FINANCING TRIBAL BUSINESS AND INFRASTRUCTURE PROJECTS

A New Markets Tax Credits Case Study Tribal Leadership Conference 9 22 2015

Teresa Leger de Fernandez, Esq.

Leger Law and Strategy, LLC

Santa Fe, New Mexico

In 2009, the Pueblo of Laguna experienced 12 straight days of no water. Even after the school reopened, kids were having to use mini port a potties.

While this was the most serious disruption in the Pueblo’s water system, it was not the only break. The dilapidated and outdated water and wastewater system needed $70 MILLION to fix it.

The Pueblo Council directed a team to go and find the financing to fix the problem. Even after securing significant USDA grants and loans the Pueblo team determined that

unless they could find alternative financing, it would take 10 years to fix the system using USDA funds alone .

The Pueblo used NMTC to raise an additional 20% above the USDA Loan/Grants – finishing the water system the first year, and the wastewater sooner than expected.

This presentation outlines the structure of NMTC; how it can be used by Tribes; and how to build the team to be successful.

My appreciation to the Pueblo of Laguna for their willingness to share their experience with all tribes in the hopes of increasing access to equity for tribal business and community needs.

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No Water, Broken Wastewater A $70 Million Project

Built a team

Convinced USDA to allow the use of NMTC

Found a way around the use of BIA approved leases to expedite the project

Used Margin Loan to “float” the NMTC project.

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NMTC Four Key Elements to the Pueblo’s

Success

New Markets Tax Credits bill signed into law by President Bill Clinton – operational since 2000.

In 2015, 3.5 Billion awarded for investment into businesses and infrastructure in severely distressed communities.

NMTC investment can contribute approximately 20% equity investment that is “forgiven” after 7 years

Relatively few tribal projects – 1% of allocations (Urban Inst.2013)

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NEW MARKETS TAX CREDIT OVERVIEW

Severely Distressed Community: 20% poverty, or with median family incomes that earn less than 80% of median income for area. Done by census tracts.

2015 Round additional targeted criteria: rural, Native American, 25% poverty rate, access to healthy food; FEMA disaster area.

See georecorder for specific tracts

Most, but not all census tracts on tribal land qualify.

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Where Is A New Market:

Equity Investment by QALICB/Owner Easiest – no issues with collateral or lender requirements

Conventional Loan – must comply with Rev. Rul. 2003-20 Term must be at least 7 years, can be longer Unsecured, forbearance for 7 years

Agency Loan If Agency loan, may need interim financing so as not to deviate from regulatory requirements USDA allows general obligation or revenue pledge Projects range from electrification, renewable energy, hotels, health facilities, grocery stores, Infrastructure, manufacturing, etc. Restrictions include no gaming, golf courses, residential housing or agriculture.

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Examples of NMTC Investments

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Lender A Loan Investment Fund NMTC Investor

CDE Combined A&B Loans = Equity Investment in QALICB – QEI Servicing fee

QALICB Must qualify for 7 yrs. A loan may be interest only or negotiated terms B loan usually interest only

• Investment covers costs of transaction

• Investor receives credits in return

• Investment becomes B loan

• Tax credits earned over 7 years

• Put/Call after 7 yrs to unwind B loan

• Complexity & Costs

• $5 Million Min. project • Common to set aside

compliance costs, and interest

P&I

The program is aimed at supporting businesses that will expand or build within the severely distressed census tracts . Need to demonstrate benefits flowing to the severely distressed community – jobs, health, safety, economic development, community benefits, etc.

These benefits flow through the borrower/business: the QALICB Qualified Active Low-Income Community Business

A Tribally Created LLC can qualify - can set up either under a Section 17 or other corporation or just as a tribally created LLC.

Must elect to be treated as a taxable entity for the duration of the 7 years. The QALICB should be a single purpose entity – exists just for this one project

- with all of its assets dedicated to this one project.

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Who Gets the Loan/Investment

The benefits are worth the headache, but it takes patience and a good team.

Financing Advisor - Laguna used Tom Whitman for 3 different projects. He found the allocations and negotiated the pricing while bird dogging the project.

Tribes’ Investment Team – They will know what sources of funds can be used for interim financing, cost of money, sources of repayment. Laguna used John Ulrich and Tribal Treasurer David Martinez. They identified the lowest cost leverage loan, and were responsible for post closing financial details.

Chief of Operations – Jim Hooper, Jr. , in charge of getting the project built and off the ground when it is finally funded. Construction details play heavy in financing due diligence.

Borrower’s Attorney – build structure and provide legal opinion on tribal laws, tribal authority, negotiate documents from tribe’s perspective, draft resolutions, etc. - Leger Law and Strategy.

NMTC Tax Attorney – will issue tax opinion and help structure deal in compllance with IRS rules.

Each member of the team will share in role of strategizing and building the story for the financing. Almost all government programs are aimed at meeting a need. The story will confirm that the project satisfies the purpose of the funding source.

Build Your Team New Markets Tax Credits Provide Significant Investment (20% equity)

into a tribal project. Like all Financing Programs, they will have a lot of strings and a lot of complexity.

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The Pueblo of Laguna convinced the USDA that it was ok to use USDA loan/grant water/wastewater money within a NMTC project. This was a key approval that will benefit all USDA funded projects in the Nation.

It brings an additional 20% of “equity” into a USDA project. Must keep the USDA and NMTC transaction complementary but not intertwined.

(See next page) Because of different draw down requirements, you must have a separate

leverage loan for the NMTC transaction. The Pueblo determined that the lowest cost leverage loan was to take out a

margin loan on its portfolio. The margin loan was low interest (1.2%) and was paid back within 18 months of

the project. Pueblo now talking to USDA about using the community facilities program for

another NMTC. USDA not yet made a decision, but initial discussions are favorable.

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Leverage Loan and USDA OK

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As complex as the chart on the previous page is – with the corresponding 39 documents. The Council was comfortable with the transaction.

The Team went before Council multiple times to explain the deal, to walk through the benefits and discuss the complexity.

By the end, the Council had learned enough to be comfortable with its approval. Indeed, the Council then authorized the Pueblo to pursue additional NMTC deals. The Pueblo or its entities have closed 4 deals, and it is looking for allocations for a large NMTC project for 2016.

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Council Support

Teresa Leger de Fernandez has served as General Counsel to Native American Tribes and their business enterprises for over 26 years. Her work ranges from financing to protecting sacred sites to negotiations and social justice litigation. She has received Presidential appointments from both President Obama and President Clinton.

She started her academic career in one of the first Headstart classes in New Mexico, went on to graduate from Yale and receive her J.D., with distinction, from Stanford Law School. She is the founder of Leger Law & Strategy, LLC. LL&S is a dynamic law firm focusing on projects that beneficially impact our communities.

Teresa@LegerLawandStrategy.com, Santa Fe, NM Website: http://LegerLawandStrategy.com

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THANK YOU