It has become more and more difficult to underwrite real estate projects in the current credit markets — a state of affairs that has only intensified in the last few weeks for obvious reasons. This pull-back in credit has affected every part of the capital and finance markets, including New Markets Tax Credit financing – a complex tax-related discipline. Still, though, such deals are still getting done, as evidenced by the Greenville New Markets Opportunity LLC. Recently, the company announced some $17 million in below market financing for the Main at Broad project in South Carolina, developed by Windsor/Aughtry Co. This project will include 65,000-sf of office and retail space, a 250-space parking garage and a 135-room Courtyard by Marriott hotel. “The change in the financial markets has made underwriting on real estate transactions using these credits more difficult,” CEO Tammy Propst tells “But it is still doable.” Using NMTC has always been complicated, correct?

Propst: Yes, that is certainly true. But the real problem today is that any kind of gap funding – and that is what a NMTC basically provides – has become very difficult in this environment. Can you walk me through a typical transaction?

Propst: In every transaction there is a tax credit investor, lender and, of course, developer. We first sit down with the developer to identify any gaps in the underwriting in the project. The cost of building parking, for instance, has become prohibitive and that was the gap we identified in the Windsor/Aughtry deal. With the lender we work through how much tax credit equity support can be pulled into the project – that allows it to underwrite transaction more comfortably. Can you give an example with numbers?

Propst: Let’s use a $10 million loan, for simplicity’s sake. Instead of the borrower getting one note for $10 million, it gets two notes – an A loan for $8 million at market rate and a B note, or NMTC note, at a nominal interest rate with the ability for the lender to put that note to the borrower at end of seven years. In other words the borrower is getting passive equity –- the $2 million B note is debt, but it has the ability to purchase that note in seven years and convert it to equity. So the borrower gets two benefits: a low interest rate for the $2 million loan and the ability to convert it into project equity. That would be an example of a leveraged structure using NMTC. In a direct structure, all of the subsidy goes into the B note. The borrower would get one $10 million note at a lower interest rate. Which is better?

Propst: You have to run the numbers in each situation. Sounds simple enough.

Propst: Yes, but in today’s market everything is scrutinized more. Also every deal is different. For instance, the Windsor/Aughtry deal also has a component in which the city is involved. The developer purchased the property from Greenville in Q4 2007. Part of the project is a village green that connects two parts of Downtown together. Because of that, we were able to pull [more] credits in to make the numbers work. What other impact has the capital crunch had on this part of the market?

Propst: Well, as you know, large bank financing has all but stopped for a lot of projects, so more and more of these projects are being supported by community or regional bank lenders. A top-10 bank probably wouldn’t have closed this deal today. That means large city projects are unlikely to be funded in this way — but the smaller metro areas, which have a good base of community lenders, are faring better.

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