Presentation on theme: "TAX CREDITS An Overview ULI/BPA Young Leaders Tax Credit Seminar May 26, 2009 Peter Roth of New Atlantic Development Corporation Stephen Nolan of Nolan."— Presentation transcript:
TAX CREDITS An Overview ULI/BPA Young Leaders Tax Credit Seminar May 26, 2009 Peter Roth of New Atlantic Development Corporation Stephen Nolan of Nolan | Sheehan | Patton LLP
Urban Land Institute New Markets Tax Credits and Hibernian Hall – A Case Study May 26, 2009 Jeanne Pinado, Madison Park Development Corporation Peter Roth, New Atlantic Development Andrea Daskalakis, Massachusetts Housing Investment Corporation Stephen Nolan, Nolan Sheehan Patten LLP
Types of Tax Credits Historic Tax Credits (HTC) 10% credits 20% credits State Historic Tax Credits (MA-HTC) New Markets Tax Credits (NMTC) Low Income Housing Tax Credits (LIHTC) 4% credits 9% credits
Overview of HTC Federal tax incentive program created in % credit for historic buildings 10% credit for non-historic buildings built before 1936 Can be used for rental projects only 10% credit for non-residential, rental only Program is administered by the Department of Interiors National Park Service
HTC Eligibility What buildings qualify? For the 20% credit, a building must be a Certified Historic Structure, meaning it is listed individually on the National Register of Historic Places or is located in a historic district and considered a significant contributing building. For the 10% credit, no certification is necessary. The process of getting a building listed on the Register begins by submitting a National Register Nomination form to NPS
HTC Eligibility What does the Park Service look for? In order to be listed on the Register, a building must demonstrate historical, cultural, architectural, or archeological significance that 1) is associated with events that have made a contribution to our history; 2) is associated with significant persons; or 3) embodies a particular type, period, or style of construction or that represents the work of a master
HTC Eligibility The certification process: The process of getting a Project certified for Historic Credits begins by submitting a Part 1 Submission to the NPS, which documents existing building conditions prior to the rehabilitation, and documents its qualifications as an eligible structure The Part 1 is reviewed by the States Historic Preservation Officer, who forwards the Part 1 submission to the National Park Service if it is approved
HTC Eligibility The certification process: A Part 2 Submission is then prepared, which documents the proposed rehabilitation (usually the Architects Plans & Specifications), and details how the rehabilitation plans conform with the Secretary of the Interiors Standards for Treatment of Historic Structures.
HTC Eligibility What rehabilitations qualify? Rehab must be substantial. Expenditures must exceed the greater of the adjusted basis or $ 5,000. The plans for the rehab must conform to Dept. of the Interior standards As with the Part I, it is first reviewed by the State Historic Preservation Officer and then forwarded to the National Park Service for final approval.
HTC Eligibility What does the Park Service look for? In order to receive Part II approval, a project must 1) make every effort to minimize changes to the appearance or use of the structure or site 2) retain significant historical features 3) recognize a buildings particular place in history by ensuring that alterations have a historical basis 4) attempt to repair, rather than replace, deteriorated features
HTC Eligibility Final Steps Once the project is completed, a Part 3 submission is made to SHPO & NPS, documenting that the completed rehabilitation conformed to plans approved in the Part 2 process.
HTC - Calculating the Credit How is the HTC calculated? The eligible rehabilitation basis is calculated, and multiplied by 10 or 20%, depending on the type of credit Certain project costs are ineligible, including acquisition, equipment/fit-up and sitework, costs associated with permanent financing, marketing/lease up costs, and capitalized reserves.
HTC – Calculating the Credit 20% of Eligible Basis = Credit Amount $6,627,000 x 20% = $1,325,400 Amount of equity to project depends on negotiated price investor pays for the credits (85-95%.)
HTC - Using the Credit How is the HTC used? The credit is typically sold to an investor, who gains an ownership position through the creation of a Limited Partnership or Limited Liability Company. The investor pays a price per dollar of credit, between $ 0.85 and $ 0.95, depending on market conditions and underwriting criteria. The investor takes the full amount of the credit in the first year the building is placed in service.
HTC – Selling the Credit Who buys tax credits? Institutional lenders Insurance companies Large C corporations Syndicators Non-profit developers cannot use the credit because they have no tax liability to offset. Most for-profit developers cannot use tax credits on this level due to passive loss limitations and alternative minimum tax requirements.
HTC – The Partnership The Owner–Investor Relationship The investor must have an ownership interest in the project. This is usually accomplished by setting up a Limited Partnership or Limited Liability Company where the Developer acts as the General Partner/Managing Member and the investor is the Limited Partner/Investor Member. The Limited Partner/Investor Member typically owns 99.99% of the project to make full use of the credits and accompanying losses. The General Partner/Managing Member manages the partnership and has day-to-day control of the project.
HTC - Using the Credit Can HTC be combined with other credits, such as LIHTC, or NMTC? Yes, though with LIHTC, the amount of the HTC must be deducted from the eligible basis when computing the basis for LIHTC. HTC equity can be used as part of the investment that forms the basis for New Markets Tax Credits, but complex structuring is usually required.
State Historic Credits State tax incentive program created in 2000 Up to 20% credit for historic buildings Generally same eligibility criteria as Federal HTC Allocated competitively by MHC Big difference is real estate ownership is not necessary State issues tax credit certificates to investors Certificates are generally not subject to ATM
Overview of NMTC Created by Congress in 2000 Administered by the U.S. Department of Treasurys Community Development Financial Institutions Fund (CDFI Fund) and the IRS Provides a 39% credit (5% for first 3 years and 6% for years 4-7) for equity investors in CDEs that receive an allocation of credits from the CDFI Fund CDEs compete nationally for the NMTC in a highly competitive process CDEs must in turn use the equity to make loans to or investments in QALICBs
Overview of NMTC What is a CDE? Community Development Entity that is accountable to a low income community and must apply to the CDFI fund for certification. CDE may be either a non-profit or for-profit. CDE must invest substantially all of its cash in Qualified Low Income Community Investments. QLICIs can be equity investments in or loans to qualified active low-income community businesses (QALICBs), financial counseling or other assistance to QALICBs, or equity investments in or loans to another CDE.
Overview of NMTC What is a QALICB? A business must earn half of its gross revenue by conducting business in a low-income community, defined by census tract. 40% of its property must be within that community. 40% of the services its employees provide must be in that community. QALICB cannot have more than 5% of its assets in nonqualified financial property or collectibles. Qualified activities include development of rental real estate, including new construction or rehab.
Overview of NMTC Types of Transactions Development of residential rental real estate is excluded, but mixed-use projects where rent from apartments comprises less than 80% of the buildings revenue are not considered residential. Can be combined with HTC, but usually requires use of a master lease pass-through structure. Non-profits can be QALICBs. Certain sin businesses are prohibited, such as sales of liquor for off-site consumption, massage parlors, tanning salons, hot tub facilities, racetracks.
Overview of NMTC CDE Qualified Business Investor Entity Lender Leverage Loan Equity Credits and Return on Equity Return on Equity/DebtEquity/Debt
Overview of NMTC CDE Qualified Business Investor Entity NMTC Investor Lender $2 MillionCredits of $3.9 Million $8 Million $9.5 Million Loans Credits of $3.9 Million Debt Service $10 Million
Overview of NMTC CDE Qualified Business Investor Entity NMTC Investor Lender $3.5 Million NMTC Credits of $3.9 Million HTC Credits of $1.8 Million $6.5Million $1 Million Loan Credits of $5.7Million Debt Service $1.8MM HTC Master Tenant $8.5 Million Loan $10 Million Equity Master Lease and $2.8MM HTC