Targeted Population Deals Done So Far Reflect Variety

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Targeted population transactions, a new category of deals made eligible in 2004 for financing under the federal new markets tax credit (NMTC) program, have been tough to do, for multiple reasons.

Nevertheless, a number – albeit apparently small – of NMTC targeted transactions have been structured and closed, of various types. In recent interviews with the Tax Credit Advisor, participants described some of these transactions.

A Community Development Financial Institutions Fund spokesman on 7/18/08 that only six targeted populations deals have been reported to the CDFI Fund by community development entities (CDEs) as of their most recent reports, for periods ending December 2006. All six deals utilized NMTC allocations from one CDE, WesBanco Bank CDC, of Jackson, Ohio, and were all to provide loans to businesses, the spokesman said.

New Area of Eligibility

Under the new markets program, CDEs generally are limited to making NMTC investments in qualified businesses (Qualified Active Low Income Community Businesses, or QALICBs) in “low-income communities.” These generally are qualified census tracts (QCTs) characterized by high poverty rates or low median family incomes.

Legislation enacted in 2004 loosened the rules to permit NMTC investments in businesses outside of low-income communities, but within moderate-income census tracts, provided the businesses benefit “targeted populations.” In general, the latter are individuals or identifiable groups of individuals who are low-income or who lack adequate access to loans or equity investments. In general, low-income is 80% or less of area median income (AMI). A moderate-income census tract is generally one in which median family income doesn’t exceed 120% of AMI.

For a business to qualify as a QALICB for NMTC investment under the targeted population criteria, it must: (1) be at least 50% owned by low-income persons; (2) have at least 40% of its employees be low-income persons; or (3) derive at least 50% of its annual gross income from sales, rentals, services, or other transactions with low-income persons. In addition, there must be a reasonable assumption that the applicable low-income threshold selected for a transaction from the preceding options will be satisfied by the business for the next seven years – the NMTC recapture period.

The requirements for targeted population transactions are more liberal for the Gulf Opportunity (GO) Zone – parts of Louisiana, Alabama, and Mississippi. The cap for moderate-income census tracts is 200% of AMI, and individuals displaced by Hurricane Katrina count toward meeting the low-income tests.

Currently, the only substantive regulatory tax guidance for the targeted population provisions is a notice (2006-60) issued by the Internal Revenue Service in mid-2006. The Service, though, is soon expected to publish new proposed regulations regarding targeted populations.

Manufacturing, Development

Telesis Corporation, a Washington, DC-based firm that develops affordable housing communities and operates a CDE, has closed two targeted population transactions to date, according to Telesis executive Bill Whitman and Washington, DC attorney Jerry Breed. Breed, who worked on the transactions, is a partner in Powell Goldstein LLP, which issued the tax opinions for these two deals and for a third.

In one transaction, Telesis’ CDE used part of an NMTC allocation to provide lower-cost debt to an existing company in Louisiana that manufactures steel framing used in modular housing. Whitman said the funding enabled the firm to pay off some expensive existing debt, and provided working capital so the firm could stabilize and beef up marketing.

The business wasn’t in a QCT and therefore ineligible for NMTC investment under the program’s normal standards. “But the business had, in fact, been hiring low-income individuals, so it met the targeted population test,” said Whitman. The targeted population requirement was met by satisfying the test that the employees are predominantly low-income. In addition, because the business is in the GO Zone, displaced workers could be counted toward the low-income test, assuring an ample cushion.

Whitman and Breed noted the company agreed to income certify the household income of its current employees and prospective new hires to make sure they qualify as low-income, and will continue to monitor and perform such actions in the future.

In the second transaction, Telesis’ CDE used part of an NMTC allocation to provide a subsidized loan of $4.5 million to an existing company formed by Telesis called Neighborhood Partners LLC, to enable the latter QALICB to develop a new for-sale housing project on H Street, NE in Washington, DC.

The site was across the street from a QCT and therefore ineligible for an NMTC investment under the standard rules. However, some of the affordable housing projects that Telesis has developed and manages – it has a separate development company and separate management company – are located in QCTs.

Neighborhood Partners LLC, based in the Washington suburb of Beltsville, MD, with offices in the District of Columbia, was formed by Telesis years ago, Whitman said, with the intention to provide multiple services (property management, asset management, and, as needed, development) in the communities in which Telesis operates.

Employees of Telesis’ management company and certain employees of its development arm – those relating to certain affordable housing projects – are the employees of the QALICB. The QALICB met the test to qualify for a targeted population transaction by having more than 40% of its employees as low-income persons. Whitman said the employees agreed to undergo income certification, as will prospective new hires. Income monitoring and certifications will continue in the future.

Whitman said the attractive-rate funding to the QALICB has or is being used to pay for site acquisition and pre-development costs, plus tax and interest on an existing leveraged loan until it is taken out by a construction loan.

Hospital Project

In a third transaction, NMTC funds were used to provide working capital to a hospital in Louisiana within the GO Zone, and a loan to finance the rehabilitation of damaged portions of the hospital, Breed explained.

He noted assurance of meeting the low-income test came from income certification by the hospital of its employees. Breed said the test was satisfied counting both employees who were low-income and employees classified as displaced persons. He added the expectation is that the minimum 40% low-income test will be met by a comfortable cushion over the next seven years even if employees classified as displaced are disregarded, based on an analysis of what percentage of current employees are displaced, and the typical employee turnover rate.

Boys and Girls Club

In a transaction that closed in late 2007, an NMTC investment is being used to finance construction of a community center in Seattle, WA, by the Boys & Girls Clubs of King County. The organization sought to use the NMTC for the project because it had cost constraints “and they needed the subsidy to make the project financing work,” said Ira Weinstein, a principal in the Reznick Group, an accounting and consulting firm.

According to Weinstein, the targeted population test was made by verifying that at least 70% of the employees were low-income, from covenants and representations and other measures. Employees already hired have been income certified, as will new hires.

Construction of Homes

In a targeted population transaction that closed in mid-July, NMTC proceeds will be used to provide subsidized loans to multiple affiliates of a national nonprofit organization to help them finance construction of modest new homes sold to households with incomes not exceeding 80% of AMI. The affiliates are located in the GO Zone in Louisiana, Alabama, and Mississippi.

The targeted population test will be met because all of the buyers will be low-income, said John Sciarretti, a partner in Novogradac & Company LLP, an accounting and consulting firm. Sciarretti, who worked on the transaction, explained that the affiliates income certify prospective buyers, requiring copies of tax returns, as part of their standard process for qualifying buyers of the homes they build,

He said it’s expected that the NMTC funds will finance construction of 300 or more houses.