Advances: The NMTC Loans will be funded on a pro-rata basis at Closing.

Sub-CDE II QLICI Loan C2:

Loan Amount: $2,301,254; Loan Term: 30 years; Interest Rate: 0.765

new markets tax credits · credits equaling thirty-nine percent (39%) of the investment amount....

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