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financeguru2
financeguru2, Financial Advisor
Category: Finance
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Experience:  Several years of experience in wealth management for high net worth individuals
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How do you record new market Tax Credit unwind of the lo

Customer Question

How do you record new market Tax Credit unwind of
the loan
Submitted: 1 year ago.
Category: Finance
Customer: replied 1 year ago.
The company I worked for already reached the 7 year term of the NMTC loan and the put was already exercised. Now, how do you record the loan that essentially the company is already the owner of the loan?
Customer: replied 1 year ago.
I posted this question yesterday and I thought experts should have some answer, it is more than a day now and I still don't have an answer. Beginning to have some doubts on this service ...
Customer: replied 1 year ago.
(Posted by JustAnswer at customer's request) Hello. I would like to request the following Expert Service(s) from you: Live Phone Call. Let me know if you need more information, or send me the service offer(s) so we can proceed.
Customer: replied 1 year ago.
Still have not receive any answer to the question posted on June 26 about new market tax credit. Any expert reviewing or searching for an answer?
Expert:  financeguru2 replied 1 year ago.
Hello. I will attempt to answer your question, as other professionals have been unable to do so. First, could you provide more specific transaction details on how the NMTC loan was set up? This would include all parties, leverage involved, capital contributions, etc. From this background, I should be able to assist you with your question. Thank you.
Customer: replied 1 year ago.
The following are the parties to this NMTC loan : Co A- Bank, Co B- Community Development Fund, Co C-Borrower (QALICB), Co E - Investment Fund. In 2008 Co A created a wholly owned subsidiary Co-E Investment Fund where Co A made and equity contribution of $1Mil. Co E then made an investment of $1Mil to Co B which in turn loaned the same money to Co. C. Seven (7) years had passed Co. B as part of the loan agreement, advised Co C if it wanted to exercise the put option for a fee of $25K. The put option transaction happened in 6/17/15 and the $1 Mil loan no longer exists. In the books of Co. C (Borrower) how would this forgiven loan be recorded. Is it going to be recorded as an equity contribution? Please advise.
Expert:  financeguru2 replied 1 year ago.
Thank you for the background information. Can you clarify the structure of the put option? This should allow me to answer your question. Thank you.
Customer: replied 1 year ago.
Included in the note agreement between Co C and Co B was a provision for an accelerated repayment at a " Discounted Repayment Amount of $25,000 considered the "put", during the accelerated repayment date ( which is 7 year maturity date of the loan). If Co B failed to exercise, loan will continue to mature on 2038.
Expert:  financeguru2 replied 1 year ago.
It appears to me that C is repaying the loan in this case. Is that correct?
Customer: replied 1 year ago.
How about the option money of $25K, what would be the appropriate entry in the GL.
Expert:  financeguru2 replied 1 year ago.
The option income would be recorded as additional investment income on the books when received. The loan would obviously be removed once paid. Does this fully answer your question? If not, please feel free to respond for further clarification. Once I have completely answered your question, please rate the answer. Thank you.
Customer: replied 1 year ago.
The $25k would not be recorded as income but expense because it is the money expended by the borrower (us) when we exercise the "put". Also what do you think will be the entry to remove the loan? Will it just revert to an additional investment capital?
Customer: replied 1 year ago.
Co C is no longer paying loan as this is already forgiven during the put option exercise wherein we paid the $25K
Expert:  financeguru2 replied 1 year ago.
Yes, the option payment would be an expense in that case. Regarding the loan, is the loan truly forgiven or is Co C paying off the loan? If forgiven, the entry is usually to record forgiveness of debt income. I would not anticipate any entries being made to investment capital, unless the loan forgiveness was truly a capital contribution by the loan investor and now the investor owns an equity portion of Co C.
Does this answer your question? If so, please rate the answer. As always, if we haven't fully answered your question, please respond for further comments before rating the answer. Thank you.
Customer: replied 1 year ago.
Hello, still not clear to me, no one is making any payment of the loan as this has been forgiven. You are suggesting that $1million loan forgiven be recorded as income. Are you sure of this? is there a reference we can look at to support this approach please advise. Thanks.
Expert:  financeguru2 replied 1 year ago.
Can you please clarify the resulting equity ownership in the transaction? If the loan is being converted to equity, it may not be income. I would have a difficult time believing that a $1 million loan is being completely forgiven without taking any type of equity stake in the entity. Please confirm and I will respond to clarify.
Customer: replied 1 year ago.
I hope you have some familiarity of New Market Tax Credit program offered by Federal Govt in 2001 because this is the type of loan transaction that we are talking about here. Co A- Bank, Co B- Community Development Fund, Co C-Borrower (QALICB), Co E - Investment Fund. In 2008 Co A created a wholly owned subsidiary Co-E Investment Fund where Co A made and equity contribution of $1Mil. Co E then made an investment of $1Mil to Co B which in turn loaned the same money to Co. C. In June 18,2015 Co. C purchased the membership interest of Co E, making now the new owner of the investment fund that provides the loan to itself in 2008. Therefore since Co C (borrower) is now the owner of the investment fund, CO. C can actually cancels the loan. What would be the entry to record this cancellation? Please advise.
Expert:  financeguru2 replied 1 year ago.
I realize this is a New Markets Tax Credit transaction. However, there are many variations of these types of transactions, so I want to make sure we get the facts straight before confirming an answer. What was the purchase price for the membership interest? $1 million? If so, the entry would be to debit loan and credit cash. No additional equity would be formed without new money being contributed to the company. I realize this isn't the most simple question, so please feel free to respond for further clarification if needed.
Customer: replied 1 year ago.
The membership interest was for $1k. Essentially, the borrower is now the lender of the loan after purchasing the interest of the investment company.
Expert:  financeguru2 replied 1 year ago.
Understood. The membership interest was purchased for $1 million or $1,000?
Customer: replied 1 year ago.
yes that is correct. So the borrower is now the lender and borrower at the same time.
Expert:  financeguru2 replied 1 year ago.
Can you please confirm the purchase price of the membership interest per my previous message? Thank you.
Customer: replied 1 year ago.
I already responded, the purchase price was for $1,000. Thanks.
Expert:  financeguru2 replied 1 year ago.
Thank you. Now I understand the transaction. For the membership interest purchase it would be debit investment in investment company and credit cash. For the loan removal it would be debit loan and credit equity as you suggested. This is because the purchase of the loan creates new equity coming in. Does this answer your question? If so just let me know and I can open up the question to be rated. Thank you.
Customer: replied 1 year ago.
Still not clear on this. Both the borrower and now the investor is one entity and maintains the same set of books. I can't follow why an investment need to be recorded. Shouldn't the loan cancellation be recorded as other income? since the loan is no longer in existent?

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