CITY COUNCIL MEMQIPANDUM

Mayor and City Council FROM: DATE:

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SUBJECT:

New Markets Tax Credits (NMTC)

Attached are two presentations to facilitate a discussion on New Markets Tax Credits (NMTC) at the Committee of the Whole meeting November 2, 2009. One is prepared by Mr. Richard Miller of Angel1 Edwards Dodge & Palmer, LLP, Special Counsel, hired by the City. The other is prepared by Mr. Ed Gray, Executive Director of Capital Trust Agency - Community Development Entity, the agency allocating the NMTCs.

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Vince Whibbs Sr. Community Maritime Park &  Vice Admiral John H. Fetterman  State of Florida Maritime Museum and Research Center
October 2009

New Markets Tax Credit Program
Enacted on December 21, 2000 Creates a tax credit for equity investments in  Community Development Entities Community Development Entities (CDEs) must  use Substantially All of the proceeds from the  Qualified Equity Investments (QEIs) to make the  Loan into the Qualified Business located in Low‐ Income Communities.

Municipal Controlled CDE History
New Markets Tax Credits (NMTCs) have a history at  the municipal level. Founded in July 2005, the Chicago Development Fund  (CDF) is a Community Facilities corporation that  provides capital to qualifying projects and Controlled by the City of Chicago.

CDF Projects ‐ Homan Square  Powerhouse High School

CDF Projects ‐ Gary Comer College  Prep High School

CDF Projects ‐ Christ the King  College Prep High School

CDF Projects ‐ Imperial Zinc

CDF Projects ‐ Community Career  Training & Economic Development  Center

Sample NMTC Structure
Transaction Summary 1.NMTC investor provides  equity to the CDE 2.Sub‐CDE provides debt  financing to the project 3.The loan has a 7 year  term consistent with the  tax credit schedule 4.Project makes interest‐ only payments during the  term of the loan 5.Loans are repaid or  refinanced at the end of  the seven‐year compliance  period

Equity (QEI)

Tax credits and  cash return

Loan (QLICI)

Repayment  of loan

State New Markets Tax Credits
FL Statute 288.9914 (5) ‐‐ The qualified community  development entity must issue the qualified  investment in exchange for cash within 60 days after  it receives the order approving an investment as a  qualified investment, otherwise the order is void.   State tax credit time constraints
60 days to cash
November 29, 2009 (Sunday) November 30, 2009 (Confirmed with the state)

State New Markets Tax Credits
FL Statute 288.9915 (3) ‐‐ A qualified active low‐ income community business, including its affiliates,  may not receive more than $10 million in qualified  low‐income community investments under the New  Markets Development Program Act.  CTA‐CDE received the maximum amount allowed by  Florida Statute for the Maritime Park.

State New Markets Tax Credits
Leverage Effect
The Florida NMTCs allow for  one (1) QEI to be used for both  federal and state NMTCs.

Leverage Example

$4.S6MM NMTC EquiLy

Transaction that must close by  November 30, 2009
$10 million investment (QEI) into Investment LLC by  the tax credit investor (US Bank). NO UP FRONT COSTS REQUIRED of CMPA other  than closing costs and obligation to pay unwind costs Agreement with US Bank to fund the sub‐CDE within  9 months. Substantial penalties and interest if sub‐ CDE is not  funded.

NMTCs Market
New markets tax credits, both federal and state, are a  market driven investment.  The market is currently  devaluing tax credits, and delays in this environment  have already lowered the benefits to CMPA by  $980,000.  The current anticipated pricing for the  Florida credits is as follows:
Calculation of Anticipated State of FL NTMC Value Anticipated FL NMTC pricing Assumptions Maximum QEI per project 10,000,000 Gross value of FL NMTCs 3,900,000 Value of federal NMTCs 26.1% of QEI Additional discount from value of federal NMTCs 25.0% Net value of FL NMTC after additional discount from federal value 19.6% NMTC equity anticipated from FL NMTC 1,957,500

Funding Proposal to Construct Park AND Maritime Museum
Updated as of 10/30/2009 Sources Gross proceeds from sponsor equity (CRA) Museum Shortfall in fund raising Museum Pledges Museum Cash on Hand NMTC equity - Federal NMTC equity - State Total Sources Uses CMP Infrastructure proj (incl $2M pre‐dev) Museum Project Cost of Issuance Capitalized Interest ‐ bonds CDE Fee for Allocation Award NMTC Legal & Other Professional Fees Compliance and Audit over 7 Years Debt Service (1% of $26,790,002) "NMTC Debt" PayOff Sinking Fund to Retire NMTC Debt in Yr. 7 Total Uses $  43,000,000.00  2,040,375.00  727,972.00  4,463,879.00  18,450,574.00  1,957,500.00  $  70,640,300.00 

Net Benefit of NMTCs

NMTC equity ‐ Federal NMTC equity ‐ State

$  18,450,574.00  1,957,500.00  (3,214,800.00) (3,489,500.00) (420,000.00) (516,000.00) $  12,767,774.00 

$  40,000,000.00  20,000,000.00  661,232.00  2,338,768.00  3,489,500.00  516,000.00  420,000.00  1,875,300.00  1,339,500.00  $  70,640,300.00 

Debt Service & Payoff CDE Award Fee Compliance and Audit over 7  Years NMTC Legal & Professional

Minimum Necessary for Preserving the State  Credits
Updated as of 10/30/2009 Sources Gross proceeds from sponsor equity (CRA) NMTC equity - Federal NMTC equity - State $    5,432,500.00  2,610,000.00  1,957,500.00 
Net Benefit of NMTCs

Total Sources

$  10,000,000.00 

NMTC equity ‐ Federal NMTC equity ‐ State

$    2,610,000.00  1,957,500.00  (548,100.00) (500,000.00) (420,000.00) (516,000.00) $    2,583,400.00 

Uses CMP Infrastructure proj (incl $2M pre‐dev) CDE Fee for Allocation Award NMTC Legal & Other Professional Fees Compliance and Audit over 7 Years Debt Service (1% of $4,567,500) "NMTC Debt" PayOff Sinking Fund to Retire NMTC Debt in Yr. 7 8,015,900.00  500,000.00  516,000.00  420,000.00  319,725.00  228,375.00 

Debt Service & Payoff CDE Award Fee Compliance and Audit over 7 Years NMTC Legal & Professional

Total Uses

$  10,000,000.00 

Benefits and Risks to preserving the State tax  credits by November , 30, 2009
Benefits The CMPA will realize a net benefit in cash for  qualifying projects of approximately $2.5 million Risks If the funding by USBank of the $10 million QEI does  not convert to an investment within 9 months for  CMPA projects, the “unwind” costs result in a penalty  and legal costs totaling approximately $1.2 million.

Action Necessary
The CRA be authorized to provide financial guarantee  to the CMPA to fund a minimum leveraged debt of  approximately $5.5 million to fund a qualifying NMTC  investment by August 30, 2010. The resulting qualifying benefit to projects of the  CMPA will be approximately $2.5 million. Total project funds available will be approximately $8  million.

Contact:
Ed Gray, III Capital Trust Agency Community Development Entity  edgray3@ctacde.com Alex Bell Capital Trust Agency Community Development Entity alexbell@ctacde.com

CITY OF PENSACOLA, FLORIDA
PRESENTATION ON USE OF NEW MARKETS TAX CREDITS IN CONNECTION WITH TAX EXEMPT AND TAXABLE MUNICIPAL BONDS
RICHARD J. MILLER, ESQ. STEVEN L. PAUL, ESQ.
EDWARDS

ANGELL PALMER &
DODGELLP

NOVEMBER 2, 2009
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Background Information:
Rick Miller and Steve Paul are partners in the Public Finance and Tax Departments of Edwards Angell Palmer & Dodge LLP, a large national/international law firm centered in Boston with offices in Fort Lauderdale and West Palm Beach, Florida. The firm specializes in municipal bond work, corporate tax matters, including tax credits, among other areas. We serve as disclosure counsel to the City in connection with its financings and have been asked by the City Attorney and Finance Director to serve as special counsel in connection with New Markets Tax Credits (“NMTCs”).
EDWARDS

ANGELL PALMER &
DODGELLP
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We have served as bond counsel and as special NMTCs counsel in many such transactions throughout the Northeast and other parts of the country. The use of New Markets Tax Credits in connection with municipal bonds is not new. Their use in connection with taxable Build America Bonds is new because such bonds are a creature of the recently enacted economic stimulus act, the American Recovery and Reinvestment Act of 2009 (“ARRA”). Your City Attorney and Finance Director requested our response to issues and questions emanating from staff and members of the City Council relating to the use of New Markets Tax Credits in conjunction with municipal bonds, which we will address today as part of our presentation.
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EDWARDS

ANGELL PALMER &
DODGELLP

Goals Today:
I. To provide an introduction to New Markets Tax Credits, defining terms where necessary, and explaining their contemplated use. To explain New Markets Tax Credit considerations for the Community Maritime Park Project, including the security and flow of funds were New Markets Tax Credits to be used in connection with the City’s municipal bonds.

II.

III. To review the nine initial questions, and any further questions on the use of New Markets Tax Credits raised by Messrs. Barker and Wells, including: A. explaining why it is necessary to change the composition/corporate control of CMPA to accomplish the transaction with Build America Bonds, and outlining the risks associated with the use of New Markets Tax Credits, and the steps we would recommend that the 4 City take to mitigate risk.

EDWARDS

ANGELL PALMER &
DODGELLP

B.

IV.

To outline the documents required in connection with New Markets Tax Credits. To review the required disclosure to investors in the Official Statement.

V.

EDWARDS

ANGELL PALMER &
DODGELLP
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I. WHAT ARE NEW MARKETS TAX CREDITS?
“New Markets Tax Credits” (“NMTCs”) are federal tax credits used to raise investment capital for qualified businesses in lowincome communities (any census tract with a poverty rate of 20% or more). They are governed by Internal Revenue Code section 45D and Treasury Regulations section 1.45D-1. The Community Development Financial Institutions Fund (“CDFI Fund”), a part of the U.S. Department of Treasury, administers the New Markets Tax Credit Program. “Community Development Entities” (or “CDEs”) are the vehicles through which NMTCs investments are made. CDEs must apply for certification by the CDFI Fund in order to receive tax credit allocations. To qualify, a CDE must show that their primary mission is to serve the needs of, or provide investment capital via equity or loans to, low-income communities or individuals. Community development entities must be either partnerships or corporations for tax purposes.
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EDWARDS

ANGELL PALMER &
DODGELLP

A Community Development Entity must apply to the CDFI Fund for an allocation of New Markets Tax Credit investment authority. Allocations are subject to an aggregate annual dollar limit, currently $3.5 billion, and are made once a year. Allocatees have included banks and other for-profit entities, nonprofits and state agencies. In this instance the primary Community Development Entity is Capital Trust Agency –Community Development Entity, LLC. Community Development Entities sell NMTCs for cash to investors in exchange for investors’ equity investment in the CDE referred to as qualified equity investments (or “QEI”). Investors receive tax credits over a seven-year period, and the tax credits amount to 39% of the equity investment in the Community Development Entity. For example, if an investor invests $1,000,000 in a Community Development Entity, the investor receives tax credits totaling $390,000 over seven years.
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EDWARDS

ANGELL PALMER &
DODGELLP

Expenditure Requirements. Upon receiving cash from investors in exchange for NMTCs, a Community Development Entity has twelve (12) months to place at least 85% of the investor’s cash in qualified low-income community investments such as the Community Maritime Park Project. This 85% requirement, which is statutory, is usually increased typically to 95% by the terms of the Allocation Agreement between the CDE and the CDFI Fund. Maintenance of investments must be maintained for seven years or the tax credits will be subject to “recapture” by the IRS and the loss of their value. Consequently, the Community Development Entity cannot make distributions to its members or shareholders in excess of its operating income from the qualified low-income community investments.
EDWARDS

ANGELL PALMER &
DODGELLP
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Qualified low-income community investments include any capital investment or equity investment in, or loan to, a “qualified active low-income community business” (“Qualified Business” or “QALICB”). CMPA is expected to qualify as a Qualified Business. Because of the requirement that the investment be outstanding for seven years, loans to QALICBs frequently provide for interest-only payments during this seven-year period. Qualified Businesses or QALICBs are, generally, businesses that, in any given tax year, generate at least 50% of their annual gross income by conducting business in a low-income community, use at least 40% of their tangible property within a low-income community and perform at least 40% of their services in a lowincome community. In addition, not more than 5% of the assets of a Qualified Business can consist of “collectibles” or “nonqualified financial property,” which includes cash and cash equivalents (other than reasonable working capital and accounts receivable), securities and similar property. 9

EDWARDS

ANGELL PALMER &
DODGELLP

Thus, for example, a nonprofit with a substantial endowment would have to form a separate legal entity that constitutes a Qualified Business in order to receive money from a Community Development Entity. If a business has no employees, it is not required to perform 40% of its services in a low-income community but may be a qualified active low-income community business if 85% of its assets are located in such a community.

EDWARDS

ANGELL PALMER &
DODGELLP
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Leveraged loans (such as the City’s bond financing) enhance NMTCs value/return. Many investors and CDEs seek to leverage the investor’s investments in order to maximize the tax credits and make the New Markets Tax Credit Program more attractive to investors. The use of leverage means that the investor borrows most of the money used to make its investment in the CDE. These loans, referred to as “Leverage Loans”, are typically nonrecourse, and secured by the investment in the CDE. Note that the Leverage Loan is made to the investor, rather than the Qualified Business, and is typically secured by the investor’s equity interest in the Community Development Entity, not by any security interest in the Qualified Business. Leveraging will be explained further in Part II in the context of the proposed transaction.
EDWARDS

ANGELL PALMER &
DODGELLP
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II. NEW MARKETS TAX CREDIT CONSIDERATIONS FOR THE COMMUNITY MARITIME PARK PROJECT, INCLUDING THE SECURITY AND SOURCE OF PAYMENT FOR BONDS.

The following is a brief description of the financing of the Community Maritime Park Project (the “Project”) if augmented by the use of NMTCs as shown in the proposed Official Statement for the financing. Capital Trust Agency and its CDE, Capital Trust Agency – Community Development Entity, LLC (“CTA-CDE”) have committed $35,000,000 in NMTC investment authority to CMPA and the Community Maritime Park Project (the “Project”) and are seeking commitments of an additional $35,000,000 from other Community Development Entities for a total NMTC investment of $70,000,000. Such an investment is estimated to generate $27,300,000 of NMTCs over seven years, resulting in additional proceeds for the Project estimated at between $15,000,000 and $20,000,000. These additional proceeds would be used for construction of a museum for use by the University of West Florida or its not-for-profit subsidiary, or a conference center or other component of the Project.
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EDWARDS

ANGELL PALMER &
DODGELLP

To effectuate the additional NMTC investment, the following structure would be employed: Series 2009 Bond proceeds in the amount of up to $43,000,000 received by the City would be loaned to the NMTC investor entity (the “Investor”) and used by the Investor, together with its own equity investment (“NMTC Equity”) and other available sources (such as proceeds from the sale of state NMTCs and funds provided by the University, to make qualified equity investments in CTA-CDE and the other CDE(s), of up to $70,000,000 which investment would entitle the Investor to NMTCs. See Diagram.

EDWARDS

ANGELL PALMER &
DODGELLP
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Maritime Park and Museum – Leveraged NMTC Financing Structure
Bond Debt Service

Bond Purchaser
Bond Proceeds

Issuer
Loan of Bond Proceeds ($40MM) NMTC Equity Issuer loan debt service Leverage Loan ($10MM)

NMTC Equity Investor(s) CTA
.1%
Fees $35MM Investment (QEI)

($20MM) NMTCs
9 99 . %

New Markets Tax Credit Investor Fund
Investment (QEI) Cash Distributions & NMTCs Investment (QEI)

Debt service?

Other Sources (Bank Debt, Museum Funds)

Cash Distributions & NMTCs

New Markets Tax Credit CDE – I Capital Trust
A and B Loans Loan Payments

New Markets Tax Credit CDE – 2 ?
A and B Loans Loan Payments

New Markets Tax Credit CDE – 3 ?
A and B Loans

Community Maritime Park Associates, Inc. (Owner/Lessor) - QALICB
501 ( c ) ( 3 )

Museum Lease Rent (nominal)

Maritime Museum (501 ( c ) ( 3 ))

Grants of tax revenues

CRA

The Leverage Loan from the City to the Investor would be interestonly for seven years and would be secured by a pledge of the Investor’s equity interest in CTA-CDE and the CDE(s). CTA-CDE and the CDE(s), in turn, would make senior and subordinate loans to the active Qualified Business, in this case, CMPA, to finance substantially all of the Project. The amount of the senior loan is expected to be $43,000,000, corresponding to the Series 2009 Bond proceeds loaned to the Investor and the amount of the subordinate loans would be based upon the NMTC equity and other sources less any fees and transaction costs paid by the CDE. All the loans from the CDE would also be interest-only for seven years and would amortize fully over their remaining terms.

EDWARDS

ANGELL PALMER &
DODGELLP
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CMPA Repayment Obligations. The principal source of repayment by CMPA of such loans would be a first claim on Tax Increment Revenues per agreement to be entered between CMPA and the CRA providing that the CRA would compensate CMPA for development of the Project. Thus, if NMTCs are used, the Series 2009 Bonds would have a security interest in the equity interests in CTA-CDE and CDEs and a claim only on the Tax Increment Revenues in the Redevelopment Trust Fund available after the payment of debt service on the CDE loans.

EDWARDS

ANGELL PALMER &
DODGELLP
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The source of CMPA loan repayment would be its income, to include the Tax Increment Revenues (in an amount sufficient to pay debt service on the CMPA loan) received from the CRA. CMPA then pays such amount to the CDE, and the CDEs remit payment to the Investor. Finally, the Investor uses the amounts received from the CDE(s) to pay debt service on the loan from the City which then becomes Pledged Revenues available for payment of the Series 2009 Bonds. To the extent there is a shortfall in such payment for any reason, including the bankruptcy of CMPA or the CDE(s) or other claims, the City has covenanted in the Bond Resolution to appropriate in its annual budget, by amendment if necessary, in each Fiscal Year, Non-Ad Valorem Revenues sufficient, after application of the other Pledged Revenues and any applicable Federal Direct Payments, to pay the Bond Service Requirements on the Series 2009 Bonds, as the same shall become due and payable.
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EDWARDS

ANGELL PALMER &
DODGELLP

Federal Direct Payments with respect to BABs would remain Pledged Revenues outside the NMTCs structure, as would Pledged Revenues with respect to Bonds evidencing the proceeds of the Series 2009 Bonds that do not fund the loan to the Investor ($2,935,000*). * Preliminary; subject to change. In the event NMTCs are employed, the City may amend the Bond Resolution to provide fully for the foregoing, so long as such amendment would not cause a change in the ratings then carried on the Series 2009 Bonds.
EDWARDS

ANGELL PALMER &
DODGELLP
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Under the loan agreements with CTA-CDE and the CDE(s), CMPA would make certain representations and provide certain covenants to support the conclusion and reasonable expectation of the CDE(s) that CMPA qualifies and will continue to qualify as a “qualified active low-income community business” (“QALICB”) under the Code. If CMPA fails to continue to qualify as a QALICB, misrepresents or violates the covenants or representations made to the CDE on which the CDE relied, or fails to cooperate with the CDE in maintaining its CDE status, such failure may result in a recapture of the NMTCs claimed by the Investor.

EDWARDS

ANGELL PALMER &
DODGELLP
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If a recapture were to occur for this reason, CMPA may become liable for the recaptured amount as set forth in Section 45D of the Code. As a result, CMPA could be forced to find a source of funding for such liability, or could be forced to cease operations, which could negatively affect the Tax Increment Revenues in possession of CMPA for the payment of the Bond Service Requirement on the Series 2009 Bonds and operation of the 2009 Project. These risks are discussed further under the nine specific questions in Part III.

EDWARDS

ANGELL PALMER &
DODGELLP
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III. NINE SPECIFIC QUESTIONS RAISED IN CONNECTION WITH THE USE OF NEW MARKETS TAX CREDITS, INCLUDING (A) WHY CHANGES IN CMPA CONTROL, AND (B) THE RISKS.

Question 1 Can tax-exempt bonds be used in conjunction with NMTCs to fund the Project? Answer 1 Tax-exempt bonds may be used in conjunction with NMTCs under the Code. In our view, the tax-exempt status of the bonds is determined by ultimate use of the bonds proceeds, in this case by CMPA as described below, rather than their use by the NMTC investor though which these proceeds pass. Explanation: Tax-exempt bonds can be either governmental bonds or tax-exempt private activity bonds, such as tax-exempt 501(c)(3) bonds for not for profit use. In the usual case, City bonds paid from tax increment revenues would be classified as governmental bonds because of characterization of the tax increment revenues as “generally applicable taxes” and the absence of, or limited nature of, private sector involvement.
EDWARDS

ANGELL PALMER &
DODGELLP
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The Distinction for NMTC Structure: Unlike the usual case, the NMTCs structure requires that proceeds of the City’s bonds and moneys used to pay debt service on the bonds both flow through CMPA. If CMPA is restructured to be an instrumentality or alter ego of the City, the City’s bonds should qualify as tax-exempt governmental bonds. If CMPA is not an instrumentality of the City, the City’s bonds should still qualify as tax-exempt, but would be classified as tax-exempt 501(c)(3) private activity bonds. Although in either case the City’s bonds would be tax-exempt, a structure which results in the City’s bonds being classified as private activity bonds precludes issuance of the bonds as taxable BABs as more fully described in answer to Question 2.

EDWARDS

ANGELL PALMER &
DODGELLP
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Question 2 NMTCs?

Can BABs be issued in conjunction with

Answer 2 The answer turns on whether the proposed BABs can be characterized as “governmental” under the IRC Code rather than a “private activity bond” or a private loan bond. Normally, bonds issued for 501(c)(3) corporations are considered private activity bonds under the Code where the corporation directly or indirectly repays the debt and uses the project or the facilities. Explanation: Since CMPA would (1) receive the loan proceeds indirectly from the Investors through the CDEs and (2) will, in effect, “use” the Project under its Lease, this financing would constitute a qualified 501(c)(3) private activity eligible for tax exempt funding under the Code but not as a “governmental bond”.
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EDWARDS

ANGELL PALMER &
DODGELLP

The BAB rules require, among other things, that bonds treated as BABs must satisfy virtually all of the rules applicable to taxexempt bonds, but may not be private activity bonds. Classification of the City’s bonds as 501(c)(3) private activity bonds would thus spoil the use of BABs. If the payments in the payment stream do not retain their characterization as “generally applicable taxes,” as they move up the chain from CRA to CMPA to CDEs, the repayment and use by CMPA would meet the two-pronged private activity bond test and, thus, preclude issuance of the bonds as BABs. There is no certainty found in the Code or Treasury rulings that the stream of payments up the chain shown in the diagram would retain their character as generally applicable taxes, as they pass from CMPA through the CDE and the Investor to pay the bonds.
EDWARDS

ANGELL PALMER &
DODGELLP
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Reason for City Control of CMPA This conclusion would not follow were CMPA to be controlled by the City and treated as an instrumentality of the City. In that event, the bonds would be deemed to have been issued by the City and repaid by the City, regardless of the intermediate steps, since CMPA would be an alter ego of the City for tax purposes. It is our view that were the structure of CMPA such that it was controlled by the City, it would, in effect, be an instrumentality of the City and its bonds issued for the Project would be classified as governmental bonds. Further, it is our view that the status of CMPA as an instrumentality of the City will not preclude the qualification of CMPA as a 501(c)(3) corporation under the Code or the capacity to use NMTCs in conjunction with tax-exempt bonds or BABs under this structure.

EDWARDS

ANGELL PALMER &
DODGELLP
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What is Control? In order to constitute an instrumentality of the City, a majority of the members of the Board of CMPA, by virtue of the terms of the charter and by-laws, must be appointed by the City and may be removed by the City without cause. At the end of the day were the 501(c)(3) to dissolve , the assets of CMPA must be distributed to the City. Accordingly, the charter and by-laws of CMPA would require amendment and the membership in the Board adjusted in order to accomplish BAB financing in conjunction with NMTCs, as only 1/3 of the CMPA board members are now appointed by the City.

EDWARDS

ANGELL PALMER &
DODGELLP
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Question 3 What is the required coincidence of the timing of the two funding sources? Must they be simultaneous? Answer 3 NMTC’s equal 39% of the Investor’s QEI and are not directly tied to project costs. All the money invested should be placed in and through the Investor at the same time so that the Investor can combine the bond or loan proceeds with its own equity in determining the amount of its QEI. Thus, the Investor must be in place in time to receive the bond proceeds and invest them in the CDE.

EDWARDS

ANGELL PALMER &
DODGELLP
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Question 4 Under the Code, when must the Project be completed to afford the benefits of NMTCs? Answer 4 The Code provides a 12-month period for the CDE to disburse 85% of the QEI to CMPA, though as a regulatory matter most allocations agreements increase the required disbursement percentage to 95%. In order to be a qualified active low-income business (QALICB), CMPA, in turn, is prohibited from holding “nonqualified financial assets, including cash in excess of 5% of the adjusted basis of all its assets. There is an exception permitting CMPA to hold “reasonable working capital” and a safe harbor under this exception for up to 12 months of construction expenditures.
EDWARDS

ANGELL PALMER &
DODGELLP

Explanation: The cumulative impact of all these rules permits expenditures to be spread over 24 months.
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Example: The following is an example of how this can work: if total Project costs were $24 million to be expended at the rate of $1 million per month, all $24 million would be paid to the CDE at closing (so that the Investor can claim NMTCs immediately on the total investment), $1 million could be disbursed to the qualified business in each of the next 12 months, and on the final day of the 12 month period, an additional $12 million could be disbursed, and the qualified business would then have 12 months to expend the final $12 million.

EDWARDS

ANGELL PALMER &
DODGELLP
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Contracted Expenditures: It is contemplated, although not necessarily within the safe harbor, that it is reasonable to retain working capital for purposes of contracts that have been let and are reasonably expected to have been completed within the 24month permissible period, but are not. Accordingly, the reasonably expected contractual period for expending 95% of the proceeds received from the CDE could be outside of 24 months. This outcome will depend upon the approval of the investors.

EDWARDS

ANGELL PALMER &
DODGELLP
30

Question 5 Can the park and the museum be combined as a single project for purposes of calculation of New Markets Tax credits benefits? Answer 5 Yes, if the project is put together in such a way as the museum and the other Maritime Park improvements are funded together as a single project within the low income community.

EDWARDS

ANGELL PALMER &
DODGELLP
31

Question 6 What is the risk to the City if the tax credits for some reason are not realized by Investors? Answer 6 Under the Code, the Investor is at risk for “recapture “ of NMTCs for an equity investment in a CDE where, (1) the CDE ceases to be a CDE ; (2) the CDE ceases to use substantially all of the proceeds of the equity investment for qualified low-income community investments; or (3) the CDE redeems the Investor’s equity investment. . Explanation: Since redemption of the investment is entirely within the Investor’s control, that event of recapture should not place any liability on the CMPA or the City, even indirectly. Under clause (2), however, loss of NMTC will result from the failure of CMPA to maintain its status as a QALICB, the principal risks of which are that it will retain more than the permitted amounts of nonqualified financial assets or collectibles. The question remains whether the close nexus between CMPA and the City could cause liability to the City were Investors’ required to rebate their NMTCs.

EDWARDS

ANGELL PALMER &
DODGELLP
32

Limit City’s Risk. We would recommend that the City take steps to alleviate the risks attendant to the NMTC obligations of CMPA by resisting any guarantees concerning CMPA’s QALICB status and through safeguards built into contracts with contractors and builders requiring on-time completion, completion bonds and penalties, not to mention substantial prior planning of the Project by CMPA , the museum and other participants. In addition, Project beneficiaries of the NMTCs may be requested to indemnify CMPA and the City from liability to the extent they benefit from the use of NMTCs. Moreover, documents should contain a disclaimer of City liability as stated in the Preliminary Official Statement. The agreements, representations and warranties to be undertaken with respect to NMTCs will expressly state that the City is not liable for and makes no representations or warranties with respect to NMTCs.
EDWARDS

ANGELL PALMER &
DODGELLP

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The primary party responsible for the sale of the New Markets Tax would be Capital Trust and its CDE. The primary parties responsible for disbursal of the bond and NMTC moneys received would be the CDE and CMPA. Presumably Capital Trust would bear any risk concerning the loss of qualified status of the CDE; CMPA, the loss of qualified status of the Qualified Business.

EDWARDS

ANGELL PALMER &
DODGELLP
34

Question 7 This question relates to the substantial cost of the transaction and, particularly, the substantial commission to CTA in connection with this transaction. Is this large commission in the permissible range? Answer 7 NMTC transaction costs are VERY high. They can include upfront, annual and exit fees to the CDE, accountants fees for preparation of financial projections and fees for the separate counsels of the CDE(s), the Investor(s), the Leverage Lender(s) and the QALICB. They were nearly $3 million for a recent transaction in which the gross NMTC equity was about $8.5 million and the allocation was $30 million. Thus the net to the project was about $5.5 million.
EDWARDS

ANGELL PALMER &
DODGELLP
35

Question 8 What is the but/for test and does it present an issue here? Answer 8 It appears that part of the Project and particularly the museum would not be funded without the use of tax increment monies in any timely fashion--the museum may take years to raise required amounts. However, the but/for test may be a regulatory matter because it’s not part of the Code relating to New Markets Tax credits, but rather, possibly, a policy of the oversight agency, CDFI.

EDWARDS

ANGELL PALMER &
DODGELLP
36

Question 9 Can the City act as trustee or disbursement agent in connection with the funds in the hands of CMPA. Answer 9 Yes. An agency agreement would be permissible. The City may act similar to the way a lender would in overseeing its loan proceeds. Funds would need to flow to CMPA as outlined but could be deposited by CMPA in a project account administered by the City. Here, City may not want to associate itself with the terms of disbursement that could affect the timing of required expenditures.

EDWARDS

ANGELL PALMER &
DODGELLP
37

IV. DOCUMENTS REQUIRED IN NEW MARKETS TAX CREDITS TRANSACTIONS QLICI Loan Documents between the CDE(s) and CMPA Loan Agreement (Senior and Subordinate) Promissory Notes Mortgages Assignments of Leases and Rents Agreement between CMPA and CRA regarding TIF revenues Intercreditor Agreement (for multiple CDE’s)

EDWARDS

ANGELL PALMER &
DODGELLP
38

EDWARDS

Unwind or Exit Documents to collapse NMTC structure after 7 years Put/Call Agreement LLC Agreement of CDE(s) LLC Agreement of Investment Fund Leverage Loan Documents between City and Fund Promissory Note Pledge Agreement regarding interest in CDE Loan Agreements Forbearance Agreement UCC-1
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ANGELL PALMER &
DODGELLP

Real Estate and Entity Due Diligence Title, survey, environmental, insurance Authority and good standing Construction and Architects Contracts Building Permits Opinions Overall tax opinion (Investor Counsel) QALICB tax opinion (QALICB tax counsel) QALICB authority opinion (QALICB general counsel) CDE tax and authority opinions (CDE counsel) Investor counsel opinions regarding Leverage Loan Financial Forecasts
EDWARDS

ANGELL PALMER &
DODGELLP
40

V. REQUIRED DISCLOSURE TO BOND INVESTORS
Required Disclosure. The Official Statement for the City’s bonds issued for the Project should have disclosure as to the possible use of New Markets Tax Credits, the risks involved and the effect on the flow of funds and bondholders’ security. The information provided in Part II regarding the flow of funds with New Markets Tax Credits has been set forth in the draft Preliminary Official Statement, as well as the risks that have been explained both in that part and in Part III Question 6.

EDWARDS

ANGELL PALMER &
DODGELLP
41

The format for disclosure at this point is contained in the draft Preliminary Official Statement which has been distributed to the City Council Members in connection with the bond sale. Were the bond issue to take place simultaneously with the New Markets Tax Credits investment, the disclosure would change because the flow of funds and bond documents would have been modified and the normal flow of funds now set out in the other parts of the Preliminary Official Statement would be no longer applicable. The important point is that the bond holders would receive information similar to that which the City Council has received with respect to their investment and the effect of the use of New Markets Tax Credits on their investment.

EDWARDS

ANGELL PALMER &
DODGELLP
42

ANY TAX ADVICE CONTAINED HEREIN WAS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, FOR THE PURPOSE OF AVOIDING FEDERAL TAXRELATED PENALTIES OR PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY TRANSACTION OR MATTER ADDRESSED HEREIN.

EDWARDS

ANGELL PALMER &
DODGELLP
43

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