1. Laying the Foundation: The Basic Tax Rules Governing HTCs Historic Tax Credit Developers Conference February 5-6, 2009 Miami Beach, Florida Presented by Daniel J. Kolodner, Esq., Nixon Peabody LLP

2. Key Federal Tax Incentives Rehabilitation Tax Credit (IRC Section 47). Low-Income Housing Tax Credit (IRC Section 42). New Markets Tax Credit (IRC Section 45D). Qualified Conservation Contributions (IRC Section 170(h)).

3. The Rehabilitation Tax Credits Internal Revenue Code Section 47

4. Two Types of Rehabilitation Tax Credits 10 percentOlder (pre-1936), non-historic and non-residential buildings: 10 percent of qualified rehabilitated expenditures. 20 percentHistoric buildings: 20 percent of qualified rehabilitation expenditures.

5. Important Dates in the History of the Rehabilitation Tax Credits 1976: First federal tax incentives for historic preservation (accelerated depreciation/ amortization). 1978: First federal tax credit for rehab of historic buildings (10%). 1981: Three tiered tax credit (25%, 20% and 15%), including first credit for rehab of older, non-historic buildings. 1986: Current two tiered structure; passive loss limitations imposed.

6. The 20% Rehabilitation Tax Credit Fundamentals Preservation aspects jointly administered by NPS and State Historic Pres. Offices (SHPOs). Tax Aspects Administered by the IRS. Tax Credits = dollar for dollar reduction in tax liability (contrast with deduction). RTC is the most important (in dollar volume) federal preservation program.

7. The 20% Rehabilitation Tax Credit Statistics 1,045 projects approved by NPS in 2007* In 2007, roughly 45% of HTC projects were for multi- family housing; 21% for office; 27% for commercial* Top states ranked by Part 3 approvals: MO (189), OH (115), VA (89), NC (51), (FY 2007 statistics) More than $4.34 billion in private investment leveraged by up to $869 million in tax credits* *Source: Annual Report for Fiscal Year 2007: Federal Tax Incentives for Rehabilitating Historic Buildings National Park Service

8. The NPS Rules: Part I, Part II, Part III

9. What Types of Buildings Qualify? The NPS Rules: Certified Historic Structure Requirement Option #1 Building is listed in the National Register of Historic Places.

10. Option #2 Building is located in a registered historic district and certified by the Sec. of the Interior as being of historic significance to the district. What Types of Buildings Qualify? The NPS Rules: Certified Historic Structure Requirement

11. What Types of Rehabilitations Qualify? The NPS Rules: Certified Rehabilitation Requirement Historic Preservation Certification Application – Part II -- Description of Rehabilitation – Part III -- Request for Certification of Completed Work

12. The IRS Rules: Section 47

13. What Types of Buildings Qualify? The IRS Rules: Depreciable Building Requirement Must be a building. Building is defined as a structure or edifice enclosing a space within its wall and usually covered by a roof. Building must be depreciable. Depreciable buildings are generally those used for nonresidential (i.e. commercial) or residential rental purposes. (See Section 168(e))

14. What Types of Rehabilitations Qualify? The IRS Rules: Substantial Rehabilitation Requirement QREs placed in service The QREs incurred during any 24-month period** selected by the taxpayer and ending in the taxable year in which the building is placed in service must exceed the greater of: – $5,000, or adjusted basis – The adjusted basis of the building. **A 60-month period may be used where written plans completed before the rehab begins show that the rehab is expected to take place in phases and is reasonably expected to take more than 24 months.

15. What Types of Rehabilitations Qualify? Definition of QREs Qualified Rehabilitation Expenditures (QREs) is the tax term given to those development costs on which rehabilitation tax credits can be claimed. QREs are any amounts chargeable to a capital account made in connection with the renovation, restoration or reconstruction of a qualified rehabilitated building (including its structural components), except as provided by law.

16. What Types of Rehabilitations Qualify? Definition of QREs QREs include costs related to: walls, partitions, floors, ceilings; permanent coverings such as paneling or tiling; windows and doors; air conditioning or heating systems, plumbing and plumbing fixtures; chimneys, stairs, elevators, sprinkling systems, fire escapes;

17. What Types of Rehabilitations Qualify? Definition of QREs (contd) QREs include costs related to: construction period interest and taxes; architect fees, engineering fees, construction management costs; reasonable developer fees

18. What Types of Rehabilitations Qualify? Definition of QREs Costs EXCLUDED from QREs: – Land and building acquisition; – Enlargements that expand total volume (cf. remodeling that increases FMR); – Personal property (furniture and appliances, cabinets and movable partitions, tacked carpeting); – New building construction; – Sitework (demolition, fencing, parking lots, sidewalks, landscaping)

19. The 20% Rehabilitation Tax Credit Calculating the Allowable Credit Credit equals 20% of all QREs incurred: – Prior to the start of the 24-month period selected (so long as they were incurred in connection with the rehab process that resulted in the substantial rehabilitation of the building); – During the 24-month period; and – After the last day of the 24-month period but before the last day of the tax year in which the measuring period ends.

20. The 20% Rehabilitation Tax Credit When is the Credit Allowed? Credit is generally allowed in the year in which the building is placed in service (provided substantial rehabilitation test has been met). Placement in Service means that the all or identifiable portions of the building is placed in a condition or state of readiness and availability for a specifically assigned function. Progress Expenditure Election available for properties with a normal construction period of 2 years or more

21. The 20% Rehabilitation Tax Credit Recapture Credit previously allowed is recaptured if any portion of the project which includes QREs is disposed of prior to the fifth anniversary of placement in service. Amount subject to recapture decreases by 20% during each year of the five year period.

22. The 20% Rehabilitation Tax Credit Recapture Disposition includes any sale, exchange, transfer, gift or casualty. Subsequent rehabs that do not comply with the Secretarys Standards can trigger recapture. Reduction of a partners interest can be deemed a disposition (33% rule).

23. Structuring the Deal

24. Single Entity Structure Tenants Rental Payments Tax Credit Investor LLC Construction/ Perm Lender Managing Member (Developer Affiliate) Managing Member (Developer Affiliate) Historic Tax Credit Equity 99.99% Credits, Profits & Losses and Cash Flow Loan Proceeds Debt Service Payments Tax Credit, LLC (Property Owner) Tax Credit, LLC (Property Owner) Tax Credit Investor.01% Credits, Profits & Losses, Fees and Cash Flow Developer Equity Developer Dev. Fee

25. Historic Tax Credit Syndication The Credit Pass-Through Structure Landlord LLC owns fee simple, undertakes rehab, enters into Dev. Agreement, and earns the Historic Tax Credit. Master Tenant, LLC leases the entire project from the Landlord LLC for a fixed annual rental payment.

26. Historic Tax Credit Syndication The Credit Pass-Through Structure Master Tenant, LLC operates the property, subleases to end users and enters into the Property Management Contract. Landlord makes special tax election to pass the Historic Tax Credit through to the Master Tenant LLC.

27. Master Lease/Credit Pass-Through Structure Sub-Tenants/ End Users Rental Payments Tax Credit Investor LLC Construction/ Perm Lender Managing Member (Developer Affiliate) Managing Member (Developer Affiliate) Historic Tax Credit Equity 99.99% Credits, Profits & Losses, and Cash Flow Loan Proceeds Debt Service Payments.01% Credits, Profits & Losses, Fees and Cash Flow Developer Equity Master Tenant, LLC (Master Tenant) Master Tenant, LLC (Master Tenant) Landlord, LLC (Property Owner/Lessor) Landlord, LLC (Property Owner/Lessor) 99.99% Credits, Profits & Losses, Fees and Cash Flow Pass-through of Historic Tax Credits & Share of Residual Lease Payment & Equity Investment

28. Sample Sources and Uses

29. Sample Transaction Calculating the HTC Equity Qualified Rehab Expenditures24,060,799 Credit Rate20.00% Total Calculated Credit4,812,160 Tax Credit Investor Allocation99.99% Total Credit to Investors4,811,679 Credit Price Per Each $1 of Credit0.98 Equity Contributions by Investors4,727,474

30. More Information? Daniel Kolodner, Esq. dkolodner@nixonpeabody.com