Transcript Daniel J. Kolodner: Historic Tax Credits in 10 minutes or less

Historic Tax Credits
(in 10 minutes or less)
Housing Tax Credit Conference 101
October 16, 2008
Boston, MA
Presented by
Daniel J. Kolodner, Esq., Nixon Peabody LLP
Two Types of
Rehabilitation Tax Credits
• IRS Code Section 47
• Older (pre-1936), non-historic and non-residential
buildings: 10 percent of qualified rehabilitated
expenditures. (not available for housing projects)
• Historic buildings: 20 percent of qualified
rehabilitation expenditures.
The 20% Rehabilitation Tax Credit
Fundamentals
• Tax Aspects Administered by the IRS.
• Preservation aspects jointly administered by NPS
and State Historic Pres. Offices (SHPOs).
• RTC is the most important (in dollar volume) federal
preservation program.
The 20% Rehabilitation Tax Credit
Statistics
• 1,045 projects approved by NPS in 2007*
• In 2007, roughly 45% of HTC projects were for multifamily 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
Historic Tax Credits and Affordable Housing
• In FY’07, HTC projects
created 18,006 housing units,
of which 36% (6,553) were
low/mod units.
• In FY’07, 8% of projects
claiming HTCs also utilized the
LIHTC.
•HTC program has financed
76,023 low/mod income units
since its inception.
Source: Federal Tax Incentives for Rehabilitating
Historic Buildings, Statistical Report and Analysis
for Fiscal Year 2007
Benefits of using Historic Buildings
for Affordable Housing
• Smart growth; proximity to work, shopping and
transportation.
• Rehab is inherently “green”.
• Attendant renovation of community landmarks can lessen
neighborhood resistance to citing of affordable housing.
• Increased building amenities and intangibles associated
with culture and heritage.
• Relief from zoning; availability of property tax breaks.
See: http://nthp.org/housing/Missed_Connection.pdf
Challenges of using Historic Buildings
for Affordable Housing
• Cost per unit can be higher (particularly as
calculated in some QAPs).
• Application of 106 standards triggered if federal
funds are used; Secretary of the Interior’s
standards if HTCs are used.
• Requirement to reduce eligible basis for the
LIHTC by the amount of the HTCs (in a single
entity structure).
What Types of Buildings Qualify?
The NPS Rules: Certified Historic Structure Requirement
Option #1
Building is listed in the
National Register of
Historic Places.
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 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))
What Types of Rehabilitations Qualify?
The IRS Rules:
Substantial Rehabilitation Requirement
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
– 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.
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.
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;
What Types of Rehabilitations Qualify?
Definition of QREs (cont’d)
QREs include costs related to:
• construction period interest and
taxes;
• architect fees, engineering fees,
construction management costs;
• reasonable developer fees
Note: The calculation of Eligible Basis
for LIHTC purposes is not the same
as the calculation of QREs
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)
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.
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
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.
The 20% Rehabilitation Tax Credit
Recapture
• Disposition includes any sale, exchange, transfer, gift
or casualty. Subsequent rehabs that do not comply
with the Secretary’s Standards can trigger recapture.
• Reduction of a partners interest can be deemed a
disposition (33% rule).
Parting Thoughts:
• Availability of State Historic Tax Credits
• Importance of Placed-in-Service deadlines
(differences between LIHTC and HTC)
• Importance of a team familiar with Historic Tax
Credits from the beginning of the transaction
• Structuring (Single Entity vs Lease/Pass-Through)
Single Entity Structure
Tax Credit Investor
LLC
Managing Member
(Developer Affiliate)
.01% Credits, Profits &
Losses, Fees and
Cash Flow
Developer
Equity
Tax Credit
Equity
99.99% Credits,
Profits & Losses
and Cash Flow
Tax Credit, LLC
(Property Owner)
Loan
Proceeds
Debt
Service
Payments
Construction/
Perm Lender
Tax Credit Investor
Dev.
Fee
Rental
Payments
Tenants
Developer
Impact of HTC Basis Reduction on Equity Raised
Sample Transaction Assumptions
• $1,000,000 Qualified Basis (Eligible Basis x Applicable
Fraction)
• $950,000 Qualified Rehabilitation Expenditures (QREs)
• LIHTC Pricing: $.75 per $1 of LIHTC
• Historic Tax Credit Pricing: $.90 per $1 of HTC
• LIHTC Credit Percentage: 8% (in each of 10 years)
• HTC Credit Percentage: 20% (in year of placement in service)
Impact of HTC Basis Reduction on Equity Raised
LIHTC–Only Transaction
• $1,000,000 x .08 x 10 x .75 = $600,000
Impact of HTC Basis Reduction on Equity Raised
HTC–Only Transaction
• $950,000 x .20 x .90 = $171,000
Impact of HTC Basis Reduction on Equity Raised
Twinned LIHTC/HTC Transaction
• HTC Equity: $950,000 x .20 = $190,000; $190,000 x
.90 = $171,000
• LIHTC Equity: $810,000 ($1,000,000 - $190,000 ) x .08
x 10 x .75 = 486,000;
• Aggregate Twinned LIHTC/HTC Equity = $486,000 +
$171,000 = $657,000 (compare $600,000)
Impact of HTC Basis Reduction on Equity Raised
LIHTC-Only Transaction in QCT/DDA
• LIHTC Equity: $1,000,000 x 130% x .08 x 10 x
.75 = $780,000
Impact of HTC Basis Reduction on Equity Raised
Twinned LIHTC/HTC
Transaction in QCT/DDA
• HTC Equity: $950,000 x .20 = $190,000; $190,000 x
.90 = $171,000
• LIHTC Equity: $810,000 ($1,000,000 - $190,000 ) x
130% x .08 x 10 x .75 = $631,800
• Aggregate Twinned Equity = $631,800 + $171,000 =
$802,800 (compare $780,000)
More Information?
Daniel Kolodner, Esq.
[email protected]
617-345-1053