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 1981
• 20% 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
Interior’s 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 State’s 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
Architect’s Plans & Specifications), and details how
the rehabilitation plans conform with the Secretary
of the Interior’s “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 building’s 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
Calculation of Eligible Basis
Budget
Acquisition
Construction
A/E
Bond/Permit/Insurance/Taxes
Appraisal/Survey
Clerk
Legal
Title & Recording
Environmental/Traffic Consultants
Cost Certification/Accounting
Marketing
Construction Loan Interest
Financing Fees
Syndication Costs
Developer Fee
Operating Reserve
Subtotal
Capitalized Interest of Soft Debt
Total
$500,000
$5,380,000
$350,000
$150,000
$12,000
$60,000
$80,000
$10,000
$15,000
$10,000
$10,000
$150,000
$40,000
$33,000
$750,000
$150,000
$6,820,000
Eligible Basis
$0
$5,000,000
$350,000
$150,000
$12,000
$60,000
$60,000
$10,000
$15,000
$10,000
$0
$110,000
$20,000
$0
$750,000
$0
$6,567,000
$60,000
$6,627,000
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
Treasury’s 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
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.
Overview of NMTC
Investor
Entity
Leverage Loan
Credits and Return
on Equity
Equity
CDE
Equity/Debt
Return on Equity/Debt
Qualified
Business
Lender
Overview of NMTC
NMTC
Investor
$2 Million
Credits of $3.9 Million
Investor
Entity
Lender
$8 Million
Credits of $3.9 Million
$10 Million
CDE
$9.5 Million Loans
Debt Service
Qualified
Business
Overview of NMTC
NMTC
Investor
NMTC Credits of $3.9 Million
$3.5 Million
HTC Credits of $1.8 Million
Investor
Entity
$10 Million Equity
Lender
$6.5Million
Credits of $5.7Million
$1.8MM HTC
Master Tenant
CDE
$1 Million
Loan
Master Lease and
$2.8MM HTC
$8.5
Million
Loan
Qualified
Business
Debt Service
BRINGING BACK
HIBERNIAN HALL
Terminal Garage - 1999
Photo: Joel Howe
Storefront
Photo: Joel Howe
Main Stair
Photo: Joel Howe
Second Floor
Photo: Joel Howe
Dance Hall
Hibernian Hall-2005
Hibernian Hall
Dance Hall Restored
Photo: Robert Schoen
Second Floor - Offices
Photo: Robert Schoen
Hibernian Hall