Puerto Rico Rural Lenders Summit

March 8, 2019______________________________________

New Markets

Tax Credits& PR Act 74 Property Assessed Financing

Making Catalytic

INVESTMENTS

That will Benefit

COMMUNITIES

Building Opportunities for

REVITALIZATION1

Presenters

Craig W. Stanley, CBO Financial Inc.

– Ten time NMTC allocatee awarded $150M in 6 federal NMTC awards and $21.8M in 4 state programs, in addition authored 14 successful applications for clients totaling $411.8M in NMTC awards including $45M for Puerto Rico Housing Finance Authority and $10M for the Municipality of Vega Baja.

– Used $3.6M in NMTCs to invest in a a 175,000 hydroponic tomato farm in Morovis, Puerto Rico, which in the midst of follow on, USDA backed financing.

Rogelio J. Carrasquillo, Esq., Carrasquillo Law Group P.C.

– Represents developers and investors seeking to raise capital through private equity or alternative sources of financing, such as NMTC.

– Experienced with projects using different sources of capital and economic incentives, including taking advantage of Opportunity Zones, EB-5 Funding, Bond Financing or Tax Credits (LIHTC, NMTC, HTC).

2

NMTC Program Overview

$65 billion federal incentive program enacted 12/12/00

Designed to incentivize investment in low income areas with flexible gap financing for 20% to 25% of project costs

Administered through private companies known as Community Development Entities (“CDE’s”) that compete annually for authority under the program

$7.0 billion awarded in 2016, then $3.5 billion per year through 2019

3

How the NMTC Program Works

LOANS

REPAYMENTOF LOANS

4

Eligibility Requirements

Projects in census tracts with at least 20% poverty, or median family income at or below 80% of the area median family income

“Severely Distressed” targets (~75% of NMTC allocations) = >30% poverty or <60% median family income

Or a project can be eligible if not located in an eligible Census Tract if it serves or employs a majority low income persons, this is known as “Targeted Populations”

5

Credit Amount (Benefit to Investors)

Equals 39% of amount of original investment

Investors take credit over a 7-year period

Credit rate:– 5% in each of the first 3

years

– 6% in each of the final 4 years

6

NMTC and USDA

Timeline

2003 - NMTC program’s 1st round of awards

2006 – 20% rural set aside enacted

2016 – USDA published final regulations that, among other changes, permit loans guaranteed by the USDA to be used for NMTC projects

To 2017: – $11.6 billion invested in 800+ rural businesses, creating

100,000 jobs

– Rural investment has grown to 24% of NMTCs from 13% in prior years.

7

Standard NMTC Structure

Pmts

QALICB (Borrower) –Needs to borrow $5 million

Lender – loans

$3.5 million

CDE

NMTC Investor

Puts in $1.5 million

$1.5 mil cash

$1.5 mil loan

$3.5 mil loan P & I $585k NMTCs + pmts

8

“Leveraged” NMTC Structure

NTMCs

QALICB (Borrower)Receives $10M

Subsidiary CDEReceives $10M equity

investment, makes two loans (QLICIs) and holds mortgage

NMTC InvestorMakes $3.2M equity

investment, owns 100% of investment fund

$10M equity inv (QEI)

Investment FundAggregates $10M debt &

equity, owns 99.9% of Sub-CDE

$6.8M $3.2M

$3.9mil NMTCs (39% of $10M)

LenderLoans $6.8M to investment fund

Master CDESub-allocates $10M

in NMTCs to subsidiary; owns

.01% as managing member

“A” Loan: $6.8Min Sr. Position

“B” Loan: $3.2 Min Jr. Position

(typically forgiven in 7 years)

Legal CounselTransaction

documentation and legal opinion, as

required

$10 M NMTCs

9

Example NMTC Sources and Uses

10

Sources

Sr. Debt 53.0% 5,300,000$

Owner Equity - Capital Campaign 15.0% 1,500,000

NMTC Equity 32.0% 3,200,000

Total sources 100.0% 10,000,000

Uses

Building acquisition & renovation 7,000,000$

Debt service reserve - construction + ramp up 800,000

Equipment & supplies 88.0% 1,000,000 8,800,000

Legal & accounting 3.0% 300,000

NMTC fees - CDE & placement 9.0% 900,000

Total Uses 100.0% 10,000,000

Example NMTC Transaction

Sources & Uses of Funds

NMTC equity - gross 3,200,000$

Less:

Legal & accounting (300,000)

NMTC fees - CDE & placement (900,000)

Net benefit: 2,000,000

Net benefit as % of project budget 23%

Net Benefit of NMTCs

Case Study: EquipCo, LLC, Morovis

11

• 175,000 sf hydroponic

greenhouse to produce 2M

lbs. of fresh food annually.

• EquipCo acquired the

facility using NMTCs and

leases it to a growing entity.

• A follow-on financing is

underway seeking to use a

USDA guarantee.

• Existing NMTC financing

structure will be

subordinated to new loan.

NAC- EquipCo Structure Diagram

12

Ways to Access NMTCs

Attract a Community Development Entity (CDE) that has an allocation– Appropriate for smaller,

single projects

Form a CDE and apply directly for NMTCs– Appropriate for large

projects or a pipeline of projects

13

What CDEs are looking for in a project

Projects that are consistent with the CDE’s mission and geographic service area

Projects located in a “Severely Distressed” census tract

Leveraged debt investors in place

NMTC equity investor in place

Building permit ready

Substantial community impacts

Projects that can’t move forward without a NMTC subsidy(the “but-for”)

14

Benefits of Property Assessed Financing15

• No down payment - 100% funding for improvements.

• Easy to qualify since the assessment is against the property, not based on

owner credit.

• Immediate positive cash flow for energy improvements with no money

down, while increasing property value by lowering operating expenses.

• Allows cost of improvements to be passed on to tenants.

• Assessment automatically transfers to a new owner upon sale.

• Off-balance sheet, no mortgage is recorded against the property.

• Better rates and terms due to repayment from tax assessment, up to 30

year term.

• Fast approval and funding.

Property Assessed Clean Energy(PACE) Financing

State-by-state program that permits loans made to fund energy and other priority improvements to be repaid via a voluntary assessments on a building’s property taxes.

To date 33 states have enacted PACE, 21 have active programs

100% funding for improvements up to 30% LTV

Easy to qualify; since the loan is against the property

Off-balance sheet, no mortgage is recorded

Payments stay with the property if it is sold

Investment funds have been established creating significant demand for lending opportunities

16

Puerto Rico Property Assessed Financing

The Tourism Development Act of 1993 enabled property assessed financing for tourism related projects

The 1993 legislation has evolved and is now known as Act 74

The statute allows a borrower to assign to a lender the right to collect the voluntary property tax assessments and the right to start foreclosure within 45 days of non-payment.

CBO Financial has educated the primary stateside PACE investors about the opportunity in Puerto Rico, to date $42M in term sheets have been generated for three projects.

17

Craig W. Stanley, CEO

7125 Chardon Court

Clarksville, MD 21029

(410) 730-0490

cstanley@cbofinancial.com

www.cbofinancial.com18