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New Markets Tax Credit: The Unwind – The Investor’s Perspective


August 2013

The following was distributed as part of the New Markets Tax Credit Connection - Summer 2013 newsletter.

by Matthew Potter and Brooke Roseberry, U.S. Bancorp Community Development Corporation

This is the third article of a three-part series that discusses unwinds for different parties involved in a New Markets Tax Credit (NMTC) transaction. The first article discussed the unwind from the perspective of qualified low-income community businesses (QALICBs). The second articled looked at unwinds from the perspective of Community Development Entities (CDEs). This final article reviews the unwind from the perspective of the leading NMTC investor in the country: U.S. Bancorp Community Development Corporation, the community development subsidiary of U.S. Bank.

NMTCs are a flexible financing tool that infuses up-front capital into communities with high poverty rates and high unemployment rates to spur job growth and catalyze community development. Businesses and buildings funded by NMTCs bring goods and services to underserved areas, create quality jobs, and help revitalize and stabilize neighborhoods by catalyzing additional investment in the surrounding area. Because the ultimate beneficiaries of NMTCs are the people and communities positively affected by NMTC projects, it is imperative that all of the parties involved in a NMTC transaction work together to support the long-term success of the project so that it may continue to serve as a community asset for many years to come. Key items to consider for successfully unwinding a NMTC partnership include:

Planning ahead: Should the parties in a NMTC investment choose to exit after the compliance period has ended, it cannot be overstated that preparation for a possible exit needs to begin early. Each partner needs to know what is expected, what is realistic, and what assumptions must be confirmed. An exit can be, essentially, a restructure, which requires involvement and focus similar to that of the original closing. Erroneously, some parties will not fully engage on structuring an exit until the very last moment, believing that all the components of an unwind had been previously determined. Although an unwind may have been contemplated, a single simple path is not necessarily a foregone conclusion. If obstacles are revealed near exit, the process slows for everyone involved and additional costs can often be incurred. In addition, transactions that originally closed years ago may have been structured differently than what might have become the current industry norm, and assumptions will need to be reevaluated. Plenty of time should be allocated for an unwind in order to help the process run more smoothly.

Preparing to refinance in a new economic climate: Qualified Active Low Income Community Businesses (QALICBs), the ultimate recipient of NMTC financing, often need to obtain refinancing in an economic environment substantially changed from the world in which NMTC financing originated. Project performance and the current lending environment will play a factor in the availability of refinancing. Additionally, if structures were altered at any point in the duration of the NMTC project, lenders may be reluctant to provide financing to complicated deals further muddled with additional documents, parties, compliance periods, etc.

We advise that QALICBs begin evaluating refinancing options many months prior to the exit and/or maturity date of the NMTC loans. QALICBs should feel comfortable reaching out to their CDE lender and tax credit investor in making these contacts, as it is imperative that a refinancing lender understands the basic issues of the NMTC financing structure and has the opportunity to ask questions and seek information in order to develop a minimal level of comfort with the structure. Comprehension of the refinance in light of the structure will assist the refinancing lender in understanding when deeds of trust and UCC strictures can be released and the project can realize any gain from the financial operations.

Contemplating obligations that may extend beyond the unwind: If the investor received various guarantees when the NMTC financing originally closed, the guarantors must be aware that some guarantees will continue, according to their original terms, beyond the end of the compliance period.

Considering tax consequences: An exit will often require the complete unwinding of the relationships between the legal entities in the original structure, necessitating purchase agreements, redemption agreements, and assignments with an intent to remove the investor and/or CDE from the transaction structure and to permit the QALICB or its affiliates to retain any ongoing benefits or liabilities owned by the transaction entities. This can result in a new tax ownership structure of the project. We engage with partners early to ensure that QALICBs understand the exit agreements, have time to analyze potential tax consequences and post-NMTC structure balance sheets, and develop a roadmap for their ideal, final tax ownership structure following an exit of the parties (CDE, Investor, Lenders).

While NMTC exits require time and resources, engaging with partners early, contemplating the consequences of a potential exit, and preparing for a possible unwind can help improve the process and leave the project and the benefitting community, in a better position than before the NMTC investment. Working together, we can facilitate lasting, positive change in underserved communities across the country.


Circular 230 Notice: In compliance with U.S. Treasury Regulations, the information included herein (or in any attachment) is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing, or recommending to another party any tax related matters.

This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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