Post on 24-Jan-2021
Twinning HTCs and NMTCs
MODERATOR PANELISTS
Amanda Read
Novogradac & Company LLP
Joseph Bredehoft
Husch Blackwell
Scott DeMartino
Dentons
Andrew Potts
Nixon Peabody LLP
Erik Rickard
Barnes & Thornburg LLP
The Rehabilitation
Tax Credit
Internal
Revenue
Code
Section 47
Two Types of Rehabilitation Tax Credits
• Older (pre-1936), non-historic and non-residential
buildings: 10 percent of qualified rehabilitated expenditures.
– 10% credit buildings aren’t certified historic structures, just (pre-1936) old.
– Don’t overlook these buildings, often the 10% credit can be combined with
other incentives, including New Market Tax Credits
– Note the non-residential aspect of the 10% credit.
• Historic buildings: 20 percent of qualified rehabilitation expenditures.
4
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.
5
What Types of Buildings Qualify?
The NPS Rules
Historic Preservation Certification Application
Part 1 – Evaluation of Significance
• Part 1 is used to establish that a building:
– Is located in a registered historic district and certified by the National Park
Service as being of historic significance to the historic district;
– Has preliminarily been determined to be eligible for National Register
listing; and
– Contributes to proposed historic district.
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What Types of Rehabilitations Qualify?
The NPS Rules
Historic Preservation Certification Application
Part 2 – Description of Rehabilitation
• Must be preceded or accompanied by Part 1.
• Part 2 is submitted to SHPO. SHPO forwards to NPS.
• Description of proposed rehabilitation.
• Processing Fee
7
Historic Preservation Certification Application
Part 3 – Request for Certification of
Completed Work
• Must be preceded or accompanied by Part 2.
• Part 3 is submitted to SHPO. SHPO forwards to NPS.
• Part 3 must generally be received prior to the date that is 30 months
after the date of the tax return upon which HTCs are claimed (the “30
Month Rule”) unless a statement is filed with IRS prior to such date
extending the 3 year statute of limitations.
What Types of Rehabilitations Qualify?
The NPS Rules
8
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))
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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.
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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.
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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;
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What Types of Rehabilitations Qualify?
Definition of QREs
• QREs include costs related to:
• construction period interest and taxes;
• architect fees, engineering fees,
construction management costs;
• reasonable developer fees
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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)
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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.
• If you plan on monetizing the Credit, it is very important to plan ahead
and bring in any partners/investors prior to the Placement in Service
date.
15
The 20% Rehabilitation Tax Credit
Who Can Claim the Credit?
• The Credits belong to the taxpayer(s) that owns title to the property
when the QREs are placed in service.
• A landlord that incurs QREs can elect to pass the credit to its long-term
tenants.
• When property owner is a pass through entity, the Credits are allocated
in accordance with taxable profits.
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How Do Credits Become Capital:
What is Syndication?
“Syndication” is the process by which the owner of a building brings an
investor into the ownership structure of the building so that the investor
can claim the credits (and other economic and tax benefits), typically in
exchange for providing equity to the project.
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How Do Credits Become Capital:
What is Syndication?
• Federal Historic Tax Credits are not sold directly to an investor.
• Investors become “owners” of the property as limited partners in a
limited partnership or as members in a limited liability company.
• Some State Historic Tax Credits can be “certificated” and sold to
investors.
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Common Investment Structures
• Single Entity Structure.
• Master Lease/Credit Pass-Through Structure.
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Single Entity Structure
Tenants
Rental
Payments
Tax Credit Investor
LLC
Construction/
Perm Lender
Managing Member
(Developer Affiliate)
Historic
Tax Credit
Equity
99% Credits,
Profits & Losses
and Cash Flow
Loan
Proceeds
Debt
Service
Payments
Tax Credit, LLC
(Property Owner)
Tax Credit Investor
1% Credits, Profits &
Losses, Fees and
Cash Flow
Developer
Equity
Developer Dev.
Fee
20
Master Lease/Credit Pass-Through Structure
Sub-Tenants/
End Users
Rental
Payments
Tax Credit Investor LLC
Construction/
Perm Lender
Managing Member
(Developer Affiliate)
Historic
Tax Credit
Equity
99% Credits,
Profits & Losses,
and Cash Flow
Loan
Proceeds
Debt
Service
Payments
1% Credits, Profits &
Losses, Fees and
Cash Flow
Developer
Equity
Master Tenant, LLC
(Master Tenant)
Landlord, LLC
(Property Owner/Lessor)
90% Profits &
Losses, Fees and
Cash Flow
Pass-through of Historic Tax
Credits & Share of Residual
Lease Payment &
Equity Investment
10% Profits, Losses,
and Cash Flow
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Sample Transaction Calculating the HTC Equity
Qualified Rehab Expenditures 24,060,799
Credit Rate 20.00%
Total Calculated Credit 4,812,160
Tax Credit Investor Allocation 99%
Total Credit to Investors 4,764,038
Credit Price Per Each $1 of Credit 0.98
Equity Contributions by Investors 4,668,757
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IRS Safe Harbor Guidance, Rev. Proc. 2014-12
General Principles
• Established a Safe Harbor for HTC investments made through a single-tier or
lease pass-through structure (does not address other credits or twinning of
credits)
• Full compliance provides certainty that the HTC Investor will be respected as a
partner and the HTCs will be treated as allocated to the HTC Investor for
federal tax purposes
• HTC Investors must share meaningful upside potential and downside risk of
loss
• Fees, distributions, lease terms and payments and "other arrangements" must
be reasonable and comparable to non-HTC-advantaged transactions
• Effective for projects placed in service on or after December 30, 2013
23
IRS Safe Harbor Guidance, Rev. Proc. 2014-12
Implications for Twinning (HTC/NMTC)
• Two provisions of the 2014-12 are implicated in twinning HTCs with New
Markets Tax Credits (NMTCs)
1. Section 4.01.01:
• HTC and NMTC transactions must generally be structured as separately
negotiated and distinct economic arrangements
• HTC investor holding an interest in the master tenant partnership may not also
invest in the developer partnership (e.g., a NMTC investment) other than
through an indirect investment through the master tenant partnership, unless
such investment is a separately negotiated and distinct economic
arrangement from the HTC investment
• How to establish a “separately negotiated, distinct economic arrangement”
remains an open question
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IRS Safe Harbor Guidance, Rev. Proc. 2014-12
Implications for Twinning (HTC/NMTC)
• The terms of the HTC and NMTC investments should be set forth in separate
term sheets
• Economically, the HTC and NMTC investments must stand on their own, such
one or the other could be sold in the market without selling both
2. Section 4.05(3):
• Prohibits the developer partnership, master tenant partnership or principals of
either from lending to the HTC/NMTC Investor funds used to acquire an
interest in the partnership
• If developer equity is a source of a leverage loan in an HTC/NMTC leveraged
transaction, the leverage loan might be deemed a loan to the Investor to help
acquire its interest in the master tenant partnership or the developer
partnership.
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B Loan
QEI
Fund
3rd party leverage
lender Loan
A Loan
Fees
99.99%
Sub-
CDE
CDE
Equity 7%
Int.
0.01%
100%
5% Int. 5% Int.
B Loan
QEI
Fund
Loan
A Loan
Fees
99.99%
Sub-
CDE
CDE
NMTC
Equity 7%
Int.
0.01%
100%
Master Tenant Lease
Tenants Sub-Lease
99%
5% Int. 5% Int.
HTC
Equity
Loan
3rd party leverage
lender
B Loan
QEI
Fund
Loan
A Loan
Fees
99.99%
Sub-
CDE
CDE
NMTC
Equity 7%
Int.
0.01%
100%
Master Tenant Lease
Tenants Sub-Lease
99%
5% Int. 5% Int.
HTC
Equity
Leverage
Loan
3rd party leverage
lender
Twinning HTCs and NMTCs
MODERATOR PANELISTS
Amanda Read
Novogradac & Company LLP
Joseph Bredehoft
Husch Blackwell
Scott DeMartino
Dentons
Andrew Potts
Nixon Peabody LLP
Erik Rickard
Barnes & Thornburg LLP