(Editor’s note: Ingrid VanBiber is the guest author for this post. She is an attorney and shareholder at Polsinelli, a business and litigation law firm that has more than 700 attorneys in 18 offices around the country. Ingrid provides valuable and strategic legal counsel to borrowers, lenders and investors and has helped Travois New Markets close numerous New Markets Tax Credit projects.)
If, like me, you have become obsessed with the HBO series “Game of Thrones,” you are familiar with the saying “Winter is Coming.” For those who are not familiar, it refers to the need to prepare oneself for some potential difficulty to come. This blog post will be devoted to a few ways to prepare for an NMTC financing, to keep “winter” from derailing you or your transaction.
Selection of a team
Generally speaking, one of the most important aspects in preparing for winter is getting all the appropriate tools in order. In terms of a transaction, that means putting together the right team. And in an NMTC financing, there are several tiers of players – the project sponsor, the community development entity (CDE), the investor, counsel for each of the project sponsor, CDE and investor, accountants and often local or general counsel.
You will want people who are well versed in both the NMTC financing arena and the issues particular to a tribal entity. Often, the tribal entity-developer hires tax credit counsel who can work with the tribe’s general counsel and who understands the unique issues present on reservation and trust lands and in tribal governance. The tribe’s general counsel also needs to be prepared to run the legwork locally and be significantly involved in the transaction.
Another important tool for your “winter” kit is a good CDE. Involving a CDE like Travois, who understands the needs of both the investor and tribal entity, can make all the difference in your preparedness for a transaction. Travois will spend countless hours with a tribe to understand the project sponsor’s goals and then put together a workable structure and to ensure that all of the appropriate officials with the tribe understand the process and the diligence prior to entering into a transaction.
And while all parties are focused on the closing at the start of the transaction, you’ll want to determine if the CDE will offer any assistance post-closing. Travois provides a post-closing guidebook with various action steps required for compliance with the NMTC program and the associated financing documents and provides post-closing consultation for compliance issues.
Finally, work with your CDE to select an investor. While the market is limited, there are a few who regularly work with tribal entities and have a smaller learning curve for such a transaction. With everyone working together, the number of difficulties that arise will be reduced significantly.
Numbers
With your transaction team in place, you will want to focus on the transaction numbers. The investor to the transaction will likely select the accountant to prepare the official financial projections for the transaction, but those numbers are only as good as the numbers that the project team provides to the accountant.
Some of the numbers that the project team will need to be ready to provide to the accountant are:
- property acquisition costs, if any;
- construction costs and fees;
- potential income numbers (from leases or services);
- and any loan financing costs.
Keep in mind that this means that your general contractor and architect should be in place by this point.
Transaction issues
A common structuring issue in NMTC financings on tribal lands is that of property ownership. Many lands are held by the Bureau of Indian Affairs in trust for the tribe and so the tribe does not own fee simple title to the property but instead holds a long-term lease.
It should not cause any difficulty in the transaction, but it will be important for all parties to be aware of the status of title.
If you’ve hired consultants that are familiar with financings on tribal lands, then they will understand that there are some additional approvals needed for such properties, and if there are participants who are not familiar with those processes, they can be educated early in the transaction so that it does not become a delay to closing.
Finally, one of the most significant issues for an NMTC financing with a tribal entity — sovereign immunity. For most of the readers of this blog, retention of sovereign immunity is of the utmost importance. A complete waiver understandably rubs against the grain.
Some investors will not have experience working with tribal entities to understand the importance of this issue. Difficulties will arise if the investor takes a hard-line complete waiver position or if the tribal entity takes a strong anti-waiver position. Each party must prepare itself for some level of compromise.
Generally speaking, in Travois transactions, there is a limited waiver of sovereign immunity so that the CDE and investor can feel comfortable that they have some measure of enforceability to the transaction documents and the tribal participants can feel comfortable that they do not lose all control.
Arbitration is required before bringing suit in any federal, state or local court and the prevailing party may enforce the judgment in the tribal court.
Winter is coming. But you need not allow it to overwhelm you. Take the words of the young heroine of the show, Arya Stark, to heart: “All halls lead somewhere. Where there is a way in, there is a way out.”
With preparation, you can find your way through your NMTC financing to reap the benefits of private investment in your community.