Michael Taylor of PNC Bank discusses the banking perspective on historic tax credits at the Heritage Ohio Historic Tax Credit Workshop in Toledo, Ohio on March 25, 2011

1. 1
Toledo HTC Workshop
March 25, 2011
MICHAEL J. TALYOR
Senior Vice President – West Territory Executive
PNC Community Development Banking
(216)222-2293
Michael.J.Taylor@pnc.com

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Banking Perspective of Historic Tax Credits
 Commitment to Fostering Community and Economic
Development
 Help the Bank meet its Community Reinvestment Act
Requirements
 Profit Motive
 “It just Makes Sense”
- Leverage other private dollars - enhances property
values
- Creates affordable and market rate housing
- Augments revenues for federal, state and local
government

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Project Structure/What the Developer Needs
 GAP Financing
 Part II certificate showing readiness to start
construction
 Additional equity equaling 5% - 10% of project costs
 Complete development budget for the project
 A forward commitment on the permanent mortgage is
not required but is preferred
 Developer must show experience in rehabilitation
construction and have acceptable credit history

4. 4
Evaluation Process/Determining Feasibility
 Size of Allocation: The PNCCDC will consider both small investments
and large investments, $500,000 - $20,000,000.
 Debt Coverage*: Minimum of 1.20. * Depending on type of project
 Deferred Development Fee paid out of cash flow prior to the ending of
the 5-year compliance period is evaluated.
 Environmental Assessment: Required
 Term of Outstanding Debt: If a portion of the funding is raised through
debt, the term of the loan must not be less than 5 years (tax credit
compliance period).
 Reporting: Annual tax returns (1065 & K-1) and annual financial
statements.

5. 5
Evaluation Process/Determining Feasibility (Cont.)
 Project must meet the community development definition: Community
development is defined as activities which primarily support affordable
housing, and community services which are targeted at low-to-moderate
income individuals or which promote economic development through
financing of small businesses and farms or which revitalize or stabilize
low-to-moderate income geographies.
 CRA Requirements: Investments consistent with the requirement under
the Community Reinvestment Act;
- The innovativeness of the project
- Responsiveness to credit and community development needs
- Other economic and community development spin off and market
impact

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Calculating the Historic Preservation Tax Credit
 Federal Credit 20% of a project’s qualifying rehabilitation
expenditures (QRE’s)
 State of Ohio Credit 25% of QRE and is a refundable tax credit.
New legislation allows for the special
allocation of the credit.
 10% Federal Credit For restoring older buildings that predate 1936.
This is a non-contributing structure by the
department of interior.

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Calculating the Historic Preservation Tax Credit
 Acceptable
- Hard construction Cost for
Rehabilitation
- Architect’s Fees
- Construction Period Interest
Allocated to the Rehabilitation
- Development Fees Allocated to
the Rehabilitation
- Environmental Testing &
Remediation
- Properly Allocable Legal
Expense
- Historic Consultants
- Insurance & Taxes During
Construction
 Unacceptable
- Land
- Acquisition Costs
- Site Improvements
- Syndication Expenses
- Personal Property, e.g.,
Furniture & Equipment
- Financing Fees (non-
construction)
- Marketing Costs
General Examples of Acceptable and Unacceptable Cost for
Historic Basis Purposes

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Pricing of Historic Tax Credits
 Depends on the following factors:
- Developer strength
- Investment size
- Capital contribution pay-in schedule
- Structure of return components
- Local market dynamics
Example: $1 million in Qualified Rehabilitation Expenditures X 20% = Your Credit or
$200,000. NCCDC with a 99% partnership interest as a limited partner will receive
$198,000 in credits. The market is approximately 85 - 95 cents of the dollar.
At 90 cents the GP will receive $178,200 for the credits.
State Credit Calculation: $250,000 x 99% = $247,500 x $.60 = $148,500.
Total investment for Federal and State: $326,700.

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Syndication Structuring
 Limited Partnership/Limited Liability Company
 Placed in Service: The appropriate work has been completed which
allows for occupancy of either the entire building, or some identified
portion of the building.
 Project Completion Date
 Timing of Pay-ins and Investment Horizon
- Capital Contributions
Can begin as early as construction start
Can come in as late as near placement
 Investment Horizon
- Can begin as early as construction start
- Can come in as late as near placement
Developer
owns 1%
Investor
owns 99%
Pass-through
Entity
owns
Land and
Buildings

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Guarantee Requirements
 Historic Tax Credit guarantee
 Construction completion guarantee
 Operating deficit guarantee equaling six months of operating
expenses and debt service coverage
 Development Fee
 Reserve Requirements
- Minimum building reserves set by the first mortgage
requirements
- Operating reserves equal to six months of operating
expenses and debt service

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New Markets Tax Credits
Fundamentals
NMTC Synopsis
A federal tax credit available to those that provide
equity to certain certified entities that in turn lend
or invest in businesses (including non-profits)
located in low-income communities.

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How They Work
QALICB* CDE
CDFI
Investor
Allocation
Qualified Equity
InvestmentRepayments
* Qualified Low Income Community Businesses
** Qualified Low income Community Investments
QLICIs ** Tax Credits
& Return
New Markets Tax Credits

13. 13
New Markets Tax Credits
When is Rehabilitating Real Estate Qualified?
 Developing or renting non-residential real estate is qualified.
 Financing the developing of residential real estate (including multi-
family) is not qualified.
 Lending or investing in developers of residential real estate may
be qualified.
Note: Residential real estate is defined as “any building or
structure if 80% or more of the gross rental income from such
building or structure is rental income from dwelling units.”

14. 14
New Markets Tax Credits
Recapture
 Potential recapture for 7-year period from the date of
investment in a CDE.
 Occurs if:
- The entity ceases to be a CDE; or
- At least 85% of the proceeds of the investment cease
to be invested in QLICIs (drops to 75% in year
seven); or
- The investment is redeemed.

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Tax Issues
 Profit Motive
- Economic Profit Independent of Tax Benefits
- Cash Flow Distribution
- CRA Supporting Economic Participation
 Exit Strategies/Investor Buyout Strategy
- Fair Market Value Calculations
- Put and Call Provisions

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Due Diligence Items/Checklist
 Existing Operating Agreement
 Certified Copy of Articles of
Organization and all amendments
 Survey
 Plans and Specifications
 Building Permit
 Availability of Utilities Letters
 Deed
 Owner’s Title Policy
 Notice of Commencement
 General Contractor
 Architect
 Corporate Resolutions
 Certificate of Good Standing
 Loan Documents
 UCC, tax lien search
 Litigation search
 Environmental Report
 Insurance Certificates
 Appraisal
 Initial Construction Budget
 Zoning Letter
 Financial Projections
 Financial Statement(s) of
Principals/Guarantors
 Federal HTC Part I & II application
 Local Approval
 State Part I Approval
 Federal and State Part III
 Commitment Letter
 Local Counsel Opinion
 Tax Opinion
 Development Agreement
 Unconditional Guaranty
 Estoppel Letter from Lender(s)

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Common Pitfalls for First-Time Users of the
Federal Historic Tax Credits
 Having inadequate contingency in the development budget
 Presenting final drawings and commencing construction prior
to receiving Part II
 Allowing the general contractor to value engineer without
regard to NPS standards
 Using third-party consultants inefficiently
 Delaying contact with potential investors
 Coordinating equity with debt