2013-01-17 2013-2014 economic outlook
TRANSCRIPT
Thrive. Grow. Achieve.
2013-2014 Economic Outlook and Impact of Finance and Accounting
Debra Santos, CPA - Manager AMSJanuary 17, 2013
RAFFA HISTORY
IN 1984, TOM RAFFA SET OUT TO CREATE MEANINGFUL ACCOUNTING WORK THAT SUPPORTED
GIVING BACK TO THE COMMUNITY.
RAFFA’S VISION IS TO BE THE MOST CARING AND EFFECTIVE PROFESSIONAL FINANCIAL SERVICES
PARTNER IN THE INDUSTRY.
200 Employees, in 3 separate companies:
• Raffa PC
• Raffa Financial Services Inc.
• Raffa Wealth Management LLC
WHERE ARE WE NOW?
CURRENT
• Largest reduction in GDP over last 4 years, since the great depression
• Non profits struggle to find funding and maintain programs
• Tax increases may reduce donations
• Government funding cuts could reduce grants to organizations
• Collaborative, Innovative, Interdisciplinary, Entrepreneurial
• Elimination of uncertainty of personal tax rates
• Improved employment statistics in District
• Sequestration
Economic &
“Fiscal Cliff” &
“ Debt Ceiling”
Impact
2013-2014
CHALLENGES
• Need to develop investment strategy/increase return on investment
• Open new revenue streams (improve program results and metrics)
• Managing organizational debt
• Attracting and retaining talent
• Understanding Capital Structure
UNDERSTANDING CAPITAL STRUCTURE
Pursuit of Mission
Preservation of Organizational & Financial Visibility
Capital Structure
STRATEGIES
INNOVATIVE USE OF TECHNOLOGY
• Revenue generation – Social Media, Crowd-sourcing
• Improve efficiency of Program Delivery
NON PROFIT PARTNERING
• Space and resource sharing
• Integrated program delivery
USE OF DEBT
• Levering a Line of Credit
• Financing out of a Deficit
RETURN ON INVESTMENT
• Engaging financial consultant or fiduciary manager
• Building excess reserves
Cresa
2013 Washington, DC Market Outlook
January 2013
Presented to: Non-Profits & Associations of Washington DC
Local Area Market/Economic Conditions
Real Estate Window-of-Opportunity
Nonprofit Real Estate Trends
Nonprofit Office Space Trends
Strategic Real Estate Planning
Table of Contents
9 | Cresa Washington DC—DC Market Outlook/ Trends
Local Area Market/Economic Conditions
3 | Cresa Washington DC—DC Market Outlook/ Trends
Uncertainty as to the role of the Federal Government and federal spending
Flight to quality; flight to efficiency Low activity in the market; no new office demand Limited new development; must have pre-
comment Stable opportunities for leasing The rise of the special servicers Stable rents; rising concessions
Current Market Conditions A lot depends on politicians coming together in
2013. They’ve already shown that political bickering is still the norm.
Still need a firm understanding on what will happen to federal spending.
- Expect continued political posturing to make any resolution difficult.
- Expect demand growth to stay sideline until certainty is established.
Expected Market Conditions in 2015
Spending Cut Debate Next Debt Ceiling Debate 2013 Fiscal Budget Debate On going risk created by political uncertainty Slow economic growth European debt crisis
Current Economic ConditionsHeadwinds
Federal Government has pent up demand and needs to spend money
Increase demand for Healthcare; Education Need for cyber-security and national
intelligence to grow Strong corporate and personal balance sheets Strong tech sector Cheap debt
Tailwinds
Local Area Market/Economic Conditions
11 | Cresa Washington DC—DC Market Outlook/ Trends
Economic Recovery and Leasing Opportunity Timeline (Projections)
AssumptionsCongress creates a spending cut agreement reducing the federal debt by $ 2 trillion over the next 10 years.No impact from European debit crises or economic recession
Trend
Lighter the color; less pronounced the trend
Darker the color; more pronounced the trend
20162012 2013 2014 2015
Debt Ceiling DebateSuper Committee Impasse
Another Continuing Resolution
Revised Spending Priorities
2012 Elections
Leasing Sweet Spot
Potential Market
Shift
Fiscal Cliff Averted
Economy GrowthPolitical UncertaintyFederal Spending/Procurement
Demand for Office Space (Private Sector)Flight to Efficiency
Demand for Office Space (Public Sector)Concessions
Full implementation of new procurement and leasing
Major BRAC Move-Outs
Major BRAC Move-Outs
MARKET + BUILDING + LANDLORD = WINDOW OF OPPORTUNITY
12 | Cresa Washington DC—DC Market Outlook/ Trends
Reduce Real Estate Costs Evaluating layout to reduce space size and sublease additional space Restructuring Lease to reduce rates by extending term Evaluating Operating Expense and Real Estate Tax Additional Costs Reducing LAN rooms through cloud technology
Increase Space Efficiency Smaller standardized offices More open workstations decreases square footage (“benching”) Considering telecommuting option
Increase Office Collaboration More open workstations increases collaboration More “teaming rooms” Incorporating “Starbucks design” in pantry for more casual meeting area Increased use of glass for collaboration and LEED design principals
Current Real Estate Trends for Nonprofits
13 | Cresa Washington DC—DC Market Outlook/ Trends
Nonprofit Office Space Trends
14 | Cresa Washington DC—DC Market Outlook/ Trends
Strategic Real Estate Planning
15 | Cresa Washington DC—DC Market Outlook/ Trends
New Markets Tax Credits
and Tax Exempt Bond Financing
Olivia Shay-Byrne, Esq., (Partner, Reed Smith LLP)
OLIVIA SHAY-BYRNE | 202.414.9370 | [email protected]
BUY VERSUS LEASE ANALYSIS
BUY VERSUS LEASE: CONSIDERATION FACTORS
THE BUSINESS’ FUTURE GOALS AND NEEDS
LONG TERM CASH FLOW ANALYSIS
FLEXIBILITY RELATING TO EXPANSION AND SPACE
UP FRONT COSTS
OPERATING EXPENSES
POTENTIAL FOR ADDITIONAL REVENUE SOURCE
ADVANTAGES TO BUYINGCURRENT LOW INTEREST RATES & PROPERTY VALUES
OPPORTUNITY TO BUILD EQUITY
FLEXIBILITY - ABILITY TO LEASE EXTRA SPACE
NO RENT INCREASES
CONTROL IN OPERATION AND MANAGEMENT OF BUILDING
TAX INCENTIVES POSSIBLE
LONG TERM FINANCING
PROFIT IF MARKET VALUE INCREASES
BUYING REQUIREMENTS
UP FRONT CAPITAL TO PURCHASE (TYPICALLY ABOUT 10 TO 20% OF TOTAL ACQUISITION)
SUFFICIENT CREDIT TO SECURE FINANCING
FAMILIARIZATION WITH OWNERSHIP AND/OR UNIT OWNER’S ASSOCIATION
LEASING BENEFITS
CREDITWORTHINESS IS NOT AS SIGNIFICANT.
MINIMAL UPFRONT COSTS.
ABILITY TO MOVE AT THE END OF THE LEASE TERM WITHOUT SELLING OR LEASING OTHER SPACE.
DISADVANTAGES TO LEASING
MINIMAL FLEXIBILITY – LANDLORDS TYPICALLY LOCK TENANTS IN FOR LONGER TERMS (10 YEARS) WITH A SIGNIFICANT EARLY TERMINATION FEE
NO EQUITY BUILD UP
RENTAL RATES ON CURRENT MARKET CONDITIONS WITH ANNUAL ESCALATION
TENANT MAY BE REQUIRED TO MOVE AT END OF LEASE TERM.
TAX-EXEMPT BOND FINANCING
TAX EXEMPT BONDS
MAY BE USED TO:
PURCHASE A BUILDING
-- may use less than all of the buildingRENOVATE A BUILDING
-- may use less than all of the buildingNEW CONSTRUCTION
-- MAY PURCHASE A FLOOR IN AN OFFICE CONDO
SELECTING PROJECTS THAT QUALIFY FOR TAX EXEMPT FINANCING
ELIGIBLE ASSETS
TYPICALLY, TAX-EXEMPT BOND PROCEEDS ARE USED TO FUND THE COST OF:
•Acquiring or constructing capital assets
•Interest during construction
•A debt service reserve fund
•Certain costs of credit enhancement
Costs of issuance funded from bond proceeds are limited to 2% of the proceeds of the bonds.
1430 K STREET, NWAMERICAN EDUCATION RESEARCH ASSOCIATION TAX EXEMPT BONDS
AMERICAN SOCIOLOGICAL ASSOCIATION
TAX EXEMPT BONDS
NATIONAL ASSOCIATION OF REALTORSWASHINGTON, D.C. HEADQUARTERS
ADVANTAGES OF TAX-EXEMPT FINANCINGLOWER INTEREST COST IN COMPARISON TO THE INTEREST RATE ON CONVENTIONAL DEBT AVAILABLE TO THE BORROWER.
BECAUSE INVESTORS IN TAX-EXEMPT BONDS DO NOT PAY FEDERAL INCOME TAX ON INTEREST PAYMENTS RECEIVED ON THE BONDS, THESE INVESTORS ARE WILLING TO ACCEPT AN INTEREST RATE LOWER THAN THE INTEREST RATE ON COMPARABLE TAXABLE BONDS, THE INTEREST ON WHICH IS SUBJECT TO FEDERAL INCOME TAXATION.
BENEFITSLOWER INTEREST RATE
EQUITY PROVIDED
HIGHER LEVERAGE
LONGER TERM LOAN
Burdens• More complex• 90 Days +• More costly
TAX EXEMPT BONDSRESTRICTIONS AND
COVENANTS
WHO MAY ISSUE TAX-EXEMPT BONDS?TYPICALLY ISSUED BY THE STATE AND LOCAL GOVERNMENT AUTHORITIES (THE “AUTHORITY”).
TO APPLY, AN ELIGIBLE ORGANIZATION MUST SUBMIT A COMPREHENSIVE APPLICATION WITH SPECIFIC INFORMATION REGARDING THE ORGANIZATION AND THE PROSPECTIVE PROJECT.
THE AUTHORITY’S APPROVAL PROCESS INCLUDING TEFRA HEARING AND APPROVALS TYPICALLY TAKES ABOUT 90 DAYS.
SELECTING PROJECTS THAT QUALIFY FOR TAX EXEMPT FINANCING
QUALIFIED USE VS. PRIVATE USE
SECTION 145 OF THE CODE IS THE PRIMARY FEDERAL TAX STATUTE DEALING WITH TAX-EXEMPT BONDS FOR 501(C)(3) ORGANIZATIONS.
•Requires all property financed by the tax-exempt bonds to be owned by a 501(c)(3) organization or a governmental unit.
•95% of the proceeds of the tax-exempt bonds be used in the exempt activities of the 501(c)(3) organization ("Qualified Use").
•Bond-financed facilities cannot be used to conduct any unrelated trade or business activities ("Private Use“).
NEW MARKET TAX CREDITS (“NMTC”)
NEW MARKET TAX CREDITS UPDATE
ON JANUARY 3, 2013 PRESIDENT OBAMA SIGNED THE AMERICAN TAXPAYER RELIEF ACT OF 2012 WHICH INCLUDED AN EXTENSION OF THE NEW MARKETS TAX CREDIT PROGRAM FOR 2012 AND 2013. THE TAX CREDIT ALLOCATION AUTHORITY IS $3.5 BILLION FOR EACH YEAR.
THE CDFI FUND IS CURRENTLY REVIEWING APPLICATIONS RECEIVED UNDER THE 2012 ROUND AND PLANS TO ANNOUNCE THE AWARDS IN APRIL.
NMTC PROGRAM
PURPOSE: TO ATTRACT PRIVATE INVESTMENT TO PROVIDE CAPITAL FOR SPECIFIC TYPES OF FOR-PROFIT AND NON-PROFIT BUSINESSES IN LOW-INCOME, ECONOMICALLY-DISTRESSED COMMUNITIES (TARGET ZONES)
GENERAL OVERVIEW
THE NEW MARKETS TAX CREDIT PROGRAM IS DESIGNED TO:
–Stimulate job creation–Encourage investment in and revitalization of low-income urban and rural communities.
THE PRIMARY FINANCIAL BENEFIT OF THE PROGRAM IS A SUBSTANTIAL FEDERAL TAX CREDIT TO THE INVESTOR.
Diagram: Example of NMTC Structure
NMTCS: WHAT’S THE BENEFIT?
20%-25% EQUITY CONTRIBUTION BY EQUITY WHICH MAY BE FORGIVEN WITH A PUT/CALL PROVISION AFTER 7 YEARS
REDUCED INTEREST RATES
FLEXIBLE STRUCTURE
NMTCRESTRICTIONS AND
COVENANTS
WHICH PROJECTS CAN USE NMTCS?NMTC PROCEEDS CAN BE USED FOR A WIDE VARIETY OF PROJECTS:
OfficesRetailMixed used projects
Manufacturing plantsSporting facilities Healthcare facilities
WHAT ARE THE BENEFITS FOR THE INVESTOR?
NMTC INVESTOR CAN CLAIM A SIGNIFICANT TAX CREDIT
CREDIT CLAIMED OVER A “SEVEN YEAR” PERIOD AS FOLLOWS:
THE TOTAL TAX CREDIT IS 39% OF THE QUALIFIED EQUITY INVESTMENT (“QEI”)
• 5% of the QEI is paid in Years 1-3
• 6% of the QEI is paid in Years 4-7
WHAT ARE THE BENEFITS FOR THE BORROWER?
GAP FINANCING - MAKES THE PROJECT FEASIBLE.
BORROWER IS TYPICALLY REQUIRED TO PAY “INTEREST ONLY” ON LOAN PAYMENTS (7 YEARS).
FINANCING STRUCTURE
A LEVERAGE STRUCTURE
INVOLVES:
A LOAN FROM A LEVERAGE
LENDER
A CAPITAL CONTRIBUTION FROM
A NMTC EQUITY INVESTOR
“TARGET ZONE”
LOW INCOME COMMUNITY (“LIC”): WHAT QUALIFIES?
A CENSUS TRACT WHERE:
AT LEAST 20% OF THE POPULATION IS AT OR BELOW THE POVERTY LEVEL
THE AREA MEDIAN FAMILY INCOME IS NOT MORE THAN 80% OF THE STATEWIDE OR METROPOLITAN AREA INCOME, AS APPLICABLE
OTHER CERTAIN AREAS AS DESIGNATED BY THE FEDERAL GOVERNMENT
Location – Location – Location
EXAMPLES OF TARGET ZONES IN THE DISTRICTTARGET ZONES INCLUDE PARTS OF:
The H Street Corridor
NOMA
Pennsylvania Avenue
Baseball Stadium
Anacostia
And More!
