New Market Tax Credits – quick look

The use of New Market Tax Credits (NMTC) for the Community Maritime Park and particularly the maritime museum has yet to be decided. Here is how Ed Gray of Capital Trust Agency-Community Development Entity presented it in August 2009:

The City/CMPA Bond issue: $43,000,000
Museum would have bank debt: $2,743,215
Maritime Museum sponsor equity: $5,000,000
New Market Tax Credits equity:$19,247,426
Total sources $69,990,641

For CMP construction:$38,000,000
For Museum: $20,000,000
Cost of issuance – bond issue: $700,000
Capitalized Interest – CMP: $4,992,621
Capitalized Interest – Museum: $82,503
CDE origination & placement fee: $3,915,517
Legal – NMTC:$300,000
Total Uses: $69,990,641

Under this plan, CMPA bond is $43,000,000 – net $38M for construction, $2M reimbursement. The museum has debt:$2,743,215, but gets another $12,256,785 that it doesn’t have to repay.

Here is the presentation: NMTC082009.

Mr. Barker, the City Finance Director, recommended a hybrid approach. The council has not approved the NMTC component that will get the maritime museum the $12.26 million net. The hybrid is what the council approved on Oct. 8, 2009.

Barker got the council to approve a hybrid bond issue that used tax-exempt bonds and Build America Bonds with some New Market Tax Credits. The Barker plan got the bond issue up to $45,675,000, with a clause to not exceed $48,000,000.

The NMTC component adds a complexity to the deal that no one contemplated in 2006, but does add $12.25 million for the maritime museum. The Committee of the Whole meets on it on November 2.

I have tried to summarize the memos from the presenters at the meeting:

Memo from Ed Gray, Capital Trust

Why weren’t the New Market Tax Credits considered before?
Capital Trust Agency only recently qualified as a Community Development Entity. It took two years to be certified by the US Treasury. It signed its allocation agreement for $75 million NMTCs in June 2009. (The NMTC wasn’t part of any of the CMP financing plans in 2006 – because it wasn’t seen as an option until August 2009).

CMP qualifies for NMTC because it’s in a highly distressed area. The NMTC has a different structure. The City CRA borrows the money that will not $40 million for the CMPA that money can be combined with the UWF funds for the maritime museum to get an NMTC allocation to put extra funds into the project.

Capital Trust has also gotten an additional $10 million dollars of state tax credits that can be sold and Gray estimates will monetize to an extra $2 million to CMP (——Does this get bond financing down to $43.675 million? Wouldn’t that chap Marty?)

To qualify for these tax credits, the City is under strict timelines.

Read Gray memo: CMP Ed Gray CTA CDE10-27-09-1

City has asked Richard Miller of Angell Edwards Palmer & Dodge to review the use of the NMTCs.

In a memo to city staff, Miller says the NMTC can be used in conjunction with tax-exempt bonds. However for the bonds to be tax-exempt, he says that since the CMPA is not an instrumentality of the city, its bonds are classified as tax-exempt 501 (c) (3) private activity bonds. However. these bonds will not quality as tax exempt bonds or Build America Bonds (BAB) under the current structure because five percent of the overall debt isn’t being paid by the CMPA.

Can BABS be issued in conjunction with NMTC?
BAB rules require the bonds treated as BABs must satisfy virtually all rules applicable to tax-exempt bonds, but may not be private activity bonds. However if the bonds were issued by the City and repaid by the City, the bonds would be deemed BAB.

Miller recommends that the City take control of the CMPA, meaning the majority of the board must be appointed by the city and can be removed by the city without cause so that the CMPA will become an instrumentality of the city. Currently only a third of the board is appointed by the city.

The tax code provides that 85% of the moneys be disbursed in a 12-month period to get the NMTCs. There are various rules about working capital and safe harbor, the cumulative effect of which extends the expenditures (95%) over 24 months.

The museum and the other park improvements can be funded together for purposes of the NMTCs.

To avoid risk to the City if the tax credits are not realized, City needs to avoid guarantees of CMPA disbursements of the funds within 24 months and needs to have on-time completion clauses, completions bonds and penalties for the contractors. UWF may be requested to indemnify the City and CMPA for its construction.

Miller says the NMTC credit transactions costs are very high.

City can act as the trustee or disbursement agent in connection with the funds in the hands of the CMPA.

Here is the complete memo: CMP RMiller Opnion NMTC 9-09-1

Rusty Wells weighs in, too:
“…unquestionably, the most complex financial transaction the City of Pensacola has ever engaged in.”

1. Creation of new component that the selling of tax credits. The stadium and maritime museum (or the conference center, if UWF decides not to use the funds for the museum) must be completed in 24 months of funding the NMTC transaction.

2. Substantial change in the construction contract with Maritime Park Development Partners, LLC will have to negotiated to insure 24-month deadline is met. Current contract has 36 months.

3. To use the Build America Bonds, the City will need to reorganize CMPA so that’s an instrumentality of the City. City will appoint majority of the CMPA board and have removal power. However, the CMPA will need to stay a 501 (3)(c) to get the NMTCs.

4. Because of the CRA tax revenues will become subject to claims of the CMPA and CDE providing the NMTC, Wells says that preliminary official statement to bondholders should read the covenant to budget and appropriate non-ad valorem revenues should be viewed as primary security for the bonds. (This will fuel petition – but is this pledge worth $12+ million more for the project and a reduction in the bonds needed?)

5. All the actions to make this happen – Interlocal Agreement, CMPA restructuring, Development Agreement – will require council votes. All be subject to petition drives and trigger 60-day waiting period to be sure referendum isn’t needed.

6. City will need to waiver conflicts of interest since the City, CMPA, UWF and GB uses many of the same attorneys.

The risks are the work isn’t completed in 24 months and can’t get any time extensions and the IRS may challenge the purchasers’ use of tax credits and City could be drawn into litigation.

Here is Rusty’s memo: CMP Rusty Wells Consideration of NMTC

I’m still processing this. Initial question is are the risk worth rewards? Pensacola is not the first city to use New Market Tax Credits – how have other cities done this? Is our structure -CMPA, City, CRA – making it too complicated? Is there a simpler way that will reduce bonds and add more money for the project.

Read the memos and see what I missed. I’ve spent 3 hours on it and I still need to spend more.