Presentation on theme: "Peter Roth of New Atlantic Development Corporation"— Presentation transcript:
1 TAX CREDITS An Overview ULI/BPA Young Leaders Tax Credit Seminar May 26, 2009 Peter Roth of New Atlantic Development CorporationStephen Nolan of Nolan | Sheehan | Patton LLP
2 Urban Land Institute New Markets Tax Credits and Hibernian Hall – A Case Study May 26, 2009 Jeanne Pinado, Madison Park Development CorporationPeter Roth, New Atlantic DevelopmentAndrea Daskalakis, Massachusetts Housing Investment CorporationStephen Nolan, Nolan Sheehan Patten LLP
3 Types of Tax Credits Historic Tax Credits (HTC) 10% credits State Historic Tax Credits (MA-HTC)New Markets Tax Credits (NMTC)Low Income Housing Tax Credits (LIHTC)4% credits9% credits
4 Overview of HTC Federal tax incentive program created in 1981 20% credit for historic buildings10% credit for non-historic buildings built before 1936Can be used for rental projects only10% credit for non-residential, rental onlyProgram is administered by the Department of Interior’s National Park Service
5 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
6 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 that1) is associated with events that have made a contribution to our history;2) is associated with significant persons; or3) embodies a particular type, period, or style of construction or that represents the work of a master
7 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 structureThe “Part 1” is reviewed by the State’s Historic Preservation Officer, who forwards the Part 1 submission to the National Park Service if it is approved
8 HTC Eligibility The certification process: A “Part 2” Submission is then prepared, which documents the proposed rehabilitation (usually the Architect’s Plans & Specifications), and details how the rehabilitation plans conform with the Secretary of the Interior’s “Standards for Treatment of Historic Structures”.
9 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 standardsAs 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.
10 HTC Eligibility What does the Park Service look for? In order to receive Part II approval, a project must1) make every effort to minimize changes to the appearance or use of the structure or site2) retain significant historical features3) recognize a building’s particular place in history by ensuring that alterations have a historical basis4) attempt to repair, rather than replace, deteriorated features
11 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.
12 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 creditCertain project costs are ineligible, including acquisition, equipment/fit-up and sitework, costs associated with permanent financing, marketing/lease up costs, and capitalized reserves.
14 HTC – Calculating the Credit 20% of Eligible Basis = Credit Amount$6,627,000 x 20% = $1,325,400Amount of equity to project depends on negotiated price investor pays for the credits (85-95%.)
15 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.
16 HTC – Selling the Credit Who buys tax credits?Institutional lendersInsurance companiesLarge “C” corporationsSyndicatorsNon-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.
17 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.
18 HTC - Using the CreditCan 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.
19 State Historic Credits State tax incentive program created in 2000Up to 20% credit for historic buildingsGenerally same eligibility criteria as Federal HTCAllocated competitively by MHCBig difference is real estate “ownership” is not necessaryState issues “tax credit certificates” to investorsCertificates are generally not subject to ATM
20 Overview of NMTC Created by Congress in 2000 Administered by the U.S. Department of Treasury’s Community Development Financial Institutions Fund (CDFI Fund) and the IRSProvides 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 FundCDEs compete nationally for the NMTC in a highly competitive processCDEs must in turn use the equity to make loans to or investments in QALICBs
21 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.
22 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.
23 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 building’s 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.
24 Overview of NMTC Investor Lender Entity CDE Qualified Business Leverage LoanLenderInvestorEntityCredits and Return on EquityEquityCDEEquity/DebtReturn on Equity/DebtQualifiedBusiness
25 Overview of NMTC NMTC Investor $2 Million Credits of $3.9 Million EntityLender$8 MillionCredits of $3.9 Million$10 MillionCDE$9.5 Million LoansDebt ServiceQualifiedBusiness
26 Overview of NMTC NMTC Investor NMTC Credits of $3.9 Million HTC Credits of $1.8 Million$3.5 MillionInvestorEntityLender$6.5Million$10 Million EquityCredits of $5.7Million$1.8MM HTCMaster TenantCDE$1 Million Loan$8.5 Million LoanDebt ServiceMaster Lease and $2.8MM HTCQualifiedBusiness