Novogradac Historic Tax Credit Conference
Marriott Riverwalk | San Antonio, Tex.
#NovocoHTC
www.novoco.com
September 17-18, 2015
1
Novogradac Historic Tax Credit Conference
Marriott Riverwalk | San Antonio, Tex.
#NovocoHTC
September 17-18, 2015
Bentley Stanton
www.novoco.com
2
Novogradac Historic Tax Credit Conference
Marriott Riverwalk | San Antonio, Tex.
#NovocoHTC
September 17-18, 2015
Today’s Agenda
GAAP Accounting and Related Issues for Entities Involved in:
Basic HTC Structure
Basic Flip Structure
Basic Master Tenant
Structure
www.novoco.com
3
Novogradac Historic Tax Credit Conference
Marriott Riverwalk | San Antonio, Tex.
#NovocoHTC
September 17-18, 2015
GAAP Accounting
BASIC HTC STRUCTURE
www.novoco.com
4
Novogradac Historic Tax Credit Conference
Marriott Riverwalk | San Antonio, Tex.
#NovocoHTC
September 17-18, 2015
Basic HTC Structure
Minority Owner
(1%)
Majority Owner
(99%)
Developer/
Manager
HTC
Investor
Lender(s)
Loans
$17,137,000
Development Budget
Hard Costs - $16,000,000
Soft Costs - $4,000,000
Developer Fee - $500,000
Total Project Costs - $20,500,000
Equity
$33,000
Property
Owner/
Lessor
Equity
$3,330,000
($0.90)
HTCs
$3,700,000
Lease
Tenant/
Lessee
QREs - $18,500,000
HTCs (20%) - $3,700,000
www.novoco.com
5
Novogradac Historic Tax Credit Conference
Marriott Riverwalk | San Antonio, Tex.
#NovocoHTC
September 17-18, 2015
Basic HTC Structure
Majority Owner/HTC Investor
GAAP Accounting Issues
•
•
www.novoco.com
Direct investment in historic
building
• ASC 970-323
• Generally investor’s
account cannot go negative
Accounting for Investments:
• Cost - <5%
• Consolidation - control
• Equity method – all others
• Investment tax credit
accounting – deferral/flow
through alternative
ASC740-10-25-45
6
Novogradac Historic Tax Credit Conference
Marriott Riverwalk | San Antonio, Tex.
#NovocoHTC
September 17-18, 2015
Majority Owner/HTC Investor Equity Method
HTC INVESTOR INC.
Investment in HTC Investee Partnership – Before Impairment
For the year ended December 31, 2015
Capital contributions
Share of net loss from Inv P’shp
Balance, Dec. 31, 2015
www.novoco.com
$3,330,000
$150,000
$3,180,000
7
Novogradac Historic Tax Credit Conference
Marriott Riverwalk | San Antonio, Tex.
#NovocoHTC
September 17-18, 2015
Majority Owner/HTC Investor Equity Method - Impairment
Future Benefits:
Capital contributions
Less basis reduction (HTC)
Share of net taxable loss from Inv P’shp
Tax Investment Balance, Dec. 31, 2015
Cash flow distributions
Residual Value
Total Estimated Future Benefits
www.novoco.com
$3,330,000
- $3,700,000
0
($370,000)
$0
$25,000
$0
$25,000
8
Novogradac Historic Tax Credit Conference
Marriott Riverwalk | San Antonio, Tex.
#NovocoHTC
September 17-18, 2015
Majority Owner/HTC Investor Equity Method - Impairment
$3,180,000
GAAP Investment balance before impairment
Future Benefits
Impairment adjustment
www.novoco.com
-
$25,000
$3,155,000
9
Novogradac Historic Tax Credit Conference
Marriott Riverwalk | San Antonio, Tex.
#NovocoHTC
September 17-18, 2015
Majority Owner/HTC Investor Equity Method
HTC INVESTOR INC.
Investment in HTC Investee Partnership – After Impairment
For the year ended December 31, 2015
Capital contributions
Share of net loss from Inv P’shp
Impairment on investment
Balance, Dec. 31, 2015
Share of Net Loss + Impairment =
www.novoco.com
$3,330,000
$150,000
- $3,155,000
$25,000
$3,305,000
10
Novogradac Historic Tax Credit Conference
Marriott Riverwalk | San Antonio, Tex.
#NovocoHTC
September 17-18, 2015
Majority Owner/HTC Investor Equity Method
HTC INVESTOR INC.
Balance Sheet
December 31, 2015
ASSETS
Cash and cash equivalents
$500,000
Loans
+$500,000,000
Investments in HTC Investee p’ship +
$25,000
Total assets
$500,525,000
LIABILITIES
Accounts payable & accrued liabilities
$25,000
Income taxes payable
+ $3,237,000
Due to affiliates
$5,000
+
Total liabilities
$3,267,000
EQUITY
Total liabilities and equity
www.novoco.com
+ $497,258,000
$500,525,000
HTC INVESTOR INC.
Statement of Operations
December 31, 2015
INTEREST INCOME
Loans
$20,000,000
NONINTEREST INCOME (LOSS)
Loss from investee p’ships
-
$3,305,000
$16,695,000
NONINTEREST EXPENSES
Professional fees
$25,000
Asset mgmt fees
$5,000
Net income from ops before inc taxes $16,665,000
- $6,937,000
Income taxes
+ $3,700,000
Historic Tax Credit
$13,428,000
NET INCOME
11
Novogradac Historic Tax Credit Conference
Marriott Riverwalk | San Antonio, Tex.
#NovocoHTC
September 17-18, 2015
Majority Owner/HTC Investor – Investment Tax Credit Accounting
HTC INVESTOR INC.
Investment in HTC Investee Partnership
For the year ended December 31, 2015
Capital contributions
Historic Tax Credit
Balance, Dec. 31, 2015
$3,330,000
- $3,330,000
$0
Total HTCs
$3,700,000
Total capital contributions
- $3,330,000
Excess of credits over investment $370,000
www.novoco.com
12
Novogradac Historic Tax Credit Conference
Marriott Riverwalk | San Antonio, Tex.
#NovocoHTC
September 17-18, 2015
Majority Owner/HTC Investor – Investment Tax Credit Accounting
HTC INVESTOR INC.
Balance Sheet
December 31, 2015
ASSETS
$500,000
Cash and cash equivalents
Loans
+ $500,000,000
$0
Investments in HTC Investee p’ship +
$500,500,000
Total assets
LIABILITIES
$25,000
Accounts payable & accrued liabilities
Income taxes payable
+ $3,289,500
$5,000
Due to affiliates
+
$3,319,500
Total liabilities
EQUITY
Total liabilities and equity
www.novoco.com
+ $497,180,500
$500,500,000
HTC INVESTOR INC.
Statement of Operations
December 31, 2015
INTEREST INCOME
Loans
$20,000,000
NONINTEREST INCOME (LOSS)
Loss from investee p’ships
-
$0
$20,000,000
NONINTEREST EXPENSES
Professional fees
$25,000
Asset mgmt fees
$5,000
Net income from ops before inc taxes $19,970,000
- $6,989,500
Income taxes
$0
+
Historic Tax Credit
$370,000
Excess of credits over investment +
$13,350,500
NET INCOME
13
Novogradac Historic Tax Credit Conference
Marriott Riverwalk | San Antonio, Tex.
#NovocoHTC
September 17-18, 2015
Basic HTC Structure
Minority Owner
(1%)
Majority Owner
(99%)
Developer/
Manager
HTC
Investor
Lender(s)
Loans
$17,137,000
Development Budget
Hard Costs - $16,000,000
Soft Costs - $4,000,000
Developer Fee - $500,000
Total Project Costs - $20,500,000
Equity
$33,000
Property
Owner/
Lessor
Equity
$3,330,000
($0.90)
HTCs
$3,700,000
Lease
Tenant/
Lessee
QREs - $18,500,000
HTCs (20%) - $3,700,000
www.novoco.com
14
Novogradac Historic Tax Credit Conference
Marriott Riverwalk | San Antonio, Tex.
#NovocoHTC
September 17-18, 2015
Property Owner – GAAP
HTC TAX CREDIT BUILDING, L.P.
Balance Sheet
December 31, 2015
ASSETS
Cash and cash equivalents
Building & Improvements
Furniture, fixtures, equipment
Deferred rent receivable
Total assets
$370,000
+ $19,987,500
+
$50,000
+
$155,000
$20,562,500
LIABILITIES & PARTNERS’ CAPITAL
Accounts payable & accrued liabilities $164,015
+ $17,137,000
Mortgage payable
+
Developer fee payable
$50,000
Total liabilities
$17,351,015
Partners’ capital
Total liabilities and equity
www.novoco.com
+
$3,211,485
$20,562,500
HTC TAX CREDIT BUILDING, L.P.
Statement of Operations
For the year ended December 31, 2015
RENTAL INCOME
$2,225,000
EXPENSES
$200,000
Administrative
+
$164,015
Real estate• taxes
No basis reduction
GAAP
+ for$300,000
Utilities
• Depreciation is generally
40 years
+
$664,015
Total expenses
• Impairment
Net operating income
OTHER INCOME
(EXPENSES)
• IRC
Section
Interest
Depreciation
$1,560,985
267
-
$1,200,000
$512,500
• Tenant Leases – generally will be
$(151,515)
operating leases, straight-line
Net income (loss)
15
Novogradac Historic Tax Credit Conference
Marriott Riverwalk | San Antonio, Tex.
#NovocoHTC
September 17-18, 2015
Property Owner – GAAP
HTC TAX CREDIT BUILDING, L.P.
Statements of Changes in Partners’ Capital
For the year ended December 31, 2015
General
Partner
$0
Balance, Jan 1, 2015
+ $33,000
Capital Contributions
- $1,515
Net Loss
$31,485
Balance, Dec 31, 2015
www.novoco.com
Limited
Partner
$0
+ $3,330,000
- $150,000
$3,180,000
Total Partners’
Capital
$0
+ $3,363,000
- $151,515
$3,211,485
16
Novogradac Historic Tax Credit Conference
Marriott Riverwalk | San Antonio, Tex.
#NovocoHTC
September 17-18, 2015
Property Owner – GAAP
• Capital Accounts not reduced
For amount of credit
• Contribution of property
www.novoco.com
17
Novogradac Historic Tax Credit Conference
Marriott Riverwalk | San Antonio, Tex.
#NovocoHTC
September 17-18, 2015
Property Owner – Investment Tax Credit Accounting
HTC TAX CREDIT BUILDING, L.P.
Balance Sheet
December 31, 2015
ASSETS
Cash and cash equivalents
Building & Improvements
Furniture, fixtures, equipment
Deferred rent receivable
Total assets
$370,000
+ $16,287,500
+
$50,000
+
$155,000
$16,862,500
LIABILITIES & PARTNERS’ CAPITAL
Accounts payable & accrued liabilities $164,015
+ $17,137,000
Mortgage payable
+
Developer fee payable
$50,000
Total liabilities
$17,351,015
Partners’ capital
Total liabilities and equity
www.novoco.com
-
$488,515
$16,862,500
HTC TAX CREDIT BUILDING, L.P.
Statement of Operations
For the year ended December 31, 2015
RENTAL INCOME
EXPENSES
Administrative
Real estate• taxes
Record basis
Utilities
Total expenses(deferral)
$2,225,000
$200,000
+
$164,015
reduction
for GAAP
+
$300,000
+
$664,015
• Depreciation is generally 40 years
$1,560,985
• Impairment
OTHER INCOME
(EXPENSES)
• Loss
allocations
- $1,200,000
Interest
•
IRC
Section
267
$512,500
Depreciation
• Tenant Leases – generally will be
Net income (loss)
$(151,515)
operating leases, straight-line
Net operating income
18
Novogradac Historic Tax Credit Conference
Marriott Riverwalk | San Antonio, Tex.
#NovocoHTC
September 17-18, 2015
Property Owner – Investment Tax Credit Accounting
HTC TAX CREDIT BUILDING, L.P.
Statements of Changes in Partners’ Capital
For the year ended December 31, 2015
General
Partner
$0
Balance, Jan 1, 2015
+ $33,000
Capital Contributions
Tax Credit Distribution - $3,700
- $1,515
Net Loss
$27,785
Balance, Dec 31, 2015
www.novoco.com
Limited
Partner
$0
+ $3,330,000
- $3,696,300
- $150,000
$(516,300)
Total Partners’
Capital
$0
+ $3,363,000
- $3,700,000
- $151,515
$(488,515)
19
Novogradac Historic Tax Credit Conference
Marriott Riverwalk | San Antonio, Tex.
#NovocoHTC
September 17-18, 2015
Basic HTC Structure
Minority Owner
(1%)
Majority Owner
(99%)
Developer/
Manager
HTC
Investor
Lender(s)
Loans
$17,137,000
Development Budget
Hard Costs - $16,000,000
Soft Costs - $4,000,000
Developer Fee - $500,000
Total Project Costs - $20,500,000
Equity
$33,000
Property
Owner/
Lessor
Equity
$3,330,000
($0.90)
HTCs
$3,700,000
Lease
Tenant/
Lessee
QREs - $18,500,000
HTCs (20%) - $3,700,000
www.novoco.com
20
Novogradac Historic Tax Credit Conference
Marriott Riverwalk | San Antonio, Tex.
#NovocoHTC
September 17-18, 2015
Basic HTC Structure
Minority Owner GAAP Accounting Issues
Consolidation
of Property
Owner entity
www.novoco.com
Deferred
Developer Fees
– 267 Issues
Disclosure of
Guarantees
21
Novogradac Historic Tax Credit Conference
Marriott Riverwalk | San Antonio, Tex.
#NovocoHTC
September 17-18, 2015
GAAP Accounting
BASIC FLIP STRUCTURE
www.novoco.com
22
Novogradac Historic Tax Credit Conference
Marriott Riverwalk | San Antonio, Tex.
#NovocoHTC
September 17-18, 2015
Basic Flip Structure
Minority Owner
(1% - Flips to 95% after 5 years)
Majority Owner
(99% - Flips to 5%
after 5 years)
Developer/
Manager
HTC
Investor
Lender(s)
Loans
$17,137,000
Development Budget
Hard Costs - $16,000,000
Soft Costs - $4,000,000
Developer Fee - $500,000
Total Project Costs - $20,500,000
Equity
$33,000
Property
Owner/
Lessor
Equity
$3,330,000
($0.90)
HTCs
$3,700,000
Lease
Tenant/
Lessee
QREs - $18,500,000
HTCs (20%) - $3,700,000
www.novoco.com
23
Novogradac Historic Tax Credit Conference
Marriott Riverwalk | San Antonio, Tex.
#NovocoHTC
September 17-18, 2015
Flip HTC Structure
GAAP Accounting Issues
www.novoco.com
Safe harbor
guidelines
Allows for
easier
purchase of
HTC investor’s
interest on
exit
Distributions
Purchase
price
24
Novogradac Historic Tax Credit Conference
Marriott Riverwalk | San Antonio, Tex.
#NovocoHTC
September 17-18, 2015
GAAP Accounting
BASIC MASTER TENANT STRUCTURE
www.novoco.com
25
Novogradac Historic Tax Credit Conference
Marriott Riverwalk | San Antonio, Tex.
#NovocoHTC
September 17-18, 2015
Basic Master Tenant Structure
ML Majority Owner
(90%)
Developer/
Manager
Lender(s)
Loans
$16,530,000
Development Budget
Hard Costs - $16,000,000
Soft Costs - $4,000,000
Developer Fee - $500,000
Total Project Costs - $20,500,000
QREs - $18,500,000
HTCs (20%) - $3,700,000
www.novoco.com
ML Majority Owner
(99%)
•
MT Minority Owner
(1%)
Equity
$607,000
Master
Landlord/
Prop Own
HTC
Investor
HTCs
Equity $3,700,000
$33,000
Master Lease &
HTC Pass-through
Equity
$3,363,000
Investor
accounting
essentially
the same as
the basic
structure
Equity
$3,330,000
($0.90)
Master
Tenant
Sublease
Tenant/
Lessee
ML Minority Owner
(10%)
26
Novogradac Historic Tax Credit Conference
Marriott Riverwalk | San Antonio, Tex.
#NovocoHTC
September 17-18, 2015
Financing – Equity Issues
• Combination vs. Consolidation
– Consolidate when controlling interest is involved
– Combine when no (or both) controlling interests, and entity activities
function together (ASC 810-10-55-1B)
– Eliminate intercompany activity
• Consolidation - Ownership vs. Control
– LLCs & LPs – GP/MM has presumptive control (ASC 810-20-25)
– LP can have participating rights
– Whomever has control consolidates
28
www.novoco.com
27
Novogradac Historic Tax Credit Conference
Marriott Riverwalk | San Antonio, Tex.
#NovocoHTC
September 17-18, 2015
Basic Master Tenant Structure
ML Majority Owner
(90%)
Developer/
Manager
Lender(s)
Loans
$16,530,000
Development Budget
Hard Costs - $16,000,000
Soft Costs - $4,000,000
Developer Fee - $500,000
Total Project Costs - $20,500,000
QREs - $18,500,000
HTCs (20%) - $3,700,000
www.novoco.com
MT Minority Owner
(1%)
ML Majority Owner
(99%)
Equity
$607,000
Master
Landlord/
Prop Own
HTC
Investor
HTCs
Equity $3,700,000
$33,000
Master Lease &
HTC Pass-through
Equity
$3,363,000
Equity
$3,330,000
($0.90)
Master
Tenant
Sublease
Tenant/
Lessee
ML Minority Owner
(10%)
28
Novogradac Historic Tax Credit Conference
Marriott Riverwalk | San Antonio, Tex.
#NovocoHTC
September 17-18, 2015
Financing – Debt Issues
• Intercompany loans
– Eliminate in combination/consolidation
• Outside loans
– Related party vs. third party – impact on lease capitalization
– Project costs incurred by owners:
• Advances – intent to repay in the future
• Capital contributions – no intent to repay
– Capitalized interest during construction
30
www.novoco.com
29
Novogradac Historic Tax Credit Conference
Marriott Riverwalk | San Antonio, Tex.
#NovocoHTC
September 17-18, 2015
Leases - GAAP
• Capital lease vs. operating lease determination
• Lease flow:
– Ground lease (if applicable)
– Master lease
– Sublease
• Scheduled lease payments vs. revenue/expense
recognition
31
www.novoco.com
30
Novogradac Historic Tax Credit Conference
Marriott Riverwalk | San Antonio, Tex.
#NovocoHTC
September 17-18, 2015
Capital Versus Operating Determination (ASC 840)
•
Items to consider:
– Determine and document each lease separately
– Lessee or lessor
– What type of property is being leased?
•
Tests to apply:
– 25% land test
– 4 tests:
•
•
•
•
•
Transfer of ownership
Bargain purchase option
75% lease term test
90% minimum lease payment test
Results:
– Generally, if none of these criteria is met, the lease shall be accounted for by the
operating lease
– Couple of exceptions for lessors
32
www.novoco.com
31
Novogradac Historic Tax Credit Conference
Marriott Riverwalk | San Antonio, Tex.
#NovocoHTC
September 17-18, 2015
Unimproved Property (Ground) Lease
•
Lease of unimproved property from the property owner to the Master Landlord (ML)
•
Could potentially consist of land and/or a preexisting building
•
For land – typically an operating lease
•
For buildings – typically a capital lease (often based on term length):
–
With even or escalating lease payments
•
•
–
Paid up front at present value
•
–
Lease obligation & capital lease asset at ML
Principal & interest recorded, reduce lease obligation
Only capital lease asset recorded at ML
Paid up front at nominal amount
•
Capital lease asset or expensed if amount is insignificant (i.e. $100)
33
www.novoco.com
32
Novogradac Historic Tax Credit Conference
Marriott Riverwalk | San Antonio, Tex.
#NovocoHTC
September 17-18, 2015
Master Landlord – Ground Lease Accounting
HTC TAX CREDIT BUILDING, L.P.
Ground Lease Example
For the year ended December 31, 2015
Initial Capitalization:
Dr. Capital lease asset - building
Cr.
Capital lease obligation
$X,XXX,XXX
$X,XXX,XXX
Subsequent Payments:
Dr. Capital lease obligation
Dr. Interest expense – cap. lease oblig.
Cr.
Cash
www.novoco.com
$XX,XXX
$XX,XXX
$XXX,XXX
33
Novogradac Historic Tax Credit Conference
Marriott Riverwalk | San Antonio, Tex.
#NovocoHTC
September 17-18, 2015
Master Lease
•
•
Lease of improved/rehabilitated property from the ML to the Master Tenant (MT)
Typically an operating lease:
–
Need to be careful in structuring the lease terms during the preliminary phase of the project
•
•
•
•
Be cognizant of 4 test criteria
How do those tests affect each party to the lease (MT & ML)?
Lessor exceptions to consider (manufacturer profit/loss)
Payment streams:
–
With even monthly/quarterly/annual lease payments
•
•
–
With escalating monthly/quarterly/annual lease payments
•
•
–
Revenue and expense recognized based on lease payment schedule
No deferred rent
Cash flow based on lease payment schedule
Deferred rent revenue/expense recorded based on straight-line basis for GAAP (matching
principle)
Generally not paid up front
35
www.novoco.com
34
Novogradac Historic Tax Credit Conference
Marriott Riverwalk | San Antonio, Tex.
#NovocoHTC
September 17-18, 2015
Master Landlord – GAAP
HTC TAX CREDIT BUILDING, L.P.
Balance Sheet
December 31, 2015
ASSETS
Cash and cash equivalents
Building & Improvements
Furniture, fixtures, equipment
Deferred rent receivable
Total assets
$370,000
+ $19,987,500
+
$50,000
+
$155,000
$20,562,500
LIABILITIES & PARTNERS’ CAPITAL
Accounts payable & accrued liabilities $164,015
+ $17,137,000
Mortgage payable
+
Developer fee payable
$50,000
Total liabilities
$17,351,015
Partners’ capital
Total liabilities and equity
www.novoco.com
+
$3,211,485
$20,562,500
HTC TAX CREDIT BUILDING, L.P.
Statement of Operations
For the year ended December 31, 2015
RENTAL INCOME
$2,225,000
EXPENSES
Administrative
Real estate taxes
Utilities
Total expenses
+
+
+
Net operating income
$200,000
$164,015
$300,000
$664,015
$1,560,985
OTHER INCOME (EXPENSES)
Interest
Depreciation
-
$1,200,000
$512,500
Net income (loss)
-
$(151,515)
35
Novogradac Historic Tax Credit Conference
Marriott Riverwalk | San Antonio, Tex.
#NovocoHTC
September 17-18, 2015
Master Tenant – GAAP
HTC MASTER TENANT, LLC
Balance Sheet
December 31, 2015
ASSETS
Operating cash
Cash reserves
Deferred rent receivable – sub
Investment in ML
Total assets
+
+
+
LIABILITIES & MEMBERS’ CAPITAL
Accounts payable & accrued liabilities
Deferred rent expense – master +
Total liabilities
Members’ capital
Total liabilities and equity
www.novoco.com
+
$75,000
$155,000
$200,000
$3,347,849
$3,777,849
HTC MASTER TENANT, LLC
Statement of Operations
For the year ended December 31, 2015
RENTAL INCOME - sublease
$2,500,000
EXPENSES
Administrative
Rent expense – master lease
Total expenses
+
+
Net operating income
$50,000
$155,000
$205,000
$3,572,849
$3,777,849
OTHER INCOME (EXPENSES)
Loss from investment in ML
Net income (loss)
$50,000
$2,225,000
$2,275,000
$225,000
-
$15,151
$209,849
36
Novogradac Historic Tax Credit Conference
Marriott Riverwalk | San Antonio, Tex.
#NovocoHTC
September 17-18, 2015
Sublease
•
Lease of improved/rehabilitated property from the MT to the end
operator of the property (e.g. school, museum, hospital, individual
tenants, etc.)
•
Typically an operating lease
– Commercial property
• With escalating lease payments
– Cash flow based on lease payment schedule
– Deferred rent revenue recorded based on straight-line basis for GAAP (matching
principle)
– Residential property
• Rents collected from tenants based on the MT’s method of accounting (cash vs.
accrual)
38
www.novoco.com
37
Novogradac Historic Tax Credit Conference
Marriott Riverwalk | San Antonio, Tex.
#NovocoHTC
September 17-18, 2015
Master Tenant – GAAP
HTC MASTER TENANT, LLC
Balance Sheet
December 31, 2015
ASSETS
Operating cash
Cash reserves
Deferred rent receivable – sub
Investment in ML
Total assets
+
+
+
LIABILITIES & MEMBERS’ CAPITAL
Accounts payable & accrued liabilities
Deferred rent expense – master +
Total liabilities
Members’ capital
Total liabilities and equity
www.novoco.com
+
$75,000
$155,000
$200,000
$3,347,849
$3,777,849
HTC MASTER TENANT, LLC
Statement of Operations
For the year ended December 31, 2015
RENTAL INCOME - sublease
$2,500,000
EXPENSES
Administrative
Rent expense – master lease
Total expenses
+
+
Net operating income
$50,000
$155,000
$205,000
$3,572,849
$3,777,849
OTHER INCOME (EXPENSES)
Loss from investment in ML
Net income (loss)
$50,000
$2,225,000
$2,275,000
$225,000
-
$15,151
$209,849
38
Novogradac Historic Tax Credit Conference
Marriott Riverwalk | San Antonio, Tex.
#NovocoHTC
September 17-18, 2015
Tax Accounting Issues
• Tax treatment for leases
– Lease or conditional sales contract?
– Facts and circumstances
• IRC Section 50(D) income
– Due to lease pass-through election the master tenant recognizes
income from the HTCs instead of having a basis reduction in the
property at the master landlord
– Amortize the HTC income over the tax life of the property (27.5 years
or 39 years)
– What happens after the 5 year compliance period?
• Can the property or ownership in the property be sold without triggering
recognition of the remaining 50(D) income?
40
www.novoco.com
39
Novogradac Historic Tax Credit Conference
Marriott Riverwalk | San Antonio, Tex.
#NovocoHTC
September 17-18, 2015
Master Tenant – 50(D) Income Recognition
HTC MASTER TENANT, LLC
50(D) Taxable Income Example
For the year ended December 31, 2015
HTC Income Amortization:
HTCs
Property depreciable life
Annual 50(D) income*
$3,700,000
39 years
$94,872
(*Prorated for partial years)
Tax Adjustment:
Dr. Investor tax basis capital account
Cr.
HTC 50(D) income
www.novoco.com
$94,872
$94,872
40
Novogradac Historic Tax Credit Conference
Marriott Riverwalk | San Antonio, Tex.
#NovocoHTC
September 17-18, 2015
Bentley Stanton
www.novoco.com
41