Ulmer & Berne partner Mary Forbes Lovett, was featured in Law360’s Dealmakers Q&A published on September 12, 2014.

Q: What’s the most challenging deal you’ve worked on, and why?
A:  Phase III of the Saint Luke’s Hospital building was a challenging but extremely rewarding project. With 65,000 square feet of leasable, transit-oriented commercial space, financing included federal and state historic tax credits (HTCs), federal and state new markets tax credits (NMTCs) utilizing the leveraged model with two NMTC/ CDE allocations and substantial capital fund raising. The project required sifting through many layers of financing (fundraising, nonprofit/public sources of funding). Due to the anchor tenant, a charter school, needing to take possession of the space for the 2013-2014 school year, the closing had a hard date and the construction had to commence prior to all the financing being in place.  Closing on financing for the project occurred after the Historic Boardwalk Hall case in which the IRS successfully challenged the treatment of a tax credit investor as a true partner and prior to the issuance of the IRS Revenue Procedure 2014-12 which provided a safe harbor for structuring historic tax credit transaction. As a result, the challenge of “twinned deals” (combining NMTC and HTC) made structuring the transaction difficult as the funds were being leveraged through the NMTC model – necessitating constant revisions to insure IRS compliance.   Furthermore, because both the developer and the end-users were nonprofits, the Internal Revenue Code’s complicated rules (in place when a nonprofit is involved as either an owner or an end-user) added another layer of complexity.    The result of this project was the award-winning and nationally-recognized Breakthrough Schools’ Intergenerational School and other community-oriented nonprofit tenants moving in on schedule.  According to nonprofit developer Neighborhood Progress Inc., “The combination of these commercial tenants is a mission-perfect alignment of organizations providing much needed and demanded services.”

Q: What aspects of regulation affecting your practice are in need of reform, and why?
A: When the IRS issued Revenue Procedure 2014-12, setting forth a safe harbor for federal historic rehabilitation tax credit (HTC) transactions on December 30, 2013, the intent was to provide increased predictability surrounding HTC transactions. Because investors are allocated HTCs through an ownership interest in either (i) a “developer partnership” which owns and develops a historic building, or (ii) a “master tenant partnership” which leases a historic building and receives a pass-through of the lessor’s HTCs, compounded with the 2012 federal appellate court decision in the Historic Boardwalk Hall case, (which disallowed the allocation of HTCs to an investor), investors have been skittish about HTC deals.   The IRS will not challenge allocations of HTCs if the provisions of the safe harbor are satisfied. The safe harbor is generally effective for allocations of HTCs made on or after December 30, 2013. It is expected that HTC deals will now be structured to satisfy the provisions of the safe harbor.   However some of the provisions of the Revenue Procedure have created issues when the HTCs are twinned with NMTCs. It has raised a question as to whether HTC bridge loans and developer equity can be sources for a NMTC leverage loan.   Another factor is that the NMTC program is not a permanent part of the Internal Revenue Code.  As such, the program is subject to annual legislative approval. It is also extremely oversubscribed which makes access to a NMTC allocation very competitive.  Because of these uncertainties, the use of NMTC as a tool for economic development is less than desirable. However, there is movement afoot to not only make the NMTC program permanent, but to increase substantially the amount of annual allocation.

Q: What upcoming trends or under-the-radar areas of deal activity do you anticipate, and why?
A: NMTC leveraged transactions require flexible debt for the leverage loan while HTC transactions require bridge lenders to bridge the financing until the capital contributions (associated with the credits) are made at the end of construction.  Traditional lenders struggle with this type of debt which forces projects to look for flexible financing. One source that is starting to gain popularity with such transactions is the use of EB-5 loans.   In exchange for a green card, the EB-5 program is an initiative for foreign nationals who invest $500,000 in a new commercial enterprise that benefits the U.S. economy and creates at least 10 full-time jobs. Additionally, the state is increasing its investment in granting loans for projects that create jobs. To further the investment in strengthening the economy / job creation, these lenders are more flexible in the collateral they require, loan to value, interest rate, and terms of repayment.

Q: What advice would you give an aspiring dealmaker?
A: Have patience! Alternative financing deals can be very complicated and will almost always be time-consuming and slow to evolve. There are no “cookie-cutter” deals in this business and sorting through the intricacies of tax credit financing can have a ripple effect throughout the project and its structure.   Developers need to be sensitive to these realities and have patience in these projects as well.   It is also critical to have a designated “quarterback” on a project. Assigning a leader that is knowledgeable, organized, and most importantly, an excellent communicator, is extremely important. Oftentimes that quarterback must also educate other project participants so they understand their role the deal.  With multiple parties in any one deal, information sharing and consistent contact are imperative to the success of a project. The time invested in keeping everyone informed builds trust and will pay off in the end.

Q: Outside your firm, name a dealmaker who has impressed you, and tell us why.
A: There are several impressive dealmakers in this area. One that stands out is Annette Stevenson. Annette is a partner in the Cleveland, Ohio office of Novogradac & Company LLP. With more than 20 years of experience with complex financing for community development real estate projects, Annette’s understanding of NMTCs, historic and rehabilitation tax credits, public/private partnerships, and other federal, state and local tax credits and incentives is superb. Active since the inception of NMTC, she has a command of the transaction structuring, financial modeling, compliance and reporting, and navigation around accounting and tax issues. From a senior expert to a client with no prior knowledge, Annette has the ability to communicate at all levels in sharing her widespread knowledge and expertise.   A respected advisor, she is also admired for her creative problem-solving skills – taking time to listen and sort through issues and draw from her extensive experience in finding a workable solution. Annette is a true asset to the Cleveland market.