2013-01-17 2013-2014 economic outlook

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

Debra Santos, CPADirect: 202-955-6746E-mail: dsantos@raffa.com

www.raffa.com

THANK YOU!

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 | OSHAY@REEDSMITH.COM

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!

THANK YOU!

CONTACT INFORMATION:

OLIVIA SHAY-BYRNE

OSHAY@REEDSMITH.COM

202.414.9370