UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2017

OR

For the transition period from __________________ to __________________



Commission File Number 001-11981

MMA CAPITAL MANAGEMENT, LLC
(Exact name of registrant as specified in its charter)



Securities registered pursuant to Section 12(b) of the Act:



Securities registered pursuant to Section 12(g) of the Act: None



Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes    No ☑

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes   No ☑

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☑No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) Yes ☑No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☑

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,”  “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes ☐ No ☑

The aggregate market value of our common shares held by non-affiliates was $123,881,115 based on the last sale price as reported in the over the counter market on June 30, 2017. 

There were 5,742,969 shares of common shares outstanding at March 13, 2018.

Portions of the registrant’s Proxy Statement to be filed on or about April 12, 2018 have been incorporated by reference into Part III of this report.

 

---

 

   





---

 



 

---

 

Cautionary Statement Regarding Forward Looking Statements

This 2017 Annual Report on Form 10-K for the year ended December  31, 2017 (this “Report”) contains forward-looking statements intended to qualify for the safe harbor contained in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Forward-looking statements often include words such as “may,” “will,” “should,” “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “seek,” “would,” “could,” and similar words or expressions and are made in connection with discussions of future events and future operating or financial performance. 

Forward-looking statements reflect our management’s expectations at the date of this Report regarding future conditions, events or results.  They are not guarantees of future performance.  By their nature, forward-looking statements are subject to risks and uncertainties.  Our actual results and financial condition may differ materially from what is anticipated in the forward-looking statements.  There are many factors that could cause actual conditions, events or results to differ from those anticipated by the forward-looking statements contained in this Report.  They include the factors discussed in Part I, Item 1A. “Risk Factors.”

Readers are cautioned not to place undue reliance on forward-looking statements in this Report or that we may make from time to time, and to consider carefully the factors discussed in Part I, Item 1A. “Risk Factors” in evaluating these forward-looking statements.  We do not undertake to update any forward-looking statements contained herein, except as required by law.



---

 

MMA Capital Management, LLC

Consolidated Financial Highlights

(Unaudited)

___________________________________________________________________________________________________________



PART I



ITEM 1.   BUSINESS 

Overview

MMA Capital Management, LLC was organized in 1996 as a Delaware limited liability company.  Unless the context otherwise requires, and when used in this Report, the “Company,” “MMA,” “we,” “our” or “us” refers to MMA Capital Management, LLC and its subsidiaries.

The Company partners with institutional capital to create and manage investments in affordable housing and renewable energy.  We invest for our own account and co-invest with our institutional capital partners.  In 2017, we derived revenue from returns on our investments and from asset management, performance and other fees that relate to investments, funds and ventures that we managed.  On January 8, 2018, the Company completed the sale of certain business lines and assets and converted to an externally managed business model by engaging an affiliate of Hunt Companies, Inc. to perform management services for the Company.  Refer to the discussion in “Sale of Certain Business Lines and Assets” in Part I of this Report for more information about these developments.  The forward-looking statements in our discussions of U.S. Operations, International Operations and Corporate Operations are qualified in their entirety by that discussion.

At December 31, 2017, the Company operated through three reportable segments – United States (“U.S.”) Operations, International Operations and Corporate Operations.  Refer to Notes to Consolidated Financial Statements – Note 15, “Segment Information,” for more information about the revenues, operating profit and loss and total assets for each of our reportable segments.    

Sale of Certain Business Lines and Assets

On January 8, 2018, the Company entered into a series of material definitive agreements with affiliates of Hunt Companies, Inc. (collectively, “Hunt”) in which the Company sold certain business lines and assets to Hunt and converted to an externally managed business model by engaging Hunt to perform management services for the Company.  The Company also agreed to issue, and Hunt agreed to acquire, 250,000 of the Company’s common shares in a private placement at an average purchase price of $33.50 per share.     In this regard, on March 9, 2018, the Company issued 125,000 common shares to Hunt for $4.1 million, representing a price per share of $33.00.  Hunt is obligated to purchase the remaining 125,000 shares for $4.3 million, or $34.00 per share, within six months of January 8, 2018.

With respect to the sale of business lines and assets, the Company sold the following to Hunt on January 8, 2018: (i) its LIHTC business; (ii) its international asset and investment management business; (iii) the loan origination, servicing and management components of its Energy Capital business; (iv) its bond servicing platform; and (v) certain miscellaneous investments (collectively, the “Disposed Assets” and the foregoing sale transaction is hereinafter referred to as the “Disposition”).  The Disposition also included certain management, expense reimbursement and other contractual rights held by the Company with respect to its Energy Capital, LIHTC and International Operations. 

As consideration for the Disposition, Hunt agreed to pay the Company $57 million and to assume certain liabilities of the Company. The Company provided seller financing through a $57 million note receivable from Hunt FS Holdings II, LLC (the “Buyer”) that has a term of seven years, is prepayable at any time and bears interest at the rate of 5% per annum.  The unpaid principal balance on the note will amortize in 20 equal quarterly payments of $2.85 million beginning on March 31, 2020.  Additionally, the Company may also receive additional purchase price consideration for the Disposition based on the performance of the transferred LIHTC businesses.

The Company’s option to purchase the LIHTC business of Morrison Grove Management, LLC (“MGM”) was converted to a purchase and sale agreement (the “MGM PSA”), pursuant to which the Company agreed to complete the purchase of MGM subject to certain conditions precedent.  In addition, the Company signed an agreement to acquire from an affiliate of MGM certain assets pertaining to a specific LIHTC property (the “Woodside Agreement” and together with the MGM PSA, the “MGM Agreements”).  Hunt has the right to elect to take assignment of the MGM Agreements and acquire the MGM LIHTC business and property directly from MGM and its affiliates.

After settlement of the Disposition, and assuming Hunt elects to, and does, close under the MGM Agreements, the Company’s assets and liabilities will consist primarily of its: (i) investments in bonds and other debt obligations that finance affordable housing and infrastructure in the U.S.; (ii) investments in partnerships, including our investments in renewable energy, U.S. real estate partnerships and our 11.85% ownership interest in South Africa Workforce Housing Fund (“SAWHF”); (iii) the $57 million note receivable from the Buyer; (iv) derivative financial instruments that are used to hedge interest and foreign currency exchange risks of the Company; and (v) other assets and liabilities, including certain LIHTC assets, real estate investments, the Company’s subordinated debt and $379.2 million of net operating losses (“NOLs”) that are subject to a full valuation allowance at December 31, 2017.

---

 

As part of the transaction, the Company engaged Hunt to externally manage the Company’s continuing operations (the agreement that governs this engagement is hereinafter referred to as the “Management Agreement” while the Hunt entity that externally manages the Company is hereinafter referred to as the “External Manager”).  All employees of the Company were hired by the External Manager.  In consideration for the external management services, the Company agreed to pay the External Manager (i) a base management fee, which is payable quarterly in arrears and is calculated as a percentage of the Company’s GAAP common shareholders’ equity, with certain annual true-ups, and (ii) an incentive fee equal to 20% of the total annual return of diluted common shareholders’ equity per share in excess of 7%.  For the first and second quarters of 2018, the base management fee is fixed at $1 million per quarter, with the percentage of GAAP common shareholders’ equity calculation beginning with the third quarter of 2018.  The Company also agreed to reimburse the External Manager for certain allocable overhead costs.

The Company will recognize an estimated increase in GAAP common shareholders’ equity of approximately $32 million in connection with the settlement of the Disposition and estimates that it would recognize an additional $14 million increase in GAAP common shareholders’ equity should Hunt decide to take an assignment of the MGM Agreements and, subject to the terms of the MGM Agreements, consummate the acquisition of the MGM LIHTC business. 

The impacts that the Disposition and Management Agreement have had on the continuing business operations of the Company are further discussed below.

U.S. Operations

At December 31, 2017, our U.S. Operations segment consisted of three business lines: Leveraged Bonds, Low Income Housing Tax Credits (“LIHTC”) and Energy Capital.  We re-allocated the Other Investments component of “Energy Capital and Other Investments” to our Leveraged Bonds business line in the fourth quarter of 2016.  However, as further discussed in “Sale of Certain Business Lines and Assets” in Part I of this Report, the Company completed the sale of the following elements of its U.S. Operations on January 8, 2018: (i) the Company’s LIHTC business; (ii) the loan origination, servicing and management components of its Energy Capital business; (iii) the Company’s bond servicing platform; and (iv) certain miscellaneous investments.  The Disposition also included, among other items, certain management, expense reimbursement and other contractual rights held by the Company with respect to its Energy Capital and LIHTC business lines. 

The impacts that the Disposition and Management Agreement have had on each business line within U.S. Operations are further discussed below.

Leveraged Bonds Business Line

In our Leveraged Bonds business line, which was not conveyed in the Disposition, we primarily own and manage bonds for our own account that finance affordable housing and infrastructure in the U.S.

The bonds we hold are fixed rate and unrated.  Our bonds are also generally tax-exempt and collateralized by affordable multifamily rental properties.  Substantially all of the rental units in these multifamily properties, which may be subsidized by the government, have tenant income and rent restrictions.     

The Company also has a smaller portfolio of other real estate bonds.  This portfolio includes: (i) municipal bonds that finance the development of infrastructure for a mixed-use town center development and are secured by incremental tax revenues generated from the development, (ii) a subordinated investment in a collateralized mortgage-backed security that finances a mixed-use multifamily housing property and (iii) a tax-exempt bond that is fully secured by U.S. Treasury notes subsequent to the sale of the underlying affordable multifamily property. 

The Company has financed its ownership of a majority of its investments in bonds through total return swap (“TRS”) agreements.  These financing arrangements enable the Company to retain the economic risks and rewards of the fixed rate bonds that are referenced in such agreements and generally require the Company to pay a variable rate of interest that resets on a weekly basis.  The Company also has executed TRS agreements to synthetically acquire the total return of multifamily bonds that it does not own.  The Company has hedged a portion of the interest rate risk associated with its TRS agreements and other sources of variable interest rate exposure using various interest rate risk management agreements.  

Table 1 provides key metrics related to all bonds in which we have an economic interest, including bonds in which we acquired an economic interest through TRS agreements (such bonds and TRS agreements are hereinafter referred to collectively as the “Bond Portfolio”).  See Notes to Consolidated Financial Statements – Note 5, “Debt,” and Note 6, “Derivative Instruments,” for more information about how TRS and interest rate risk management agreements are reported in the Company’s financial statements. 



---

 

Table 1:  Bond Portfolio - Summary







The fair value of the Bond Portfolio as a percentage of its UPB was 102.5% at December 31, 2017 and 2016, while the weighted-average debt service coverage ratio of the Bond Portfolio improved from 1.05x at December 31, 2016 to 1.10x at December  31, 2017.   



---

 

Other Investments of the Leveraged Bonds Business Line

At December 31, 2017, we owned or were an equity partner in,  two direct investments in real estate consisting of one land parcel and a mixed-use town center development whose incremental tax revenues secure our infrastructure bond investments.  The carrying value of the two direct investments was $21.5 million as of December 31, 2017.    

LIHTC Business Line 

At December 31, 2017, our LIHTC business line primarily owned and managed limited partner (“LP”) and general partner (“GP”) investments in affordable housing communities in the U.S.  In this regard, we provided asset management and administrative services to a limited liability company formed in 2015 by the Company and a commercial bank (“TC Fund I”) that acquired limited partnership interests either directly or through fund investments in approximately 650 affordable properties.  Since the formation of TC Fund I, many properties in which it had an interest have been sold and, as of September 30, 2017, TC Fund I had investments in approximately 440 properties. 

At December 31, 2017, we also had loan receivables from, and an option to purchase, MGM, which, at December 31, 2017, had approximately 235 properties under management.  Additionally, at December 31, 2017, our LIHTC business line had outstanding guarantees to some of the Company’s institutional investors related to the yield on the funds, the receipt of tax credits and the performance of the underlying assets.     

On January 8, 2018, and as further discussed in “Sale of Certain Business Lines and Assets” in Part I of this Report, the Company sold its LIHTC business to Hunt as part of the Disposition while converting its option to acquire MGM into a purchase and sale agreement that the Company has retained, but for which Hunt has the right to elect to take assignment.  As part of the Disposition, the Company’s LIHTC fund-level guarantees of investor returns, individual indemnifications made to specific investors in non-guaranteed LIHTC funds and its limited tax credit guarantee to TC Fund I were assumed by Hunt.

TC Fund  I

As consideration for providing asset management and administrative services to TC Fund I, the Company was due an asset management fee of 2% per annum on the initial capital contribution of $211.4 million by the investor with which the Company partnered to form TC Fund I.  Asset management fees were generally payable to the Company by TC Fund I after payments are made by TC Fund I to: 1) repay any tax credit losses funded by the investor; 2) redeem any investor member voluntary loans; 3) repay any mandatory loans made by the Company to fund investor tax credit losses; 4) pay any expense loans; 5) establish any required reserves; and 6) pay any accrued guarantee fees.  Cash flows to TC Fund I are generated primarily from residual events that generally occur at the end of the tax compliance period and are generally outside of the control of the Company in terms of whether and when they occur.  At December 31, 2017, we anticipated that a significant amount of these properties would not generate any material residual value.  Any accrued but unpaid asset management fees bear interest at 6% per annum compounded annually.

In connection with the formation of TC Fund I, the Company provided a limited guarantee of tax credits that are expected to be generated by TC Fund I’s portfolio of investments.  In consideration for providing this guarantee, the Company was contractually entitled to receive $4.2 million in guarantee fees from TC Fund I and, on December 31, 2015, recognized a guarantee fee receivable for this amount in conjunction with recognizing a liability of equal size related to its obligation to stand ready to perform under this guarantee.  At December 31, 2017, this guarantee fee receivable, inclusive of accrued interest, had been fully collected by the Company while the carrying value of the Company’s guarantee obligation to TC Fund I was $2.8 million.   

To cover certain costs associated with the organization of TC Fund I, the Company advanced a loan of $5.3 million to TC Fund I upon its formation.  This loan accrues interest at 9.5% per annum, compounds annually and will be repaid by TC Fund I after it pays accrued guarantee and asset management fees.  At December 31, 2017, this loan, which had a carrying value of $0.2 million, was on non-accrual status due to the timing and amount of cash flow projections for the loan and its payment priority in TC Fund I’s waterfall, among other factors.  The non-accrual status of this loan was re-assessed by the Company each reporting period.

On January 8, 2018, as further discussed in “Sale of Certain Business Lines and Assets” in Part I of this Report, the Company conveyed all of its rights and obligations associated with TC Fund I to Hunt as part of the Disposition.

Interests in and Obligations to MGM

Prior to the sale of substantially all of our LIHTC business in 2014, we “syndicated” tax credits by forming LIHTC funds that purchased directly or indirectly the limited partnership interests in multiple Lower Tier Property Partnerships (“LTPPs”).  We raised capital from institutional investors, which comprised virtually all of the equity of the LIHTC funds, and the LIHTC funds used this capital, and sometimes interim debt financing, to purchase the limited partner interests in the LTPPs.  We were the general partner of, and managed, the LIHTC funds and usually retained an interest of between 0.01% and 1.0% in each of them.  The remaining 99.0% to 99.99% interest in each LIHTC fund was typically held by one or more large financial institutions.

---

 

We provided two general types of guarantees in connection with these transactions: (i) LIHTC fund-level guarantees where the Company, directly and indirectly, guaranteed the investors’ return on investment (“Guaranteed Funds”); and (ii) individual indemnifications to specific investors in non-guaranteed LIHTC funds related to the performance of specific LTPPs.   Because the LTPPs and the LIHTC funds (as well as any intermediate entities) are pass-through entities for federal income tax purposes, the equity owners of the LIHTC funds receive the tax benefit of the credits generated by the LTPPs.  In order for the investors in the Guaranteed Funds to benefit from low-income housing tax credits, the LTPPs in which these entities invest must operate affordable housing properties in compliance with a number of requirements in the Internal Revenue Code (the “Code”) and the regulations under it.  Failure to comply continuously with these requirements throughout a 15-year recapture period could result in loss of the right to those low-income housing tax credits, including recapture of credits that were previously taken, potentially creating a liability under our guarantee.  The execution of these guarantees caused the Company to consolidate the Guaranteed Funds for financial reporting purposes.

As consideration for providing these guarantees, the Company received upfront guarantee fees of $28.9 million that were initially deferred for financial reporting purposes and that are amortized into earnings over the contractual life of such obligations.  At December 31, 2017, the unamortized balance of the Company’s deferred guarantee fees was $7.5 million.  However, because the Guaranteed Funds have been consolidated by the Company for reporting purposes, certain fees and other payments received from these entities are not classified as revenues in our Consolidated Statements of Operations but rather as income that is allocated to us from CFVs.

When the Company sold its LIHTC business in 2014 to MGM, the Company agreed to indemnify MGM from investor claims related to those guarantees.  Additionally, to facilitate this sale transaction, the Company made a bridge loan and a subordinated loan to MGM.  As of December 31, 2017, only the subordinated loan, which matures on June 30, 2025, remains outstanding.  This subordinated loan, which was conveyed to Hunt on January 8, 2018 as part of the Disposition, had a UPB of $13.0 million as of December 31, 2017, was non-amortizing, bore interest at a base rate of 11% that was paid quarterly and had a contingent interest feature that provided up to an additional 13% of interest annually.  However, because the conveyance of the Company’s LIHTC business could not be treated as a sale for financial reporting purposes, this subordinated loan is not recognized in the Company’s financial statements.  As a result, principal and interest payments that are made to the Company are deferred in the Company’s Consolidated Balance Sheets as a component of “Other Liabilities.”  At December 31, 2017, the Company had recorded $10.3 million of deferred revenue in connection with principal and interest payments received from MGM.   

As consideration for the sale of the Company’s LIHTC business in 2014, the Company also received an option to acquire MGM, which primarily manages LIHTC investments on behalf of third party investors and for its own account.  The purchase price for the option was $12.0 million, subject to various purchase price adjustments that, as of December 31, 2017, would increase the purchase price to $13.2 million.  However, as further discussed in “Sale of Certain Business Lines and Assets” in Part I of this Report, this purchase option was converted on January 8, 2018, into the MGM PSA, which requires the Company to complete the purchase of MGM subject to certain conditions precedent.  The Company also executed an agreement on January 8, 2018, to acquire from an affiliate of MGM certain assets pertaining to a specific LIHTC property.  Hunt has the right to elect to take assignment of the MGM Agreements and settle directly with MGM. 

Direct Real Estate Investments

At December 31, 2017, the Company owned one real estate investment that it acquired during the third quarter of 2017.  This investment, which consists of a 98.99% LP interest in a partnership that owns affordable housing, had a carrying value of $0.9 million at December 31, 2017.  This investment was not conveyed to Hunt as part of the Disposition. 

At December 31, 2017, the Company was the general partner in four LTPPs in which it held equity interests ranging from 0.01% to 1.00%.  One of these interests was in a partnership that owns an affordable multifamily property that collateralized one of our bond investments.  The Company consolidated all four partnerships for financial reporting purposes and, as a result, recognized all of the assets and liabilities of these entities on its Consolidated Balance Sheets.  The four consolidated partnerships had a net carrying value of $18.8 million at December 31, 2017.  However, as further discussed in “Sale of Certain Business Lines and Assets” in Part I of this Report, the Company conveyed on January 8, 2018, its general partner interests in all four LTPPs to Hunt as part of the Disposition. 

Refer to Notes to Consolidated Financial Statements – Note 14, “Consolidated Funds and Ventures” for more information about the assets and liabilities of these consolidated property partnerships at December 31, 2017.

---

 

Energy Capital Business Line 

Throughout 2017, our wholly owned subsidiary, MMA Energy Capital, LLC (“MEC”), originated late-stage development, construction and permanent loans directly and through multiple ventures with a leading global private investment firm and an alternative asset manager (hereinafter, the “Solar Ventures”) to enable developers,  design and build contractors and system owners to develop, build and operate renewable energy systems throughout North America.  The Solar Ventures included Renewable Energy Lending, LLC (“REL”); Solar Construction Lending, LLC (“SCL”); Solar Permanent Lending, LLC (“SPL”); and Solar Development Lending, LLC (“SDL”).  MEC provided loan origination, servicing, asset management and other management services to the Solar Ventures entitling it to receive reimbursement for most costs that the Company incurred in executing its responsibilities as administrative member for the Solar Ventures.  However, as further discussed in “Sale of Certain Business Lines and Assets” in Part I of this Report, on January 8, 2018, the Company sold the loan origination, servicing and management components of its Energy Capital business line to Hunt as part of the Disposition.  Additionally, the Disposition included certain management, expense reimbursement and other contractual rights held by the Company with respect to the Energy Capital business line. 

In November 2016, the Company made an initial $75.0 million non-cash capital contribution into REL that was comprised of solar energy loan investments, including our membership interests in SCL and SPL, in exchange for a membership interest in REL.  As a result of this exchange, our interest in REL, which was not conveyed to Hunt as part of the Disposition, provides us with an indirect interest in SCL and SPL.  As stipulated in the governing documents of REL, our partner will make 100% of the incremental capital contributions to REL until it has funded 85% of the equity invested and will receive 100% of the capital distributions from REL until it has received a return of all of its contributed capital, thereby causing our ownership interest in REL to fluctuate.  At December 31, 2017, the Company’s investment in REL had a carrying value of $78.0 million, which represented a 57.0% ownership interest.  We received $5.9 million of cash distributions from REL during the year ended December 31, 2017, which reflects the Company’s share of income earned by REL.   

Upon the formation of SDL, the Company and its capital partner agreed to contribute 50% of the initial and incremental capital contributions to the partnership.  However, during the third quarter of 2017, the partners agreed that the Company would fund 10% and our capital partner would fund the remaining 90% for a particular portfolio of loans, thereby causing our ownership interest in SDL to decrease in percentage terms.  At December 31, 2017, the Company’s investment in SDL, which was not conveyed to Hunt as part of the Disposition, had a carrying value of $19.1 million, representing an 11.2% ownership interest.  We received $3.9 million in cash distributions from SDL during the year ended December 31, 2017, of which $3.4 million reflects a return of our invested capital and the remaining $0.5 million is an income distribution reflecting the Company’s share of income earned by SDL.   

At December 31, 2017, the UPB of loans that were funded through the Solar Ventures was $278.4 million.  Loans outstanding at December 31, 2017 had a weighted-average remaining maturity and coupon of nine months and 8.7%, respectively.

International Operations

Throughout 2017, we managed our International Operations segment through two wholly owned subsidiaries, International Housing Solutions S.à r.l. (“IHS”) and IHS Property Management Proprietary Limited (“IHS PM”).  During this period, IHS’s strategy was to raise, invest in and manage funds and ventures that invest in residential real estate.  This included four private real estate funds and a publicly-traded real estate investment trust (“REIT”).  IHS earned asset management fees from all five investment vehicles and also invested as a limited partner in the four funds it managed and was entitled to special distributions based on the funds’ returns.  In this regard, IHS managed the following investment vehicles in 2017:









---

 





In managing these funds in 2017, we were paid asset management fees and, in most cases, earned a return on our co-investment and had the opportunity to earn performance fees after various investment hurdles are met.  Additionally, throughout 2017, IHS PM provided property management services to a substantial portion of the properties in our IHS-managed funds.    

On January 8, 2018, the Company conveyed its asset management business and ownership interests in IHS and IHS PM to Hunt as part of the Disposition, although the Company retained an 11.85% ownership interest in SAWHF, related financing for that investment and a foreign currency hedge agreement for risk management purposes.  Refer to the discussion in “Sale of Certain Business Lines and Assets” in Part I of this Report for more information.

Corporate Operations

In 2017, our Corporate Operations segment was responsible for accounting, reporting, compliance and financial planning and analysis services. 

At December 31, 2017, this segment had interests in cash; certain interest rate derivative instruments; leases; furniture, fixtures and equipment; and various prepaid assets. 

At December 31, 2017, the primary obligations of this segment included subordinated debt.  Refer to Liquidity and Capital Resources, as well as to Consolidated Financial Statements – Note 5, “Debt,” for more information about the Company’s debt obligations that were outstanding as of December 31, 2017. 

On January 8, 2018, and as further discussed in “Sale of Certain Business Lines and Assets” in Part I of this Report, the Company engaged Hunt through the execution of the Management Agreement to externally manage the Company’s continuing operations.  All employees of the Company were hired by the External Manager.  Additionally, as part of the Disposition, the Company received a $57 million note receivable from the Buyer and conveyed certain leases, furniture, fixtures and equipment. 

Competition

In our Leveraged Bond business line of our U.S. Operations, we face competition from numerous financial institutions, including banks, government-sponsored enterprises, mutual funds and asset management companies, related to the debt and equity that we invest in real estate related assets.  Prior to the sale of our LIHTC business line on January 8, 2018, we faced similar competition in that business line. 

In our Energy Capital business line of our U.S. Operations, we face competition from banks and other renewable energy lenders related to the loans we provide to develop and build renewable energy systems.  As further discussed in “Sale of Certain Business Lines and Assets” in Part I of this Report, the Company sold on January 8, 2018, the loan origination, servicing and management components of its Energy Capital business line to Hunt as part of the Disposition.  However, the Company still faces competition subsequent to the Disposition related to new investments made by our Energy Capital business line. 

In our International Operations, our primary activity in 2017 was making workforce housing investments in South Africa for the funds and ventures we invest in and manage.  We competed against other investors, developers and companies to acquire, develop and manage similar housing investments.  We also competed against other asset managers in raising capital and making investments.  However, as further discussed in “Sale of Certain Business Lines and Assets” in Part I of this Report, the Company sold its International Operations to Hunt and, therefore, we no longer face competition to make workforce housing investments.

---

 

While we have historically been able to compete effectively against such competitors as a result of our service, reputation, access to investor capital and longstanding relationships with developers, many of our competitors benefit from substantial economies of scale in their business and have other competitive advantages.  The Company’s ability to compete has also historically depended on its ability to attract and retain professional and other personnel.  However, as further discussed in “Sale of Certain Business Lines and Assets” in Part I of this Report, the Company engaged Hunt on January 8, 2018, to externally manage the Company’s continuing operations while all employees of the Company were hired by the External Manager.  Therefore, our ability to compete depends on the performance of the External Manager.

Employees 

At December 31, 2017, we had 216 employees, which included 30 employees in our U.S. and Corporate Operations and 186 employees in our International Operations (the latter headcount includes 150 employees of IHS PM).  At December 31, 2017, none of these employees were party to any collective bargaining agreements.

On January 8, 2018, and as further discussed in “Sale of Certain Business Lines and Assets” in Part I of this Report, the Company engaged Hunt through the execution of the Management Agreement to externally manage the Company’s continuing operations.  All employees of the Company were hired by the External Manager.

Other Information Concerning Our Business

At December 31, 2017, our principal office was located at 3600 O’Donnell Street, Suite 600, Baltimore, MD 21224.  Our telephone number at this office was (443) 263-2900.  Our corporate website is located at www.mmacapitalmanagement.com, and our filings under the Exchange Act are available through that site, as well as on the U.S. Securities and Exchange Commission (“SEC”) website at www.sec.gov.    The information contained on our corporate website is not a part of this Report.



ITEM 1A.  RISK FACTORS 

Investing in our common shares involves various risks and uncertainties.  The risks described in this section are among those that, as of the filing date of this Report, could, directly or indirectly, have a material adverse effect on our business, financial condition or results of operations, as well as on the value of our common shares.

Risks Related to the Sale of Certain Business Lines and Assets 

We are exposed to the risk that the Buyer may fail to meet its payment obligations to us in connection with financing that we provided to facilitate the sale of certain business lines and assets.  

On January 8, 2018, the Company provided seller financing associated with the Disposition and received a $57 million note from the Buyer that has a term of seven years, is prepayable at any time and bears interest at the rate of 5% per annum.  The unpaid principal balance on the note will amortize in 20 equal quarterly payments of $2.85 million beginning on March 31, 2020.  This note has certain net worth, leverage ratio, debt service coverage ratio and interest coverage ratio covenants.  Notwithstanding these financial covenants to the extent the Buyer does not meet its payment obligations under the terms of the note it could result in a decrease in the number and dollar value of our investments, or a decline in the rate of growth of such investments, any of which could adversely impact our revenues, cash flows and financial condition.  If the Buyer fails to repay the note and we are unable to realize the value of the collateral, our business, cash flows and financial condition may be adversely affected.

Risks Associated with Our Relationship with Our External Manager

We no longer have any employees and we are therefore completely dependent upon the External Manager to provide all of the services we need, including finding suitable investments, conducting our operations and maintaining regulatory compliance.

Because we have no employees, we are completely dependent on the External Manager to find and close suitable investments on our behalf and to conduct all of our operations.  Although our former employees have become employees of the External Manager, the External Manager is not obligated to require these, or any other, employees to devote their time exclusively to us.  As a result, the employees may not devote sufficient time to the management of our business operations, and in particular to sourcing and placing investments with us.  Further, the Management  Agreement does not require the External Manager to dedicate specific personnel to our operations and none of our former employees’ continued service is guaranteed.  If these individuals leave the External Manager or are reallocated to other activities of the External Manager or its affiliates, the External Manager may be unable to replace them with persons with appropriate experience, or at all, and we may not be able to execute our business plan or maintain compliance with applicable regulatory requirements.

---

 

In addition, we can offer no assurance that the External Manager will remain our manager or that we will have access to the External Manager’s officers and key personnel.  The current term of the Management Agreement extends to December 31, 2022 and will be automatically renewed for additional two-year terms.  The External Manager may elect not to renew the Management Agreement effective upon the expiration of the initial term or any automatic renewal term, both upon 12 months’ prior written notice.  If the Management Agreement is terminated and no suitable replacement is found to manage us, we may not be able to execute our business plan.

Various termination provisions in the Management  Agreement, including termination by us without cause, require us to pay the External Manager a substantial termination fee, which could deter termination or adversely affect our results of operations.    

The initial term of our Management Agreement extends to December 31, 2022 and, unless terminated, the Management Agreement will automatically renew for additional two-year terms.  We may elect not to renew the Management Agreement effective upon the expiration of the initial term or any automatic renewal term, both upon 12 months’ prior written notice.  However, if we elect not to renew the Management Agreement on this basis, we are required to pay the External Manager a termination fee equal to three times the average annual management fee and incentive compensation earned by, plus one times the average annual amount of certain reimbursements received by, the External Manager during the 24-month period immediately preceding the effective date of termination, which could cause the termination fee to be substantial.  These provisions may make it costly and difficult for us not to renew the Management Agreement.  If we are required to pay the termination fee as a result of any termination, our results of operations and our shareholders’ equity will be adversely affected.

If we terminate the Management Agreement without cause, we cannot hire the External Manager’s employees, including our former employees, which could make it difficult for us to conduct our operations following any such termination.

If we terminate the Management  Agreement without cause, we may not, for a period of two years, without the consent of the External Manager, employ any employee of the External Manager or any of its affiliates, or any person who was employed by the External  Manager or any of its affiliates at any time within the two-year period immediately preceding the date we hire such person.  This restriction applies to all of our former employees except that, if we have paid the termination fee described above, we may hire persons serving in the capacity of Chief Executive Officer, Chief Operating Officer/President and Chief Financial Officer.  The inability to hire the External Manager’s employees could make it difficult for us to terminate the Management Agreement since we will need to find a new external manager or hire all new employees. 

The fixed percentage component of the management fee payable to the External Manager is payable regardless of our performance.

The External Manager is entitled to receive a management fee from us that is based on a fixed percentage of our GAAP common shareholders’ equity, regardless of the performance of our investment portfolio.  For example, we would owe the External Manager a management fee for a specific period even if we experienced a net loss during that period.  The External Manager’s entitlement to a fee based on a fixed percentage of our GAAP common shareholders’ equity may encourage the External Manager to invest in riskier assets in order to grow the equity base upon which the fee is paid and may reduce its incentive to find investments that provide appropriate risk-adjusted returns for our investment portfolio.  Similarly, the incentive compensation payable to the External Manager is based on year-over-year increases in diluted GAAP common shareholders’ equity per share, which could also encourage the External Manager to invest in riskier assets.

External Manager’s liability is limited under the Management Agreement and we have agreed to indemnify the External Manager against certain liabilities.

Under the terms of the Management Agreement, the External Manager does not assume any responsibility other than to render the services called for thereunder in good faith and is not responsible for any action of our board of directors in following or declining to follow any advice or recommendations of the External Manager, including as set forth in the investment guidelines.  Under the terms of the Management Agreement, the External Manager and its affiliates and their respective directors, officers, employees, managers, trustees, control persons, partners, stockholders and equity holders are not liable to us, our directors, stockholders or any subsidiary of ours, or their equity holders or partners for any acts or omissions performed in accordance with and pursuant to the Management Agreement, whether by or through attempted piercing of the corporate veil, by or through a claim, by the enforcement of any judgment or assessment or any legal or equitable proceeding, or by virtue of any statute, regulation or other applicable law, or otherwise, except by reason of acts or omissions constituting bad faith, actual and intentional fraud, willful misconduct, gross negligence or reckless disregard of their duties under the Management Agreement.  We have agreed to indemnify the External Manager and its affiliates and their respective directors, officers, employees, managers, trustees, control persons, partners, stockholders and equity holders with respect to all expenses, losses, damages, liabilities, demands, charges and claims arising from their acts or omissions not constituting bad faith, actual and intentional fraud, willful misconduct, gross negligence or reckless disregard of their duties under the Management Agreement.  As a result, we could experience poor performance or losses for which the External Manager would not be liable.

---

 

Affiliates of the External Manager are engaged in similar businesses to ours and the External Manager may have conflicts of interest which could result in decisions that are not in the best interests of our shareholders.

We are subject to conflicts of interest arising out of our relationship with Hunt, including the External Manager and its affiliates.  The External Manager may be presented with investment opportunities that we would find attractive, but which it offers instead to its affiliates, some of which are engaged in businesses similar to ours.  There is no guarantee that the policies and procedure adopted by us, the terms and conditions of the Management Agreement or the policies and procedures adopted by the External Manager and Hunt, will enable us to identify, adequately address or mitigate all potential conflicts of interest.  These factors could adversely impact our ability to make investments with attractive risk adjusted returns.

Risks Related to Our Business

Increases in interest rates and credit spreads may adversely affect the fair value of our assets and increase our costs of borrowing. 

Investments in our bond portfolio and other fixed rate financial instruments that are reported at fair value in our financial statements expose us to changes in interest rates and credit spreads.  These instruments include our investments in bonds, loans held-for-sale and derivative financial instruments. 

Interest rates can fluctuate for a number of reasons, including as a result of changes in the fiscal and monetary policies of the federal government and its agencies.  Interest rates can also fluctuate as a result of geopolitical events or changes in general economic conditions, including events or conditions that alter investor demand for Treasury or other fixed-income securities.

Changes in market conditions, including changes in interest rates, liquidity, prepayment and/or default expectations, and the level of uncertainty in the market for a particular asset class, may cause fluctuations in credit spreads.

If interest rates increase or credit spreads widen, the fair value of our investments in bonds and other fixed rate financial instruments (whose fair value measurements are based upon contractual cash flows) will generally decline and, therefore, have a negative effect on our financial results and net worth.  Declines in the fair value of these instruments could be significant in such circumstances. 

If short-term interest rates rise, our borrowing costs would increase and our net income would decline as interest payments associated with a significant portion of our debt obligations are indexed to short-term interest rates and, therefore, would increase.  However, the Company may, from time to time, enter into agreements with third parties that are designed to manage a portion of this risk.  

Changes in capitalization and interest rates may adversely impact the fair value of our investments in non-performing bonds, investments in subordinate cash flow bonds, certain TRS and other real estate-related investments.

For non-performing bonds, subordinate cash flow bonds and certain TRS derivatives that are reported at fair value in our financial statements, the Company measures the fair value of such instruments based upon internally-generated, 10-year projections of future net operating income from the underlying properties that serve as collateral for such instruments (a terminal value is added to these projections to estimate remaining property value that is expected to be realized at the end of the projection period).  In this regard, an increase in capitalization and interest rates generally would cause a decline in the fair value of these investments, as well as that of our other direct real estate investments.  Additionally, the value of our real estate-related interests in the portion of our LIHTC business line that we retained is dependent upon the residual value of multifamily rental properties, which will generally decline if capitalization and discount rates increase. 

The magnitude of changes in the value of our real estate-related interests could vary from market to market as a result of differences in capitalization and discount rates.

TRSs are important to financing our U.S. Operations and for other purposes and we are exposed to various risks associated with such agreements.  

A TRS is an agreement that requires one party to make interest payments based on either a fixed or floating rate of interest in exchange for payments from its counterparty that are based on the return of a referenced asset that is typically an index, a loan or a bond.  The Company has financed its ownership of a majority of its investments in bonds through such agreements.  All payments under this type of agreement are calculated based upon contractually-specified notional amounts.  In a typical TRS agreement, we are required to make interest payments that are based on a floating rate of interest and our counterparty is required to make payments to us that reflect the total return associated with a referenced asset.  Cash flows associated with this type of agreement are subject to risks associated with the referenced asset (including interest rate and real estate-related risks) and are exposed to the credit risk of both the obligor on the referenced asset and our counterparty to a TRS agreement.  To the extent the fair value of a referenced asset declines, we are at risk of having to provide additional collateral to our TRS counterparty.  If we were unable to post additional collateral in such circumstances, the referenced asset might be sold at a time when its full value could not be achieved and our existing collateral would be at risk of being retained by our TRS counterparty.  As the TRS agreements mature or are terminated, we need to make our counterparty whole and to the extent that the referenced asset value is less than the notional amount of the TRS, we would need to pay the difference in cash and if we are unable to do so, we have the risk of our collateral being retained.  

---

 

Currently, our TRS agreements are with one financial institution.  At least in the near term, entering into new TRS agreements, or extending existing agreements, is a significant part of our U.S. Operations.  To the extent we are unable to execute these types of agreements in the future, we may be unable to achieve our near-term goals and our financial position could suffer significantly. 

Cash flows from our Bond Portfolio and our other real estate-related investments are exposed to various risks associated with real estate to which our investments are related.

Because a substantial portion of our investments are secured by real estate or consist of real estate or investments in entities that own real estate, the value of these investments is exposed to various real estate-related risks.  Most of these investments are directly or indirectly secured by multifamily rental properties and, therefore, the value of these investments may be adversely affected by changes in macroeconomic conditions or other developments in real estate markets.  These factors include (but are not limited to): (i) increasing levels of unemployment and other, adverse regional or national economic conditions; (ii) decreased occupancy and rent levels due to supply and demand imbalances; (iii) changes in interest rates that affect the value of the real estate we own or in which we have an interest; and (iv) lack of or reduced availability of mortgage financing.

The value of most of our real estate-related investments is based upon cash flows generated by tenant leases.  The majority of the properties that we have financed or in which we have invested have rent limitations that could adversely affect the ability to increase rents.  The majority of such properties also have tenant income restrictions that may reduce the number of eligible tenants and, as a result, occupancy rates at such properties could decline. If tenants move out or cannot pay the rents charged on the specific units they lease, the owners (our borrowers and partners) may be unable to lease the units to replacement tenants at full rent (or at all).  In such circumstances, cash flows from such properties may not be sufficient to pay interest on our bonds or loans, which would cause the value of our investments to decline. 

Real estate may also decline in value because of adverse changes in market conditions, environmental problems, casualty losses for which insurance proceeds are not sufficient to cover the loss, or condemnation proceedings.  The value of our real estate-related investments and our ability to conduct business also may be adversely affected by changes in local or national laws or regulatory conditions that affect significant segments of the real estate market, especially the multifamily housing market.   These local or national laws or regulatory conditions specifically include environmental, land use and other laws and regulations that affect the cost of maintaining and operating the properties in which we have an interest.

We are exposed to various risks associated with agreements that we use to manage interest rate risk.

From time to time, we may execute agreements that are designed to reduce our interest rate risk.  For example, we may enter into interest rate swaps whereby we agree to pay a fixed rate of interest and the counterparty agrees to pay us a floating rate of interest in order to synthetically fix our variable rate debt to better match assets that pay on a fixed rate basis.  We also may enter into interest rate caps whereby we pay the counterparty an upfront premium and the counterparty pays us if the benchmark rate on the cap reaches a certain level. As further discussed above, derivative instruments are exposed to changes in fair value as a result of changes in interest rates.  Additionally, interest rate swaps and caps expose the Company to the risk of counterparty default (including counterparty failure to meet its payment obligations).  Further, there is a risk that these contracts do not perform as expected and may cost more than the benefits we receive.  Moreover, in the case of interest rate swaps, we are exposed to the risk of collateral calls if the fair value of such agreements declines.

Our ability to maintain and grow our shareholder value over the long term would be adversely affected if we are unable to raise capital, if our capital partners fail to meet their funding commitments to us or if we are unable to make new investments.

We need to identify, attract and obtain new capital in order to increase the number and size of the investments that we make.  Our ability to raise capital depends on a number of factors, including certain factors that are outside our control.  There can be no assurances that we can find or secure commitments for new capital or that new or existing capital partners will meet their funding commitments to us.  The failure to obtain or maintain capital in sufficient amounts could result in a decrease in the number and dollar value of our investments, or a decline in the rate of growth of such investments, any of which could adversely impact our revenues, cash flows and financial condition.

Additionally, there is a risk that we will not be able to deploy our cash or the cash held by our Solar Ventures or expand our leverage to make investments that generate risk-adjusted returns that sufficiently grow shareholder value.  Furthermore, because there are no restrictions as to the nature of our investments, our investments in the future may result in additional or new risks that we do not face today. 

We face risks associated with our renewable energy finance business.  

Our Energy Capital business line invests in late-stage development, construction and permanent loans through our Solar Ventures and may also invest for its own account in other parts of the capital structure, to enable developers, design and build contractors and system owners to develop, build and operate renewable energy systems throughout North America.  This business is subject to construction risk, permanent financing risk, repayment risk and collateral risks (such as value and ability to foreclose).  In addition, federal and state

---

 

governments have established various incentives and financial mechanisms to accelerate the adoption of renewable energy.  These incentives include tax credits, tax abatements and rebates among others.  These incentives help catalyze private sector investments in solar and other renewable energy.  Changes in government incentives, whether at the federal or local level, could adversely affect our renewable energy finance business.  In addition, changes in federal law, including the 2018 tariff on solar panels, could adversely affect our renewable energy finance business.  Furthermore, the ability of the Solar Ventures and the Company to fund our development or construction loan commitments is currently and may become increasingly dependent upon the repayment of other, similar loans in which we invested.  Repayment of such loans is often dependent upon permanent loans, tax credit equity and other monetization events whose funding is outside of our control.  Furthermore, lenders of permanent loans and syndicators of tax credit equity may require access to the credit markets, which could impact their ability to finance the take-out of our loans. 

We do not control our Solar Ventures.  Our Solar Venture partners may make decisions regarding the Solar Ventures that are not in our best interests or that have an adverse effect on our investment in the Solar Ventures.

We have been, and may continue to be, directly and indirectly affected by disruptions in credit markets.

Disruptions in credit markets may cause significant deterioration in the market for tax-exempt mortgage revenue bonds and other debt instruments that are a major part of our assets and may play a role in our reinvestment strategy.  This has in the past and may in the future result in our having to reduce the carrying value of our bonds and other receivables associated with our lending activities.  We are also dependent upon our capital partner to extend existing TRS agreements and other financings upon their maturity.  If we were unsuccessful in renewing such agreements, we may be forced to create liquidity in an unfavorable market which could have a material adverse effect on our business.  

Virtually all of our non-cash assets are illiquid and may be difficult to sell at their reported carrying values.

Our bonds, our direct and indirect investments in real estate, our renewable energy investments, and our other debt investments are illiquid and difficult to value.  In particular, our investments in bonds are unenhanced and unrated and, as a consequence, there is a relatively small trading market for these instruments.  The relative lack of liquidity in the market for our bond investments complicates our ability to measure their fair value and that of other debt investments.  Therefore, there is a risk that if we need to sell any of these assets, the price that we are able to realize may be lower than their carrying value in our financial statements.  

Some of our bonds are 30 or more days past due in payment of principal and/or interest and other bond investments are at risk of becoming 30 or more days past due in payment of principal and/or interest.

As of December 31, 2017, the aggregate UPB of bonds that were 30 or more days past due in either principal and/or interest was $9.9 million, or approximately 4.3% of our Bond Portfolio.  We report our defaulted bonds at their fair value, which takes into consideration a borrower’s default.  However, amounts we realize could be even less than such estimates if foreclosures were pursued or if our borrowers filed for bankruptcy protection.  Additionally, properties collateralizing certain performing bonds have net operating income (as represented in operating statements provided by the borrowing partnerships), which is less than the debt service owed to us.  These bonds are at risk of default if the partners of the borrowing partnerships are unable or unwilling to continue to cover the shortfall in order to pay the full debt service.  

Comprehensive tax reform legislation could adversely affect our business and financial condition.

On December 22, 2017, the Tax Cut and Jobs Act of 2017 (the “Tax Act”) was signed into law.  The Tax Act introduced significant changes to the Internal Revenue Code.

The Tax Act contains, among other things, significant changes to corporate taxation, including (i) reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, (ii) limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), (iii) limitation of the deduction for NOLs to 80% of current year taxable income in respect of net operating losses generated during or after 2018 and elimination of net operating loss carrybacks, (iv) one-time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, (v) immediate deductions for certain new investments instead of deductions for depreciation expense over time, and (vi) modifying or repealing many business deductions and credits.  Any federal NOL arising in taxable years beginning after December 31, 2017 will be carried forward indefinitely pursuant to the Tax Act.  There is no change to the carryforward limitations on federal net operating losses generated in periods ending prior to January 1, 2018.

In addition to the direct changes in corporate taxation created by the Tax Act, certain provisions of the Tax Act may impact the value of various loan products in which we invest, including loans secured by renewable energy projects and tax-exempt bonds.  For the renewable energy loan investments, it is uncertain how the capital markets will adjust valuations for the various loan products we underwrite.  In addition, the majority of our tax-exempt bonds produce income that have traditionally been subject to the alternative minimum tax (“AMT”) for both individuals and corporations.  Although the corporate AMT was eliminated by the Tax Act, the individual AMT continues, though with a higher AMT exemption beginning in tax years after December 31, 2017.   In addition, marginal tax brackets for individuals were changed with a new maximum marginal tax rate of 37% versus the prior 39.6%.  These changes may also impact the value of our investments.

---

 

The full impact on the value of our tax-exempt bond portfolio from the Tax Act may not yet be reflected in our reported portfolio valuations while the overall impact of the Tax Act is uncertain and our business and financial condition could be adversely affected.

In addition, the government could make other changes in tax or other laws, such as affordable housing incentive programs, that while not directly affecting our tax-exempt bonds, could make them less valuable to investors.  For example, if the federal government were to further lower marginal federal income tax rates or phase out the tax-exempt nature of the interest income for all or higher income taxpayers, our bonds would likely decline in value.  Congress could also pass laws that make competing investments more attractive than tax-exempt bonds, which would also make our bonds less valuable. 

Our bonds may not retain their tax-exempt status.

On the date of initial issuance of any tax-exempt bond that we hold, bond counsel or special tax counsel rendered its opinion that interest on the bond is excludable from gross income for federal income tax purposes.  However, under certain circumstances, our bonds could lose their tax-exempt status subsequent to issuance.  While we take steps to ensure that these circumstances do not occur, there can be no guarantees that the tax-exempt status will be maintained.  If our bonds were to lose their tax-exempt status, then the fair value of these investments would decline.  In this case, if a bond was the referenced asset in a TRS financing, the TRS would terminate, thereby causing us to reacquire such bonds at fair value while we would also be obligated to pay any difference required to settle a TRS.  If we did not purchase a bond in such circumstances, our counterparty could sell it and, if its value at the inception of the TRS agreement was not realized upon sale, we would also be obligated to pay any difference required to settle a TRS agreement and our TRS collateral would be at risk.

We could lose the tax benefit of our NOLs.

As of December 31, 2017, we had an estimated $379.2 million of federal NOLs that were subject to a full valuation allowance at such reporting date.  Our federal NOLs can be used to offset federal taxable income for the foreseeable future.  However, there are events that could cause us to lose, or to otherwise limit, the amount of NOLs available to us.  For example, our NOLs could be lost if we suffer a change of control event as defined by the Internal Revenue Code.  A change of control event may occur when a shareholder, or a collection of shareholders, owning at least five percent of our shares, acquire more than 50% of our outstanding shares within a three-year period.  The Company adopted a Tax Benefits Rights Agreement on May 5, 2015 (the “Rights Plan”) in an attempt to avoid a change of control event as defined by the Internal Revenue Code, although the Company cannot guarantee the effectiveness of the Rights Plan.  Changes in tax laws could also cause us to lose, or could otherwise limit, the amount of NOLs available to us. 

Our NOLs are also subject to a 20-year carryforward limitation that limits the time that we have to generate the income necessary to fully utilize our NOLs.  In this regard, it is possible that some of our NOLs will become permanently impaired if the Company is unable to generate the income required to utilize our NOLs before their expiration period begins in 2027. 

If we become subject to the Investment Company Act of 1940 (the “Investment Company Act”), we could be required to sell substantial portions of our assets at a time when we might not otherwise want to do so, and we could incur significant losses as a result.

We continuously monitor our business activities to ensure that we do not become subject to regulation as an investment company under the Investment Company Act.  We currently rely on exemptions from the Investment Company Act for companies that are primarily engaged in the business of certain types of financings or of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.  Because of changes in the nature and number of companies that rely on the exemption for real estate, as well as given that most of the guidance surrounding this exemption comes from “no action” letters issued by the SEC staff, the SEC on August 31, 2011 issued a concept release requesting comment directed to the scope and use of this exemption.  We do not know what action, if any, the SEC may take in response to the comments that it receives.  If we were to become regulated as an investment company under the Investment Company Act, either due to a change in the SEC’s interpretation of that Act or due to a significant change in the value and composition of our assets, we would be subject to extensive regulation and restrictions.  Among other restrictions, we would not be able to incur borrowings, which would limit our ability to fund certain investments.  Accordingly, either we would have to restructure our assets so that we would not be subject to the Investment Company Act or we would have to materially change the way we do business.  Either course of action could require that we sell substantial portions of our assets at a time when we might not otherwise want to do so,

---

 

and we could incur significant losses as a result.  Any of these consequences could have a material adverse effect on our business, financial condition and results of operations.

The value of certain investments and cash flows are dependent on the quality of the management of the underlying properties.

Inadequate property management can adversely impact the performance, cash flows and value of properties held by funds in which we have invested or that secure our Bond Portfolio. 

Our accounting policies and methods require management to make judgments and estimates about matters that are inherently uncertain.

Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations.  In addition, many of our accounting methods involve substantial use of models, which are based on assumptions, including assumptions about future events.  Our management must exercise judgment in applying many of these accounting policies and methods so that these policies and methods comply with generally accepted accounting principles in the United States (“GAAP”) and reflect management’s judgment of the most appropriate manner to report our financial condition and results of operations.  In some cases, management must select the appropriate accounting policy or method from two or more alternatives, any of which might be reasonable under the circumstances but might affect the amounts of assets, liabilities, revenues and expenses that we report.  See Notes to Consolidated Financial Statements – Note 1, “Summary of Significant Accounting Policies” for a description of our significant accounting policies.

We have identified three of our accounting policies as critical to the presentation of our financial condition and results of operations.  These accounting policies are described in “MD&A—Critical Accounting Policies and Estimates.”  We believe these policies are critical because they require management to make particularly difficult, subjective or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions.  These judgments, by their nature, are based on current facts and circumstances.  Accordingly, actual results could differ from these estimates, possibly in the near term, and could have a material adverse effect on the consolidated financial statements.  Even a small change in an estimate can have a significant impact for a reporting period. 

Additionally, we have established detailed policies and control procedures that are intended to ensure these critical accounting estimates and judgments are well controlled and applied consistently.  These policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. 

Because of the uncertainty surrounding management’s judgments, assumptions and estimates pertaining to these matters, we cannot guarantee that we will not be required to adjust accounting policies or restate prior period financial statements.

A breach of the security of our External Manager’s systems or those of other third parties with which we do business, including as a result of cyber-attacks, could damage or disrupt our business or result in the disclosure or misuse of confidential information, which could damage our reputation, increase our costs and cause losses. 

Our business is reliant upon the security and efficacy of our External Manager’s information technology environment, as well as those of other third parties with whom or on whom we rely.  Our business relies on the secure processing, transmission, storage and retrieval of confidential, proprietary and other information in the computer and data management systems and networks of third parties, particularly our External Manager. 

Our ability to conduct business may be adversely affected by any significant disruptions to our External Manager or to third parties with whom we interact or upon whom we rely.  In addition, our ability to implement backup systems and other safeguards with respect to third-party systems is more limited than if those systems were our own.  In the event that backup systems are utilized, they may not process data as quickly as needed and some data might not have been backed up.

As with most systems, our External Manager’s information technology systems are subject to computer viruses, malicious codes, phishing attacks, unauthorized access and other cyber-attacks.  To date, we are not aware of any significant impact on our operations or financial results from such attempts; however, unauthorized access could disrupt our business operations, result in the loss of assets, and have a material adverse effect on our business, financial condition, or results of operations.

As cyber threats continue to evolve, third parties with whom we interact or upon whom we rely, particularly our External Manager, may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities or incidents.  Despite efforts to protect the integrity of systems and implement controls, processes, policies and other protective measures, third parties with whom we interact or upon whom we rely, particularly our External Manager, may not be able to anticipate all security breaches, nor may they be able to implement guaranteed preventative measures against such security breaches.  Cyber threats are rapidly evolving and third parties with whom we interact or upon whom we rely, particularly our External Manager, may not be able to anticipate or prevent all such attacks. 



---

 

Risks Related to Ownership of Our Shares

Our Rights Plan could depress our share price.

Under the Rights Plan, the acquisition by an investor (or group of related investors) of greater than a 4.9% stake in the Company, could result in all existing shareholders other than the new 4.9% holder having the right to acquire new shares for a nominal cost, thereby significantly diluting the ownership interest of the acquiring person.  By discouraging acquisitions of greater than a 4.9% stake in the Company, the Rights Plan might limit takeover opportunities and, as a result, could depress our share price.  At December 31, 2017, we had two shareholders with a greater than a 4.9% stake in the Company.  Additionally, two employees of the External Manager would each have a greater than 4.9% stake in the Company for purposes of the Rights Plan to the extent that they exercised their vested option awards. 

On January 3, 2018, the Board approved a waiver of the 4.9% ownership limitation for Hunt, increasing it to 9.9% of the Company’s issued and outstanding shares in any rolling 12-month period.   

Our Board of Directors (“Board”) can issue an unlimited number of common or preferred shares, which could reduce our book value per common share and earnings per common share and the cash or other assets available for distribution per common share upon liquidation or otherwise.

Under our Operating Agreement, but subject to certain Nasdaq Capital Market rules which impose some limitations on our ability to issue shares without shareholder approval, our Board can authorize the issuance of an unlimited number of common shares without obtaining shareholder approval.  Issuances of common shares could dilute the book value or the net income per common share or the cash per share available for distribution to common shareholders.  Our Board can also authorize, without any requirement of shareholder approval other than those imposed by Nasdaq Capital Market rules, the issuance of an unlimited number of shares with preferences over the common shares as to dividends, distributions on liquidation and other matters, other than voting.  This could reduce the book value and net earnings that would be allocable to our common shares and the cash or other assets that are available for distribution to our common shareholders either periodically or upon our liquidation.

Provisions of our Operating Agreement may discourage attempts to acquire us. 

Our Operating Agreement contains at least three groups of provisions that could have the effect of discouraging people from trying to acquire control of us.  Those provisions are:

The above provisions could deprive our shareholders of opportunities that might be attractive to many of them.

Our shares are thinly traded and, as a result, the price at which they trade may not reflect their full intrinsic value.

Although we are traded on Nasdaq Capital Market, our shares are thinly traded and we do not have analysts actively tracking and publishing opinions on the Company and our stock.  Additionally, when we have repurchased our shares, the number of shares

---

 

outstanding is reduced, which has the effect over time of further decreasing the trading volume of our shares.  Accordingly, the trading price of our shares may not reflect their full intrinsic value.   

ITEM 1B.   UNRESOLVED STAFF COMMENTS

None.

ITEM 2.   PROPERTIES

We do not own any of the real property where we conduct our business.  Our corporate headquarters is located in Baltimore, Maryland, where we occupy approximately 6,400 square feet of office space pursuant to a lease that expires in March 2024.  Additionally, as of December 31, 2017, certain employees of our Energy Capital business line occupied approximately 1,469 square feet of office space pursuant to a lease that expires in February 2020.  However, as part of the Disposition, all of the Company’s property leases are expected to be assumed by Hunt in 2018.   Refer to the discussion in “Sale of Certain Business Lines and Assets” in Part I of this Report for more information about the Disposition.

As of December 31, 2017, our International Operations were located in Johannesburg, South Africa, where we had occupied approximately 8,500 square feet of office space pursuant to a lease that was to expire in April 2020.  However, this lease was terminated in February 2018 and, in its place, a new lease was executed during the fourth quarter of 2017, pursuant to which the International Operations began to occupy approximately 10,800 square feet of office space beginning on March 1, 2018.  This new lease will expire in February 2023.  However, as further discussed in “Sale of Certain Business Lines and Assets” in Part I of this Report, the Company sold its International Operations to Hunt on January 8, 2018.

ITEM 3.  LEGAL PROCEEDINGS 

We are not, nor are any of our subsidiaries, a party to any material pending litigation or other legal proceedings.  Furthermore, to the best of our knowledge, we are not party to any threatened litigation or legal proceedings, which, in the opinion of management, individually or in the aggregate, would be likely to have a material adverse effect on our results of operations or financial condition.

ITEM 4.  MINE SAFETY DISCLOSURES 

Not applicable.



---

 

PART II



ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND     ISSUER PURCHASES OF EQUITY SECURITIES 

Our common shares currently trade on the Nasdaq Capital Market under the symbol “MMAC.”

Table 2 shows the high and low sales prices for our common shares during the years ended December 31, 2017 and 2016 as reported by the Nasdaq Capital Market. 

Table 2:  Common Share Prices





Our Board has not declared a dividend since the fourth quarter of 2007.  It is unlikely that we will pay a dividend in the foreseeable future.

On March 13, 2018, there were approximately 365 holders of record of our common shares.

Performance Graph

Table 3 compares total shareholder return for the Company at December 31, 2017 to the Nasdaq Composite Total Return Index (“Nasdaq Composite Total Return”), Nasdaq US Benchmark Financial Services Total Return Index (“Nasdaq US Benchmark Fin Serv TR”) and a peer group (“Peer Group”) index consisting of Encore Capital Group, Inc., Federal Agriculture Mortgage Corporation, 180 Degree Capital Corporation (formerly known as Harris & Harris Group, Inc.), One Liberty Properties, Inc., Walker & Dunlop, Inc., and Whitestone REIT, assuming that a $100 investment was made on December 31, 2012 and that all dividends paid since that date were reinvested.  The Company is included within the Nasdaq Composite Total Return index.  The Company selected the Nasdaq US Benchmark Financial Serv TR index because it represents a published industry index consisting of companies that operate in business segments similar to ours.  The Company selected the Peer Group companies because those companies operate within the same general industry or have similar market capitalization as the Company.

---

 

Table 3:  Comparison of 5 Year Cumulative Total Return (1) 







Recent Sales of Unregistered Securities

None for the three months ended December 31, 2017.

Use of Proceeds from Registered Securities

None for the three months ended December 31, 2017.

Issuer Purchases of Equity Securities

Table 4 provides information on the Company’s common share repurchases during the three months ended December 31, 2017.

---

 

Table 4:  Common Shares Repurchases









ITEM 6.   SELECTED FINANCIAL DATA

Information in response to this Item 6 can be found in the “Consolidated Financial Highlights” table that is located on page 2 of this Report.  That information is incorporated into this item by reference.







---

 

ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 



SUMMARY OF FINANCIAL PERFORMANCE

___________________________________________________________________________________________________________

Net Worth

Common shareholders’ equity increased from $125.3 million at December 31, 2016 to $137.5 million at December 31, 2017.  This change was driven by $22.7 million in comprehensive income that was allocable to common shareholders that was partially offset by $10.5 million in other reductions in common shareholders’ equity that were primarily driven by the repurchase of the Company’s common shares. 

Diluted common shareholders’ equity (“Book Value”) per share increased to $24.48 at December  31, 2017, which represents an increase of  $3.73 per share of Book Value compared to what we reported at December  31, 2016.  This increase was primarily attributable to net income from operations, which was primarily driven by fee and other income from our asset management businesses and equity in income from unconsolidated funds and ventures. 

Refer to “Consolidated Balance Sheet Analysis” for more information about changes in common shareholders’ equity and other components of our Consolidated Balance Sheets.

Comprehensive Income

We recognized comprehensive income that was allocable to common shareholders of $22.7 million during 2017, which consisted of $19.4 million of net income that was allocable to common shareholders and $3.3 million of other comprehensive income that was allocable to common shareholders.  In comparison, we recognized $19.0 million of comprehensive income that was allocable to common shareholders during 2016, which consisted of $42.4 million of net income that was allocable to common shareholders and $23.4 million of other comprehensive loss that was allocable to common shareholders. 

Refer to “Consolidated Results of Operations” for more information about changes in common shareholders’ equity that is attributable to net income allocable to common shareholders.

Other Considerations

As further discussed in “Sale of Certain Business Lines and Assets” in Part I of this Report, the Company sold certain business lines and assets to Hunt and converted to an externally managed business model by engaging Hunt to perform management services for the Company.  By executing this strategic transaction, the Company will no longer recognize after the Disposition:











The Disposition also prompted the derecognition from the Company’s Consolidated Balance Sheets on January 8, 2018, of all guaranteed LIHTC funds and nearly all other CFVs that were recognized in our Consolidated Balance Sheets at December 31, 2017.  As a result, the Company will no longer recognize in future reporting periods revenues, expenses, assets, liabilities and non-controlling interests associated with derecognized CFVs.

---

 

In place of the aforementioned revenues and expenses, and notwithstanding revenues and expenses associated with assets and liabilities of the Company that were excluded from the Disposition, the Company will recognize interest income associated with its loan receivable from Hunt and will recognize various costs set forth in the Management Agreement with Hunt, including base management fees, incentive management fees and reimbursements to the External Manager for certain allocable overhead costs.

Information that is provided in this Report’s “Consolidated Balance Sheet Analysis” and “Consolidated Results of Operations” should be reviewed in consideration of the aforementioned changes.    



---

 

CONSOLIDATED BALANCE SHEET ANALYSIS

___________________________________________________________________________________________________________

This section provides an overview of changes in our assets, liabilities and equity and should be read together with our consolidated financial statements, including the accompanying notes to the financial statements.

Table 5 provides a balance sheet summary for the periods presented.  For presentation purposes, assets, liabilities and equity that were attributable to noncontrolling interest holders of CFVs are presented in Table 5 as separate line items because the Company generally has a minimal ownership interest in these consolidated entities.  For the periods presented, CFVs were comprised of consolidated property partnerships and certain LIHTC funds in which we guaranteed minimum yields on investment to investors and for which we agree to indemnify the purchaser of our GP interest in such funds from investor claims related to those guarantees.  See Notes to Consolidated Financial Statements –  Note 14,  “Consolidated Funds and Ventures,” for more information about CFVs.  

Table  5:  Balance Sheet Summary 



---

 



Common Shareholders’ Equity

Table 6  summarizes the changes in common shareholders’ equity for the periods presented.

Table 6:  Changes in Common Shareholders’ Equity

Other Comprehensive Income (Loss) Allocable to Common Shareholders

Table 7 summarizes other comprehensive income (loss) that was allocable to common shareholders for the periods presented.

Table 7:  Other Comprehensive Income (Loss) Allocable to Common Shareholders





---

 

Other comprehensive income that was allocable to common shareholders for the year ended December 31, 2017, increased compared to the other comprehensive loss for the year ended December 31, 2016, primarily as a result of non-recurring transactions that occurred in 2016 that prompted the reclassification of unrealized holding gains out of AOCI and into our Consolidated Statements of Operations, including (i) the Company’s purchase of two GP interests in two partnerships in 2016 that resulted in the derecognition of three investments in bonds and for which $14.4 million of unrealized bond holding gains were reclassified out of AOCI and into our Consolidated Statements of Operations, (ii) the foreclosure and sale in the first quarter of 2016 of a multifamily property that resulted in an $11.4 million reclassification of unrealized bond holding gains out of AOCI and into our Consolidated Statements of Operations and (iii) the redemption of two bond investments in 2016, which resulted in an $11.8 million reclassification of unrealized bond holdings gains out of AOCI and into our Consolidated Statements of Operations.      

Other comprehensive loss that was allocable to common shareholders for the year ended December 31, 2016, increased compared to the other comprehensive income for the year ended December 31, 2015, primarily as a result of (i) the financial statement consolidation of two partnerships in 2016 that resulted in the derecognition of two investments in bonds and for which $14.4 million of unrealized holding gains were reclassified out of AOCI and into our Consolidated Statements of Operations and (ii) the foreclosure and sale in the first quarter of 2016 of a multifamily property that secured a nonperforming bond investment that resulted in a $11.4 million reclassification of unrealized bond holding gains out of AOCI and into our Consolidated Statements of Operations.

Other Changes in Common Shareholders’ Equity

Table 8 summarizes other changes in common shareholders’ equity for the periods presented.

Table 8:  Other Changes in Common Shareholders’ Equity





The amount of other changes in common shareholders’ equity for the year ended December  31, 2017 increased compared to that reported in the year ended December 31, 2016, primarily as a result of the Company’s purchase of noncontrolling interests in IHS PM during the third quarter of 2017. 

The amount of other changes in common shareholders’ equity for the year ended December 31, 2016 increased compared to that reported in the year ended December 31, 2015, primarily as a result of an increase in the average price at which the Company repurchased its common shares during 2016. 

---

 

CONSOLIDATED RESULTS OF OPERATIONS

___________________________________________________________________________________________________________

This section provides a comparative discussion of our Consolidated Results of Operations for the years ended December 31, 2017, 2016 and 2015 and should be read in conjunction with our financial statements, including the accompanying notes.  See “Critical Accounting Policies and Estimates” for more information concerning the most significant accounting policies and estimates applied in determining our results of operations.

For presentation purposes, income (losses) that were attributable to noncontrolling interest holders of CFVs are excluded from amounts presented in Tables 9 through 17 because (i) the Company generally has a minimal ownership interest in these consolidated entities and (ii) such income (losses) do not affect the measurement of diluted common shareholders’ equity per common share, which is a key metric that is used by management to evaluate the Company’s financial performance.  In this regard, the discussion and analysis of consolidated results of operations herein is focused on income (losses) that are allocable to common shareholders.  See Notes to Consolidated Financial Statements –  Note 14,  “Consolidated Funds and Ventures,” for more information about income (losses) that were attributable to noncontrolling interest holders of CFVs.  

Net Income Allocable to Common Shareholders

Table 9 summarizes net income allocable to common shareholders for the periods presented.

Table 9:  Net Income Allocable to Common Shareholders

Net Interest Income

Net interest income represents interest income earned on our investment in bonds, loans and other interest-earning assets less our cost of funding associated with short-term borrowings and long-term debt that we use to finance such assets.

Table 10 summarizes net interest income for the periods presented.

---

 

Table 10:  Net Interest Income





Net interest income for the year ended December  31, 2017 declined compared to that reported for the year ended December  31, 2016 primarily due to the redemption of various bond investments, the sale of solar loans to our Solar Ventures in the fourth quarter of 2016 and the elimination of certain bond investments for reporting purposes due to the financial statement consolidation of certain property partnerships in 2016.

Net interest income for the year ended December 31, 2016 declined compared to that reported for the year ended December 31, 2015 primarily as a result of (i) the sale or redemption of certain bond holdings and (ii) the full redemption of a bridge loan in the second quarter of 2015.  This decline was partially offset by an increase in interest income that was driven by an increase in the unpaid principal balance (“UPB”) of solar loans that were funded directly by the Company in 2016.  

Fee and Other Income

Fee and Other Income includes our asset management fees and reimbursements as well as other miscellaneous income.

Table 11 summarizes fee and other income for the periods presented. 

Table 11:  Fee and Other Income



Fee and other income for the year ended December  31, 2017 increased compared to that reported for the year ended December  31, 2016 due primarily to our recognition in 2017 of $9.0 million of asset management fees for services rendered to TC Fund I while we recognized no such revenues in 2016 in the absence of being reasonably assured of collection of amounts that were contractually due to the Company from TC Fund I.  This increase was also attributable in part to an increase in catch up asset management fees of $3.8 million that we recognized during the year ended December 31, 2017 as additional investor capital was closed into IHS Fund II SA and IHS Fund II SSA during such reporting periods.     

Fee and other income for the year ended December 31, 2016 declined compared to that reported for the year ended December 31, 2015 primarily as a result of the redemption of the Company’s investment in preferred stock in the fourth quarter of 2015.  This decline was partially offset by an increase in asset management fees and reimbursements that was driven primarily by $1.5 million of property management fees earned by IHS PM and an increase of $0.8 million in management cost reimbursement fees that were earned from SCL and REL during 2016. 

---

 

Other Interest Expense

Other interest expense represents our cost of funding associated with senior and subordinated debt that does not finance our interest earning assets.

Table 12 summarizes other interest expense for the periods presented.

Table 12:  Other Interest Expense





Other interest expense for the year ended December 31, 2017 increased compared to that reported for the year ended December 31, 2016 primarily as a result of: (i) an increase in the reference rates associated with TRS that are used to finance certain of the Company’s bond investments and (ii) the issuance of debt in the third quarter of 2017 to finance the purchase of an equity investment in SAWHF.  This increase in our cost of funding was largely offset by a decrease in other interest expense that was attributable to our discounted purchase of $26.4 million of the Company’s subordinated debt in 2017. 

Other interest expense for the year ended December 31, 2016 declined compared to that reported for the year ended December 31, 2015 primarily as a result of a decrease in our cost of funding associated with MMA Financial Holdings, Inc. (“MFH”) subordinated debt, which was restructured during the second quarter of 2015.  The reported decline in other interest expense was also partially attributable to the paydown of certain debt outstanding that was used by the Company to fund its investment in preferred stock, which was redeemed in full in the fourth quarter of 2015.      

Operating Expenses

Operating expenses include salaries and benefits, general and administrative expense, professional fees and other miscellaneous expenses.

Table 13 summarizes operating expenses for the periods presented. 

Table 13:  Operating Expenses





Operating expenses for the year ended December 31, 2017 increased compared to those reported for the year ended December 31, 2016 primarily due to: (i) an increase in stock compensation expense that was driven by an increase in the price of the Company’s common shares in 2017; (ii) an increase in salaries and benefits expense that was attributable to an increase in employee headcount and incentive compensation; (iii) an increase in professional fees that was largely driven by the Disposition as well as the restructuring of Fund II SSA and (iv) an increase in other expenses that was driven by fee-related concessions that were made to certain investors in Fund II SSA in the fourth quarter of 2017.

Operating expenses reported for the year ended December 31, 2016 declined compared to those reported for the year ended December 31, 2015 primarily due to non-recurring expenses that we recognized in 2015, which included:  (i) a $1.6 million impairment loss that we recognized on our co-investment in SAWHF during the third quarter of 2015, (ii) a $1.2 million loan loss that we incurred in the fourth quarter of 2015 relating to IHS, (iii) the strengthening of the rand against the U.S. dollar during the year ended December 31, 2016 and (iv) $1.0 million of nonrecurring expenses that we incurred in the second quarter of 2015 relating to the restructuring of MFH subordinated debt.  The reported decline was partially offset by a (i) $1.4 million increase in employee compensation for the full year ended December 31, 2016 and (ii) $0.8 million increase in audit-related fees.   

---

 

Net Gains (Losses) Relating to Real Estate Sales and Operations, Bonds, Derivatives, Real Estate-Related Investments, Loans, Other Assets and the Extinguishment of Liabilities

Net gains (losses) relating to real estate sales and operations, bonds, derivatives, real estate related investments, loans, other assets and extinguishment of liabilities (collectively, “Net Gains”) includes unrealized gains or losses on loans, realized gains or losses associated with the sale of bonds and loans and the early redemption of bonds and loans, as well as the gain or loss on sales and operations of real estate, net.  Such amounts also include unrealized holding gains or losses associated with our derivative instruments that result from fair value adjustments, as well as include gains (losses) that are realized by the Company in connection with the extinguishment of its recognized debt obligations.

Table 14 summarizes Net Gains for the periods presented.

Table 14:  Net Gains  



Net Gains for the year ended December  31, 2017 declined compared to those reported for the year ended December  31, 2016 primarily due to (i) a decline in real estate sales activity and associated gains in 2017, (ii) a decline in bond sales and redemptions in 2017, (iii) an incremental $1.8 million increase in fair value losses associated with a subordinated loan that the Company made to a residential solar power provider that filed for bankruptcy protection in March 2017 and (iv) an increase in net fair value losses associated with derivative instruments used by the Company to hedge its interest rate risk.  These impacts were partially offset by $4.8 million of extinguishment gains that were recognized by the Company in 2017 in connection with discounted purchases of $26.4 million of subordinated debt.

Net Gains for the year ended December 31, 2016 declined compared to those reported for the year ended December 31, 2015 primarily due to a decline in gains from real estate and other assets, which, in large part, was driven by (i) $5.1 million of net gains on real estate associated with the sale of an affordable multifamily property during the second quarter of 2015, (ii) $4.3 million of net gains on real estate associated with the sale of undeveloped land during the third quarter of 2015, (iii) $5.2 million net gains generated by the redemption of the Company’s investment in preferred stock during the fourth quarter of 2015 and (iv) $4.2 million net gains on extinguishment of liabilities relating to a working capital loan during the fourth quarter of 2015.  This decline was partially offset by an increase in (i) net gains on bonds that stemmed from the sale and redemption of one bond investment in the fourth quarter of 2016 that resulted in the recognition of a $10.0 million gain and (ii) $4.4 million in fair value adjustments that were recognized in the fourth quarter of 2016 in connection with interest rate derivatives that are used for economic hedging purposes.    

Equity in Income from Unconsolidated Funds and Ventures

Equity in income from unconsolidated funds and ventures includes our portion of the income associated with certain funds and ventures in which we have an equity interest.

Table 15 summarizes equity in income from unconsolidated funds and ventures for the periods presented.

---

 

Table 15:  Equity in Income from Unconsolidated Funds and Ventures





Equity in income from unconsolidated funds and ventures for the year ended December  31, 2017 increased compared to that reported for the year ended December  31, 2016 primarily due to (i) a non-recurring $3.8 million gain that was recognized during 2017 in connection with the sale of the underlying real estate by the partnership in which the Company held a 33% limited partner interest, (ii) an increase in loan origination and related fees earned by our Solar Ventures and (iii) an increase in equity in income from IHS-managed funds that was primarily attributable to the purchase of an 11.85% limited partner interest in SAWHF from a third party in the third quarter of 2017. 

Equity in income from unconsolidated funds and ventures for the year ended December 31, 2016 increased compared to that reported for the year ended December 31, 2015, primarily due to (i) an additional $4.7 million of equity in income from our Solar Ventures, (ii) $2.7 million of equity in income from the sale of real estate in the first quarter of 2016 that was owned by a partnership in which the Company held a 50% limited partner interest and (iii) $0.6 million of equity in income from the sale of real estate in the second quarter of 2016 that was owned by a partnership in which the Company held a 98.99% limited partner interest.

Net Income (Loss) from CFVs Allocable to Common Shareholders

Table 16 allocates the net income (loss) from CFVs to noncontrolling interests in CFVs and common shareholders for the periods presented.

Table 16:  Net Income (Loss) from CFVs Allocable to Common Shareholders





Table 17 further attributes the reported net loss from CFVs that was allocable to common shareholders for the periods presented.

---

 

Table 17:  Net Income (Loss) from CFVs Allocable to Common Shareholders





Net income from CFVs allocable to common shareholders for the year ended December 31, 2017 increased compared to the net loss from CFVs allocable to common shareholders for the year ended December 31, 2016 primarily due to the sale of the underlying real estate of one of the Company’s consolidated partnerships during the fourth quarter of 2017 that resulted in approximately $5.7 million of net income from CFVs allocable to common shareholders. This net increase was also partly attributable to (i) an increase in allocated interest income as a result of bond investments that were eliminated for reporting purposes beginning in the second quarter of 2016 and fourth quarter of 2016 as a result of the financial statement consolidation of the corresponding property partnerships, (ii) a decline in equity losses from the LTPPs and (iii) a non-recurring $0.6 million lower of cost or market adjustment that was recognized in the second quarter of 2016 related to a property held for sale.

The net loss from CFVs allocable to common shareholders for the year ended December 31, 2016 was relatively unchanged compared to the year ended December 31, 2015.

---

 

LIQUIDITY AND CAPITAL RESOURCES 

___________________________________________________________________________________________________________

Liquidity

Our principal sources of liquidity include: (i) cash and cash equivalents; (ii) cash flows from operating activities; and (iii) cash flows from investing activities. 

Summary of Cash Flows

At December 31, 2017 and 2016, we had unrestricted cash and cash equivalents of $39.3 million and $45.5 million, respectively.  We believe that cash generated from operating and investing activities, along with available cash and cash equivalents has been, and will continue to be, sufficient to fund our normal operating needs and meet our obligations as they become due.

During the periods presented in this Report, we consolidated certain funds and ventures for financial reporting purposes and, therefore, cash flow activities for such funds and ventures were reflected in our Consolidated Statements of Cash Flows.  In this regard, cash balances of CFVs are classified as “Restricted cash” in our Consolidated Balance Sheets because the Company does not have legal title to such balances.

Table 18 provides a consolidated view of the change in cash and cash equivalents of the Company for the periods presented, though changes in such balances that were attributable to CFVs are separately identified in such disclosure.  

Changes in net cash flows that are reported in Tables 19,  20 and 21 are exclusive of changes in restricted cash balances of CFVs.



Table 18:  Net Increase (Decrease) in Cash and Cash Equivalents









---

 

Operating Activities

Table 19 provides information about net cash flows provided by, or used in, operating activities for the periods presented.  Cash flows from operating activities include, but are not limited to, interest income on our investments and asset management fees.

Table 19:  Net Cash Flows Associated With Operating Activities





Net cash flows provided by operating activities increased by $3.8 million during the year ended December 31, 2017 as compared to the year ended December 31, 2016.  The most significant driver of this net increase was an increase of $15.5 million in asset management fees received during the year ended December 31, 2017 in connection with asset management services that we provided to TC Fund I and our IHS-managed funds.  Catch up asset management fees that were received in 2017 in connection with IHS Fund II capital raising activities accounted for most of the year over year increase in asset management fees collected from IHS.  The net increase in 2017 from cash flows provided by asset management services was partially offset by the following:









Net cash flows provided by operating activities during the year ended December 31, 2016 increased by $16.4 million compared to those reported for the year ended December 31, 2015.  This increase was primarily attributable to distributions from investments in partnerships and a decline in originations of loans held for sale:



---

 



Investing Activities

Table 20 provides information about net cash flows provided by investing activities for the periods presented.  Cash flows from investing activities include, but are not limited to, principal payments and sales proceeds received on bonds and proceeds from the sale of real estate and other investments.  

Table 20:  Net Cash Flows Associated With Investing Activities





Net cash flows provided by investing activities during the year ended December 31, 2017 decreased by $13.1 million compared to those reported for the year ended December 31, 2016.  This net decrease was primarily driven by the following: (i) an increase in 2017 in investments in partnerships, which included $22.1 million of incremental capital contributions to our Solar Ventures and a purchase of an 11.85% limited partner interest in SAWHF from a third party in the third quarter of 2017; (ii) a decline in the pace of redemption of bonds and loans; and (iii) a decline in the volume of sales of real estate and other investments.   The effects of these items were partially offset by (i) loan originations and advances, which decreased given that the majority of the Company’s loan origination activity was conducted through its Solar Ventures beginning in the fourth quarter of 2016 and (ii) a decrease in the amount of cash restricted for use.   

Net cash flows provided by investing activities during the year ended December 31, 2016 increased by $3.7 million compared to those reported for the year ended December 31, 2015.  This increase was primarily attributable to: (i) a decline in cash used for investments in property partnerships and real estate, primarily as a result of $50.0 million invested in our Solar Ventures during the second half of 2015 and (ii) a $12.2 million increase in principal payments and sales proceeds received on bonds and loans.  The net increases in net cash flows provided by investing activities were partially offset by a $37.2 million increase in cash used by the Company to originate loans held for investment.   

As further discussed in “Sale of Certain Business Lines and Assets” in Part I of this Report, the Company sold certain business lines and assets to Hunt and converted to an externally managed business model by engaging the External Manager to perform management services for the Company.  The Company provided seller financing to the Buyer in connection with the Disposition.  The financing is secured by a pledge of all of the equity interests in the Buyer.  The note receivable from the Buyer has an original principal amount of $57 million, has a term of seven years, is prepayable at any time and bears interest at the rate of 5% per annum, payable quarterly in arrears.  During the first two years of the note receivable, only interest is payable.  Thereafter, the note receivable from the Buyer will amortize in 20 equal quarterly payments of $2.85 million beginning on March 31, 2020.  In this regard, net cash flows provided by investing activities will change in future reporting periods in connection with payments made by the Buyer under the note.  The terms of the note receivable limit the ability of the Buyer to incur additional debt.  The Buyer also provided a number of financial covenants to the Company, including, but not limited to, its commitment to maintain tangible net worth, debt service coverage and interest coverage ratios and limitations on leverage.



---

 

Financing Activities

Table 21 provides information about net cash flows provided by, or used in, financing activities for the periods presented. 

Table 21:  Net Cash Flows Associated With Financing Activities



Net cash flows used in financing activities during the year ended December 31, 2017 increased by $20.5 million compared to those reported during the year ended December 31, 2016, primarily as a result of an $11.9 million increase in the amount of cash used to repay borrowings.  Specifically, the Company used $21.8 million of cash to execute discounted purchases of its fixed rate subordinated debt during the year ended December 31, 2017.  The increase in net cash flows used in financing activities in 2017 was also partially attributable to a decline in borrowing activity, which decreased the amount of proceeds provided by financing activities by $8.5 million during such reporting period.  

Net cash flows used in financing activities during the year ended December 31, 2016 decreased by $11.4 million compared to those reported for the year ended December 31, 2015.  This decrease was primarily attributable to $37.2 million of cash used for repayment of borrowings during 2015 compared to only $15.5 million that was used for the same purpose during 2016.  These decreases were partially offset by a $9.0 million decrease in proceeds received from borrowing activity, which was primarily the result of a decrease in proceeds generated from total return swap financing arrangements entered into by the Company during 2016.

As further discussed in “Sale of Certain Business Lines and Assets” in Part I of this Report, the Company sold certain business lines and assets to Hunt and converted to an externally managed business model by engaging the External Manager to perform management services for the Company.  As part of the Disposition, the Company will generate additional liquidity through financing activities through a private placement of 250,000 of the Company’s common shares to Hunt at an average purchase price of $33.50 per share.  This share purchase is required to occur within six months from the date of closing of the Disposition and will generate aggregate proceeds of $8.4 million for the Company.

Capital Resources

Our debt obligations primarily include liabilities that we recognized in connection with the execution of TRS agreements that we use to finance a portion of our investments in bonds, as well as subordinated debentures and other notes payable.  Each of the major types of our debt obligations is further discussed below.

---

 

Table 22 summarizes the carrying values and weighted-average effective interest rates of the Company’s debt obligations that were outstanding at December 31, 2017 and 2016.  See Notes to Consolidated Financial Statements –  Note 5, “Debt,” for more information about these contractual commitments.



Table 22:  Asset Related Debt and Other Debt





Notes Payable and Other Debt – Bond Related

These debt obligations pertain to bonds that are classified as available-for-sale and that were financed by the Company through TRS agreements.  See Notes to Consolidated Financial Statements – Note 5, “Debt,” for more information. 

Subordinated Debt

At December 31, 2017 and 2016, the Company had subordinated debt with a  UPB of $91.6 million and $120.5 million, respectively.  The carrying value and weighted-average yield of this debt at December 31, 2017 and 2016 is provided above in Table 22.  See Notes to Consolidated Financial Statements – Note 5, “Debt,” for more information.      

Notes Payable and Other Debt

At December 31, 2017 and 2016, the Company had notes payable and other debt with a UPB of $28.2 million and $18.8 million, respectively.  See Notes to Consolidated Financial Statements – Note 5, “Debt,” for more information.



---

 

Debt Related to CFVs

At December 31, 2017 and 2016, debt related to CFVs included $6.7 million of debt obligations associated with one of the Guaranteed Funds that we consolidate for reporting purposes.  At December 31, 2017 and 2016, the carrying value of this debt, which is due on demand, equaled its UPB and its weighted-average effective interest rate was 6.5% and 5.8%, respectively. 

At December 31, 2017 and 2016, the remaining $6.2 million and $6.3 million, respectively, of debt related to CFVs relates to two consolidated property partnerships with a UPB of $5.3 million and $5.4 million at December 31, 2017 and 2016, respectively.  This debt had a weighted-average effective interest rate of 4.0% at both December 31, 2017 and 2016 and has various maturity dates through March 11, 2029. 

As further discussed in “Sale of Certain Business Lines and Assets” in Part I of this Report, the Company sold certain business lines and assets to Hunt and converted to an externally managed business model by engaging the External Manager to perform management services for the Company.  As part of the Disposition, all guaranteed LIHTC funds and nearly all other CFVs that were recognized in our Consolidated Balance Sheets at December 31, 2017 were derecognized on January 8, 2018.  As a result, the Company will no longer recognize in future reporting periods, among other items, debt related to CFVs that were derecognized.

Covenant Compliance and Debt Maturities

At December 31, 2017 and 2016, the Company was in compliance with all covenants under its debt arrangements.   

Off-Balance Sheet Arrangements

As of December 31, 2017, the Company has guaranteed minimum yields on investment to investors in 11 Guaranteed Funds that are consolidated for reporting purposes.  The Company also has agreed to make mandatory loans to TC Fund I for distribution to the fund investor in the event of certain tax credit shortfalls covered by a tax credit guarantee provided by the Company.  Refer to Notes to Consolidated Financial Statements – Note 8, “Guarantees and Collateral,” for more information about our guarantees and certain other contingent arrangements.

As further discussed in “Sale of Certain Business Lines and Assets” in Part I of this Report, the Company sold certain business lines and assets to Hunt and converted to an externally managed business model by engaging the External Manager to perform management services for the Company.  As part of the Disposition, the Company’s guarantee obligations to investors in 11 Guaranteed Funds were assumed by Hunt and, consequently, such Guaranteed Funds were derecognized from the Company’s Consolidated Balance Sheets on January 8, 2018. 

Other Contractual Commitments

The Company is committed to make additional capital contributions to certain of its investments in partnerships and ventures.  Refer to Notes to Consolidated Financial Statements - Note 3, “Investments in Partnerships and Ventures,” for information about these commitments.

The Company had no unfunded loan commitments at December 31, 2017 and 2016.  Refer to Notes to Consolidated Financial Statements - Note 4, “Other Assets,” for more information.

The Company uses derivative instruments for various purposes and that contingently obligate the Company in most cases to make payments to its counterparties.  Refer to Notes to Consolidated Financial Statements - Note 6, “Derivative Instruments,” for more information about these instruments.

At December 31, 2017, the Company had four non-cancelable operating leases that expire between 2018 and 2024.  Refer to Notes to Consolidated Financial Statements - Note 9, “Commitments and Contingencies,” for more information about these commitments.

Table 23 summarizes, by maturity, our future cash obligations related to our long-term debt, operating leases and other material non-cancelable contractual obligations.

---

 

Table 23:  Contractual Obligations





As further discussed in “Sale of Certain Business Lines and Assets” in Part I of this Report, the Company sold certain business lines and assets to Hunt and converted to an externally managed business model by engaging the External Manager to perform management services for the Company.  As part of the Disposition, operating leases associated with our International Operations were assumed by the Buyer.  The Company’s remaining leases are expected to be assumed by Hunt in 2018.

Other Capital Resources

Common Shares

On December 1, 2016, the Board authorized a 2017 share repurchase program (“2017 Plan”) for up to 580,000 shares and the Company adopted a Rule 10b5-1 Plan implementing the Board’s authorization.  The 2017 Plan expired on December 31, 2017.  On March 13, 2018, the Board authorized a 2018 share purchase plan for the repurchase of up to 125,000 shares.  The maximum price at which management is currently authorized to purchase shares is $30.00 per share.   

Table 24 summarizes the number of shares purchased during each quarter and the average price per share.

Table 24: Shares Purchased





Dividend Policy

The Board makes determinations regarding dividends based on management’s recommendation, which is based on an evaluation of a number of factors, including our common shareholders’ equity, business prospects and available cash.  We do not expect to pay a dividend for the foreseeable future.

Tax Benefits Rights Agreement

Effective  May 5, 2015, the Company adopted a Rights Plan designed to help preserve the Company’s NOLs.  In connection with adopting the Rights Plan, the Company declared a distribution of one right per common share to shareholders of record as of May 15, 2015.  The rights do not trade apart from the current common shares until the distribution date, as defined in the Rights Plan.  Under the Rights Plan, the acquisition by an investor (or group of related investors) of greater than a 4.9% stake in the Company, could result in all existing shareholders other than the new 4.9% holder having the right to acquire new shares for a nominal cost, thereby significantly diluting the ownership interest of the acquiring person.  The Rights Plan runs for five years, or until the Board determines the plan is no longer required, whichever comes first. 

At December 31, 2017, we had two shareholders with a greater than a 4.9% stake in the Company.  Additionally, two employees of the Company would each have a greater than 4.9% stake in the Company for purposes of the Rights Plan to the extent that they exercised their vested option awards at December 31, 2017.  The Board of Directors has determined that these holdings do not constitute a triggering event for purposes of our Rights Plan.  

---

 

On January 3, 2018, the Board approved a waiver of the 4.9% ownership limitation for Hunt, increasing it to 9.9% of the Company’s issued and outstanding shares in any rolling 12-month period.

---

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

___________________________________________________________________________________________________________

The preparation of our consolidated financial statements is based on the application of U.S. GAAP, which requires us to make certain estimates and assumptions that affect the reported amounts and classification of the amounts in our consolidated financial statements.  These estimates and assumptions require us to make difficult, complex and subjective judgments involving matters that are inherently uncertain.  We base our accounting estimates and assumptions on historical experience and on judgments that are believed to be reasonable under the circumstances known to us at the time.  Actual results could differ materially from these estimates.  We applied our critical accounting policies and estimation methods consistently in all material respects and for all periods presented and have discussed those policies with our Audit Committee.



We evaluate our critical accounting estimates and judgments required by our policies on an ongoing basis and update them as necessary based on changing conditions.  Management has discussed any significant changes in judgments and assumptions in applying our critical accounting policies with the Audit Committee of our Board of Directors.  See “Item 1A - Risk Factors” for a discussion of the risks associated with the need for management to make judgments and estimates in applying our accounting policies and methods.  We have identified three of our accounting policies as critical because they involve significant judgments and assumptions about highly complex and inherently uncertain matters, and the use of reasonably different estimates and assumptions could have a material impact on our reported results of operations or financial condition.  These policies govern:

Fair Value Measurement of Financial Instruments

Fair value measurement is a critical accounting estimate because we account, or provide disclosures, for a portion of our assets and liabilities based upon their fair value.  The techniques that we use to determine fair value are described in Notes to Consolidated Financial Statements – Note 7, “Fair Value.”

Applicable accounting standards that govern fair value measurements provide a framework for measuring fair value and establishes a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value based on the assumptions a market participant would use at the measurement date.  The three levels of the fair value hierarchy are described below:



The measurement of fair value requires management to make judgments and assumptions.  The type and level of judgment required is largely dependent on the amount of observable market information available to the Company.   For instruments valued using internally developed valuation models and other valuation techniques that use significant unobservable inputs and are therefore classified within level 3 of the valuation hierarchy, judgments used to estimate fair value are more significant than those required when estimating the fair value of instruments classified within levels 1 and 2.  These judgments and assumptions may have a significant effect on our measurements of fair value, and the use of different judgments and assumptions, as well as changes in market conditions, could have a material effect on our Consolidated Statements of Comprehensive Income and Consolidated Balance Sheets.

In arriving at an estimate of fair value for an instrument within level 3, management must first determine the appropriate valuation technique to use.  Second, the lack of observability of certain significant inputs requires management to assess all relevant empirical data in deriving valuation inputs including, for example, market yields of thinly-traded investments in bonds, capitalization rates and NOI annual growth rates.

For further discussion of the valuation of level 3 instruments, including unobservable inputs used, refer to Notes to Consolidated Financial Statements – Note 7, “Fair Value.”

Imprecision in estimating unobservable market inputs or other factors can affect the amount of gain or loss recorded for a particular position.  Furthermore, while we believe that our valuation methods are appropriate and consistent with those of other market participants, the methods and assumptions used reflect management judgment and may vary across the Company’s businesses and portfolios.

---

 

Consolidated Funds and Ventures

We have equity investments in partnerships and other entities that primarily hold or develop real estate.  In most cases our legal interest in these entities is minimal; however, we apply ASC Topic No. 810, “Consolidation” in order to determine if we need to consolidate any of these entities.  There is considerable judgment in assessing whether to consolidate an entity under these accounting principles.  Some of the criteria we are required to consider include:





Income Taxes

We are a limited liability company that elected to be taxed as a corporation for income tax purposes.  All of our business activities, with the exception of our foreign investments and managing member interests in two remaining LIHTC Funds, are conducted by entities included in our consolidated corporate federal income tax return.  To determine the financial statement impact of accounting for income taxes, including the provision for income tax expense and unrecognized tax benefits, the Company must make assumptions and judgments about how to interpret and apply these complex tax laws to numerous transactions and business events, as well as make judgments regarding the timing of when certain items may affect taxable income in the U.S. and non-U.S. tax jurisdictions.

Our interpretations of tax laws are subject to review and examination by the various taxing authorities in the jurisdictions where we operate, and disputes may occur regarding our view on a tax position.  These disputes over interpretations with the various taxing authorities may be settled by audit, administrative appeals or adjudication in the court systems of the tax jurisdictions in which we operate.  We regularly review whether additional income taxes may be assessed as a result of the resolution of these matters, and we record additional reserves as appropriate.  In addition, we may revise our estimate of income taxes due to changes in income tax laws, legal interpretations, and business strategies.  It is possible that revisions in our estimate of income taxes may materially affect our results of operations in any reporting period.

The Company’s provision for income taxes is composed of current and deferred taxes.  Deferred taxes arise from differences between assets and liabilities measured for financial reporting versus income tax return purposes.  Deferred tax assets are recognized if, in management’s judgment, their realizability is determined to be more likely than not.  The Company has also recognized deferred tax assets in connection with certain tax attributes, including NOLs.  We perform regular reviews to ascertain whether our deferred tax assets are realizable.  These reviews include management’s estimates and assumptions regarding future taxable income, which also incorporates various tax planning strategies, including strategies that may be available to utilize NOLs before they expire.  In connection with these reviews, if it is determined that a deferred tax asset is not realizable, a valuation allowance is established.  The valuation allowance may be reversed in a subsequent reporting period if we determine that, based on revised estimates of future taxable income or changes in tax planning strategies, it is more likely than not that all or part of the deferred tax asset will become realizable.  As of December 31, 2017, management has determined it is not more likely than not that the Company will realize its deferred tax assets and, as a result, we maintained a valuation allowance against all of our deferred tax assets.  Refer to Notes to Consolidated Financial Statements – Note 12, “Income Taxes,” for more information about the Company’s deferred tax assets and other considerations associated with the Company’s income taxes.

On December 22, 2017, the Tax Act was signed into law.  The Tax Act introduced significant changes to the Internal Revenue Code including, but not limited to, the following: (i) reduction of the statutory corporate income tax rate from 35% to 21%; (ii) limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses); (iii) limitation of the deduction for NOLs to 80% of current year taxable income in respect of NOLs generated during or after 2018 and elimination of NOL carrybacks; (iv) one-time taxation of offshore earnings at reduced rates regardless of whether they are repatriated; (v) immediate deductions for certain new investments instead of deductions for depreciation expense over time and (vi) modification or repeal of many business deductions and credits.  Any federal NOLs arising in taxable years beginning after December 31, 2017 will be carried forward indefinitely pursuant to the Tax Act. 

---

 

Based on our review of the Tax Act, we have assessed the following impacts on the operations of the Company: (i)  there is no change to the carryforward limitations on federal NOLs generated in periods ending prior to January 1, 2018, although any future operating losses would be eligible for the indefinite carryforward period; (ii)  the reduction of the federal tax rate from 35% to 21% significantly reduces the potential value of our NOL carryforward, although, at December 31, 2017, our deferred tax assets are fully reserved and, as a result, there was no immediate impact of this change in federal tax rates on common shareholders’ equity at December 31, 2017.

We continue to assess the impact the Tax Act could have on our business operations.   The overall impact of the Tax Act is uncertain and our business and financial condition could be adversely affected.



---

 

ACCOUNTING AND REPORTING DEVELOPMENTS

___________________________________________________________________________________________________________

We identify and discuss the expected impact on our consolidated financial statements of recently issued accounting guidance in Notes to Consolidated Financial Statements – Note 1, “Summary of Significant Accounting Policies.”