bank or corporation buys the tax credits. The favorable financing
from NMR is possible because a bank or corporation will pay to purchase
federal tax credits (New Markets Tax Credits, or NMTCs) from an entity
formed by NMR for financing purposes. The credits are equal to 39%
of the equity investment made in NMR's financing entity. The
credits offset federal income tax for the bank or corporate at a rate
of 5% per year for years 1-3 and 6% per year for years 4-7 (in total,
39% over seven years). The equity investment in NMR's financing entity
supplies approximately 30% of the cash for the financing entity's
investment in the real estate project. The price that the bank
or corporation is willing to pay for these tax credits becomes economic
benefit to the owner of the real estate project, by virtue of the
favorable terms of the NMR financing.
bank makes a seven year loan.
In addition, a bank must be willing to make a seven-year interest-only
loan for the real estate project. Instead of making the loan directly
to the project owner, the bank makes the loan to an investment fund,
owned by the buyer of the tax credits. The investment fund makes
an equity investment in a subsidiary CDE (the financing entity)
formed by NMR. This equity investment gives rise to the tax credits,
which flow through to the bank or corporation which owns the investment
fund. In some cases, the bank making the seven year loan is the
same bank that buys the tax credits (and owns the investment fund).
makes the real estate investments.
NMR (through the financing entity) makes a low interest rate loan
or loans to the owner of the real estate project, and sometimes
an equity investment as well. The debt service on the loans is calculated
at a level which together with distributions attributed to the NMR
equity investment allows the NMR financing entity to distribute
cash to the investment fund sufficient to pay interest on the seven
year bank loan. Because there are no principal payments for seven
years, and because the distributions required for the NMR equity
investment are very modest, the interest rate on the NMR loans will
be significantly below market.
seven years, the project refinances.
NMR's loans mature in seven years. At that time the project owner
must refinance. However, the NMR financing includes an agreement
giving the project owner the ability to purchase the investment
fund at its fair market value if the fund hasn't first "put"
its interest to the project owner at a pre-agreed price. The effect
of this agreement is to give the project owner the opportunity,
under certain specified circumstances, to effectively increase its
equity and arrange its refinancing on very attractive terms.
here to see a the structure of a sample transaction.