building and managing panel · 2013-05-26 · 2 0 1 0 n a t i o n a l i n t e r a g e n c y c o m m...
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2 0 1 0 N A T I O N A L I N T E R A G E N C Y C O M M U N I T Y R E I N V E S T M E N T C O N F E R E N C E
March 2010
2 0 1 0 N A T I O N A L I N T E R A G E N C Y C O M M U N I T Y R E I N V E S T M E N T C O N F E R E N C E
Building and Managing an Investment PortfolioDudley Benoit, SVPCommunity Development BankingMarch 2010
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Agenda
Chase Community Development Banking
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Low Income Housing Tax Credits
New Market Tax Credits
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Historic Tax Credits
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Fixed Income Instruments
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C O M M U N I T Y D E V E L O P M E N T B A N K I N G 120
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Chase Community Development Banking (CDB)y p g ( )
CDB’s Objectives
•Deliver JPMC's commitment to making a difference in communities – by bringing g y g gChase's financial expertise, leadership, and innovative ability to the Affordable Housing, Community Development Financial Institutions (CDFIs), and New Markets Tax Credit Industries
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• Run a disciplined and profitable business – with strong risk management, expense control, marketing, cross-selling, and people development practices
•Coordinate our activities and deploy our resources in ways that support the firm's CRA NV
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objectives
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The CDB Business represents the wholesale lending portion of the firm's communityYC
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The CDB Business represents the wholesale lending portion of the firm's community development activities and has been part of JPMC's Commercial Banking Line of Business since the beginning of 2008
We are active in Chase's footprint markets, with 85 people in 15 locations
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C O M M U N I T Y D E V E L O P M E N T B A N K I N G
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CDB’s Three Primary Businessesy
Community Development Real Estate
•Principally a construction lender on affordable housing projects that have received LIHTCsLIHTCs
•#2 bank lender nationally in 2009
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Intermediaries Lending
•Provider of tailored financing solutions and banking products to high-performing CDFIs
•Provider of subscription financing and working capital to LIHTC funds and syndicatorsNV
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• Provider of subscription financing and working capital to LIHTC funds and syndicators
New Markets Tax Credits
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• Received $310MM in allocations since 2005, one of only 5 applicants to receive five consecutive allocations
•Closed over $500MM in transactions through investing in NMTC allocations of third partiesON
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C O M M U N I T Y D E V E L O P M E N T B A N K I N G
parties
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Low Income Housing Tax Creditg• The Low-Income Housing Tax Credit (“LIHTC”) is a federal program designed to encourage
private investment in the development of affordable multi-family rental housing. It was created as part of the Tax Reform Act of 1986 and appears in Section 42 of the Internal Revenue Code.
• The LIHTC program is regarded as the nation’s most successful affordable housing program, having produced more than 1.7 million units of affordable housing. Today, it accounts for nearly 90% of current affordable housing development.
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• By utilizing equity capital to reduce permanent mortgage debt, property rents can be set and maintained at below-market levels.
• Equity investors receive a return on and return of capital from the tax credit and not directly from the real estateN
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the real estate.
• Incidences of foreclosure and credit loss have been very low (less than 0.03%) across the industry.
• Though the LIHTC industry had grown to an estimated $8 billion / year of equity investment by 2007 it has fallen to an estimated $4 billion in 2009 as a result of economic contraction andY
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2007, it has fallen to an estimated $4 billion in 2009 as a result of economic contraction and disruption of financial markets.
• National and regional banks compete in LIHTC lending and investing in each of our markets.
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C O M M U N I T Y D E V E L O P M E N T B A N K I N G 420
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Low Income Housing Tax Credit – Two Typesg yp
• “9% credits” are allocated by annual competitive round by each state’s designated allocating agency. Each state receives $2 10 of LIHTC per capita per annum minimum $2 43 million Each state receives $2.10 of LIHTC per capita per annum, minimum $2.43 million
per state. Every dollar of credit allocated to a project represents one tenth of the total award
(credits are earned equally over a ten year period).
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Most states award credits on an annual or semi-annual cycle. Applications for credits typically exceed available amounts by a factor of three or more.
• “4% credits” are “as-of-right” if tax-exempt private activity bonds are used to NV
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g p p yfinance at least 50% of eligible project costs. Sponsors compete for state bond volume cap allocation, but not for a tax credit
award
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9% and 4% credits cannot be combined The 4% credit raises less equity because of a lower credit rate, but the favorable
tax-exempt financing combined with other sources of subsidy are often adequate to bridge the gapO
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C O M M U N I T Y D E V E L O P M E N T B A N K I N G
bridge the gap.
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Mechanics of Low Income Housing Tax Credit Investmentsg
• Credits are earned over a 10-year period, but the project needs to comply with the affordability requirements for a minimum 15-year compliance period.
• Credits are purchased by investors who acquire a limited partnership interest• Credits are purchased by investors who acquire a limited partnership interest (typically 99.99%) in the entity that owns the project. The remaining 0.01% is held by the developer as general partner.
• Investors are almost exclusively corporate taxpayers. Tax regulations make most
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y p p y gindividuals ineligible to utilize the credit.
• In return for its equity, the investor receives a pro rata share of the tax credits allocated to the project. The credit produces a dollar-for-dollar reduction of tax liability.
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• The developer receives a development fee (up to 15% of total development cost), minimal cash flow from the property, and often a property management contract.
• The total equity investment equals the product of total credits, percentage of ownership and the price paid per $1 00 of creditY
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ownership, and the price paid per $1.00 of credit.
• The investor’s equity contributions are generally funded in stages throughout the construction, leasing and stabilization periods.
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C O M M U N I T Y D E V E L O P M E N T B A N K I N G 620
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New Markets Tax Credits Background: Program Basicsg g•The New Markets Tax Credit (NMTC) was created by Congress as part of the Community Renewal and New Markets Act of 2000.
•It is a program of the U S Treasury and the CDFI Fund (Community Development Financial•It is a program of the U.S. Treasury and the CDFI Fund (Community Development Financial Institutions) to generate $19.5 billion in new private-sector investments in low-income communities, which includes a special set-aside for the GO Zone.
•The NMTC provides a 39% tax credit over 7 years (5% each of the first 3 years, 6% each of the
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remaining 4 years).
•All NMTC funds must be invested for 7 years; if funds are returned early they must be reinvested within 12 months or risk full recapture of all tax credits claimed
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•How NMTCs are Obtained:
•The CDFI Fund allocates NMTCs to qualified Community Development Entities (CDEs) with a primary mission of providing investment capital to low-income communities
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•Allocations are through a competitive process, with applicants being judged on their underlying business strategy, track record and community impact
•Tax credits are generated by equity investments in a CDE, which invests (or makes loans) in lif i b i d i l l t t j tO
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C O M M U N I T Y D E V E L O P M E N T B A N K I N G
qualifying businesses and commercial real estate projects
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New Markets Tax Credits Background: Program Basicsg g
•The NMTC can be used for a broad range of eligible projects in specified target areas – but it is focused on commercial development
•Q lif i t t h 80% l f AMI d/ 20% t t t•Qualifying census tracts have 80% or less of AMI and/or 20% or greater poverty rate
•Based on the 2000 Census, about 39% of all census tracts are eligible and about 36% of the nation’s population live in eligible census tracts
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•QALICBs are generally one of the following three asset types: Commercial Real Estate Projects Projects located in a qualified census tract that derive at least 20% of its gross
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income from commercial activities Office, retail, light industrial, mixed-use
•Community Development Financial Institutions
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Loan pools or community banks that serve low-income persons or communities•Businesses and Non-Profits Businesses and non-profits that are located in and serve low-income communities
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C O M M U N I T Y D E V E L O P M E N T B A N K I N G 820
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New Markets Tax Credits: Direct Investment
JPMorgan ChaseLoans Underwritten by JPMC Lending Unit
Program Eligibility and Structure Determined by NMTC Group
QEI Investment
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Chase New Markets Corporation
(CDE)
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Client QALICB or BorrowerAffili t f G t d t i ll th P t O
QLICI Loan
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(Guarantor) Affiliate of Guarantor and typically the Property Owner
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New Markets Tax Credits: Leveraged Investmentg
Transaction Specific Investment Fund, LLC
JPMC NMTC Group
Equity
JPMC Lending Unit
Debt
Subsidiary of 3rd Party CDE, LLC
QEI Investment
NMTC All tt
Suballocation
EquityDebt
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(CDE)Allocattee
(3rd Party CDE)
QLICI Loans
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Client QALICB or Borrower
A Note
B Note
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Client
(Guarantor) Affiliate of Guarantor and Property Owner
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C O M M U N I T Y D E V E L O P M E N T B A N K I N G 1020
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Historic Tax Credits
•The Historic Tax Credit (HTC) program was created as part of Real Estate Tax Reform Act of 1986. There is no budget or limit to the amount of program credits available.
• Through the Internal Revenue Code Section 47, the federal government offers rehabilitation tax credits to encourage preservation and adaptive reuse of historic and old buildings.
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• Property must be an income producing property (rental residential or commercial), personal residences do not qualify
• The federal tax credit is a dollar-for for-dollar reduction of federal income tax liability.
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• Historic Tax Credits are based on 20% of qualified costs as reported by a qualified CPA for historic buildings or 10% of qualified costs for non-historic, non non-residential buildings built before 1936.
• Tax credits earned over 5 yearsYC
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• Tax credits earned over 5 years.
•Uses: office, retail, mixed-use, hotels, entertainment/theater, community facilities.
•Unused credits can be “carried back” 1 year and “carried forward” up to 20 years
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• The HTC is frequently paired with the LIHTC and NMTC.
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Historic Tax Credits – Typical Structureyp
Tax Credit CConstruction/PermanentEquity
HistoricTax Credit
99.99% Credits, Profits & Losses Loan
DebtService
Payments
Tax Credit Investor LLC
Tax Credit Investor
Construction/Permanent Lender
Credits
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a C ed tEquity
o ts & ossesand Cash FlowProceeds
Payments
Real Estate Holding Company, LLC99 99% Tax Credit Investor LLCN
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RentalPayments
99.99% – Tax Credit Investor LLC0.01% - Developer Affiliate LLC
(this entity owns the property, the developer is the Managing Member of the LLC)
Developer
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Tenants
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C O M M U N I T Y D E V E L O P M E N T B A N K I N G 1220
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Private Equity Fundsq y
There are three classes of private equity investment vehicles that qualify for CRA Investment Test credit:
•Community Development Venture Capital Funds (CDVCs) – Strategy is to invest inbusinesses with strong growth potential that promise to provide outstanding financial returns for investors. These funds use a “Double bottom line” investment strategy.
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•Small Business Investment Companies (“SBICs”) - SBICs are private investment companies co-funded or credit enhanced by the Small Business Administration (“SBA”). SBIC id b i ith d bt it fi i ti SBIC i t $2N
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SBICs provide businesses with debt or equity financing options. SBICs receive up to $2 of leverage for every $1 of private capital raised.
•Community Development Private Equity Real Estate Funds - Strategy includesYC
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Community Development Private Equity Real Estate Funds - Strategy includes rehabilitating, developing and leasing properties in LMI areas. Typical size of fund is either $15 mm (housing) or $100 mm + (commercial)
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Factors to Consider When Investing in Private Equity Funds
•Mission: Funds with a primary mission of community development (investing in LMI communities or benefiting LMI individuals). Many funds are more active in “underserved markets” but not necessarily in community development funds that generate CRAmarkets but not necessarily in community development funds that generate CRA eligible activity
•Management - Private equity/venture capital teams with strong track records:
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10+ years of investment experience
Realized exits with cash returns to investors
Consistency in strategy and execution
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•Structure - The typical structure dictates:
Funds providing a return of capital beginning within 5 years (final return of capital within 10 years)
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Financial and legal terms that are consistent with the mainstream market
•Double Bottom Line: Balancing your firm’s need for attractive returns with community development/CRA needs
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Risk vs. return vs. impact
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Fixed Income Instruments
•CRA Double Bottom Line Mutual Funds:
Make only CRA qualifying investments
Allows investors to target the geography they need with their investment dollars
Realized exits with cash returns to investors
Consistency in strategy and execution
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Examples: Access Capital, Calvert Social Investment Foundation, CRAIX
•CRA Double Bottom Line Securities Agency and non-Agency single family mortgage-backed securities (MBS) N
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g y g y g y g g ( )Municipal Housing Authority homeownership bonds Fannie Mae DUS bonds and Ginnie Mae project loans USDA and SBA loansY
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Other Qualifying Investmentsy g
• Grants to community organizations, CDFIs, or non-profits that work primarily in low-moderate income communities
•Equity Equivalent Investments (EQ2s) to CDFIs
•Deposits in Low-Income Credit Unions or Community Development Banks
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C it D l t iC it D l t iCommunity Development via Federal Tax Credits
Community Development via Federal Tax CreditsFederal Tax CreditsFederal Tax Credits
Robert J. WassermanRobert J. WassermanSenior Vice President – Managing Director of SyndicationsU S Bancorp Community Development CorporationSenior Vice President – Managing Director of SyndicationsU S Bancorp Community Development CorporationU.S. Bancorp Community Development CorporationU.S. Bancorp Community Development Corporation
Table of ContentsTable of Contents
Why invest in Tax Credits? About US Bank Community Development Corp Federal Tax Credit Overview State Tax Credit Overview Legal StructureLegal Structure What challenges and risks do investors face? The Numbers The Numbers
US Bancorp Fact Sheet US Bancorp Fact Sheet pp3Q 2009 Dimensions
C i l B k Si (A t ) 6th Commercial Bank Size (Assets) 6th
Bank Market Cap Ranking 4th
Bank Company Debt Rating S&P AA-p y g
Asset Size $281 billion
Deposits $183 billion
Loans $195 million
Customers $15.8 billion
Market Capitalization * $49 5 billion Market Capitalization $49.5 billion
Founded 1863
Bank Branches 3,015
As of February 11, 2010
What is USBCDC?What is USBCDC?
USBCDC is a wholly owned subsidiary of U.S. Bank. USBCDC is a business unit headquartered in St.
Louis with offices in Los Angeles, Denver, Minneapolis Kansas City and Washington DCMinneapolis, Kansas City and Washington DC.
USBCDC makes equity investments in Low-Income Housing, New Markets, Historic, and g, , ,Renewable/Alternative Energy tax credit projects.
The State Tax Credit Clearinghouse is a division of USBCDCUSBCDC.
USBCDC Investment MixedUSBCDC Investment MixedExposure by Investment Type % Total
HTC / NMTC10%
LIHTC - Direct22%
Syndicated7%
AETC2%
HTC6%
LIHTC - Fund31%
NMTC22%
Opportunities: Why invest?Opportunities: Why invest?pp ypp y Attractive Tax Advantaged Yields
– Guaranteed vs Unguaranteed returns– Guaranteed vs. Unguaranteed returns– Compare to other investments such as corporate or
muni bonds, real estate investments Cash Management Benefits Cash Management Benefits
– Liquidity (Leveraged)– GAAP earnings (Unleveraged)
Tax Liability Management Tax Liability Management– Manage tax liability– Predictable tax credit stream– Low risk due to conservatively underwritten portfolio– Each credit offers different benefits
Community Impact and Public Relations Community Impact and Public Relations
LIHTC Program BackgroundLIHTC Program Background
Background: Federal program started in 1986 to create and maintain Federal program started in 1986 to create and maintain
more affordable housing for low and moderate income families
Codified in Section 42 of the Internal Revenue Code. Market Size and Returns: Current market size: $4-5 Billion Current market (exclusive of secondary transactions): $3-4 Billion Yields:
– Guaranteed and Unguaranteed
Pay-in Structures Pay-in Structures– Unleveraged/Up-front vs. Leveraged/Pay-Go
LIHTC Program BasicsLIHTC Program BasicsThe Credit: A ten year Federal tax credit
– Owners of qualified rental housing projects– Tax benefits include tax credit, passive losses and capital losses – Assumes no cashflow
The Basics: Investment is in the form of an equity investment in a partnership
which invests in multi-family real estate New construction or rehab There is a 15 year compliance (hold) period Investor equity from the sale of the tax credits reduces the amount
of debt needed to finance the property. – Lower debt levels allows for lower rents– Lower rent levels ensure higher market demand
LIHTC Syndication Fund DiagramUSB
GuarantyInvestor
USB LIHTC Fund 2009, LLCInvestor 99.9% MemberUSBCDC 0.1% Manager
“Guaranteed Fund”
Equity
LIHTC
Limited Partner
Operating Partnership
Operating Partnership
Operating Partnership
Operating Partnership
99.99%
Operating PartnershipGP / Developer
0.01%
LIHTC: Low Income Housing Tax Credit
NMTC Program BackgroundNMTC Program BackgroundBackground: Created in 2000 as part of the Community Renewal TaxCreated in 2000 as part of the Community Renewal Tax
Relief Act. Codified in Section 45D of the Internal Revenue Code. Administered through the CDFI Fund, a department of the
US Treasury.
Market Size and Yields: Capacity of $26 billion of investments for $10 billion credits Capacity of $26 billion of investments for $10 billion credits Yields are between 8% and 10% depending on the timing of
the investment
NMTC Program BasicsNMTC Program BasicsThe Credit: 39% of investment, claimed over seven years from date of QEI.
Ex: $10 million QEI * 39% = $3 9 million in credits– Ex: $10 million QEI 39% = $3.9 million in credits
5% of QEI in years 1-3 each; and 6% of QEI in years 4-7 each. Equity investor’s basis is reduced by 100% of NMTCs claimed.
NMTCs are subject to limited events of recaptureNMTCs are subject to limited events of recapture1. The CDE ceases to be a CDFI Fund-certified CDE, or2. “Substantially all” (85%) of the QEI proceeds are no longer continuously invested in
Qualified Low-Income Community Investments (QLICIs), or3. The CDE redeems the equity investment.• Note: Default by the operating asset does NOT trigger recapture
The Basics:The Basics:Community Development Entities (CDEs) must use Substantially All (85%) of the proceeds from the Qualified Equity Investments (QEIs) to make Qualified-Low Income Community Investments (QLICIs) in Qualified Active Low-Income y ( )Community Businesses (QALICBs) located in Low-Income Communities.
NMTC Syndication Fund DiagramNMTC Syndication Fund DiagramUSB
GuarantyInvestor
Equity
USB NMTC Fund 2009, LLCInvestor 99.9% MemberUSBCDC 0.1% Manager
“Guaranteed Fund”
NMTC and HTC
Fund
Sub-CDE
Fund
Sub-CDE
Fund
Sub-CDE
Fund
Sub-CDEInvestment Fund
Sub CDE
QALICB
Sub CDE
QALICB
Sub CDE
QALICB
Sub CDE
QALICB
USB NMTC Fund 99.99-100%Manager 0 – 0.01%
Lender
QEI
Subsidiary CDEU S Treasury
Sub-allocationNMTC Allocation
Legend
CDE – Community Development Entity
QALICB“Qualifying Business”
QLICI A QLICI B
Leveraged Fund 99.99%Sponsor CDE/Allocatee 0.01%
U.S. Treasury(CDFI) Sponsor CDE
Fees (CDE, Legal)
NMTC Allocation Award CDFI – Community Development Financial Institutions
Fund
NMTC – New Markets Tax Credit
QALICB – Qualified Active Low-Income Community Business
QEI – Qualified Equity InvestmentQualifying Business
QLICI – Qualified Low-Income Community Investment
Renewable Energy Credits OverviewRenewable Energy Credits Overview
Renewable Energy Program Basics Two types of Renewable Energy (RE) creditsTwo types of Renewable Energy (RE) credits
– Investment Tax Credit (ITC) and Production Tax Credit (PTC) Primary RE uses are solar and wind facilities ITC is 30% of the amount of the qualified investment in the RE system is q y
taken in the year the system is “placed-in-service.”– Cash grant is an alternative to the credit
Primary return is a component of the credit, passive losses, and sometimes a capital loss or residual payment.
Codified in Section 48 of the Internal Revenue Code. PTC investment return is based on the operations of the system. It is
sed in ind in estments not solarused in wind investments, not solar. Five-year compliance period (similar to HTC). Recapture triggered by (a) disposition of the property (b)
noncompliance Amount decreases 20% each yearnoncompliance. Amount decreases 20% each year. Unlimited amount of credits and no competition.
Opportunities: Why invest?Opportunities: Why invest?pp ypp y Attractive Tax Advantaged Yields
– Guaranteed vs Unguaranteed returns– Guaranteed vs. Unguaranteed returns– Compare to other investments such as corporate or
muni bonds, real estate investments Cash Management Benefits Cash Management Benefits
– Liquidity (Leveraged)– GAAP earnings (Unleveraged)
Tax Liability Management Tax Liability Management– Manage tax liability– Predictable tax credit stream– Low risk due to conservatively underwritten portfolio– Each credit offers different benefits
Community Impact and Public Relations Community Impact and Public Relations
Challenges – Why not invest?Challenges – Why not invest?g yg y Complexity – legal and accounting Internal champion needed Internal champion needed Economic return minimums not met Reserve requirements RISKS: 4 primary risks
– Economic risk: Will I get my return? Operating Risk of underlying assets/properties?y g p p
– Tax structure risk: Will the IRS find the structure abusive?
– Utilization risk: Can I use the stream of credits?– Change in law risk
Credit-Enhanced Yields – Spread over UST10Credit-Enhanced Yields – Spread over UST10
Guaranteed Yields (pretax equivalent) vs. UST 10 - Trend Chart
14.0
"AA/AAA" Guaranteed LIHTC Pretax Equivalent Yield
10.0
12.3
10.8
10.0
12.0
q
US Treasury - 10 year
Yield Spread
8.1 8.1 8.18.3
8.9
8.07.7 7.8
8.2
7.77.2 7.37.2
7.0 7.17.3
7.67.37.3 7.3 7.2
6.96.5 6.5
7.7
9.2
7.3
9.5
7.0
8.0
ld S
prea
d
6.2 6.2
5.6
6.2
5.45.8 5.7
6.15.8
6.3 6.2
4.8
5.4
5.9 6.0 6.0
5.1 5.2
4.5
5.1 5.2
4.13.73.8
3.4
4.43.9
4.3
3.7
4.6 4.7 4.74.54.5
3.94.2
4.4 4.65.0
5.24.95.0
4.7 4.6
3.7 3.6
4.34.0
3.32 9
3.33.1 3.1
3.63.4
3.63.4 3.4
3.6
2 9
3.4
5.2
3.74.0
6.0Yiel
2.72.7
2.22.4
2.9 2.92.5
3.1
2.42.7 2.7 2.5 2.4 2.5
2.1 2.32.0
1.21.6
0.4 0.50.8
1.2 1.1
1.8
2.5
2.92.8
0.0
2.0
Feb-99 Aug-99 Feb-00 Aug-00 Feb-01 Aug-01 Feb-02 Aug-02 Feb-03 Aug-03 Feb-04 Aug-04 Feb-05 Aug-05 Feb-06 Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 Feb-09
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Feb 99 Aug 99 Feb 00 Aug 00 Feb 01 Aug 01 Feb 02 Aug 02 Feb 03 Aug 03 Feb 04 Aug 04 Feb 05 Aug 05 Feb 06 Aug 06 Feb 07 Aug 07 Feb 08 Aug 08 Feb 09
Offering DatePre-tax equivalent yields assuming 35% taxpayer.US Treasury yields on various transaction dates.
Types of State Tax Credits in which U S Bank Invests
Types of State Tax Credits in which U S Bank InvestsU.S. Bank Invests U.S. Bank Invests
Film Production Low-Income Housing Historic RehabilitationHistoric Rehabilitation New Markets Brownfield Remediation Brownfield Remediation Affordable Housing Assistance
Contact InformationContact Information
Rob WassermanManaging Director of Syndicationsg g y(213) 615-6647robert wasserman@usbank [email protected]
NMTC Leveraged ModelNMTC Leveraged Model
U.S. Bank CDCLender
Credits
$3.0mm Equity
Credits$3.9mm
$7.0mmLoan
Interest/Balloon
Investment Fund
US Treasury Department(CDFI Fund)
Sponsor
QEI$10.0mm
Sub-Allocation
Fund
DistributionsNMTC Allocation
SponsorCDE Fees (CDE, Legal)
$7 0mm
Subsidiary CDE
Legend
QALICB
$7.0mmQLICI Loan A
$3.0mm (less Fees)QLICI Equity and/or Loan B
Debt Service (P/I or I/O)Possible return on equity
CDE – Community Development Entity
CDFI – Community Development Financial Institutions Fund
NMTC – New Markets Tax Credit
QALICB – Qualified Active Low-Income Community Business
QALICB(Project)
and/or Loan BQEI – Qualified Equity Investment
QLICI – Qualified Low-Income Community Investment