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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.

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tax credits an overview uli bpa young leaders tax credit seminar may 26 2009
TAX CREDITSAn OverviewULI/BPA Young Leaders Tax Credit SeminarMay 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

Urban Land InstituteNew Markets Tax Credits and Hibernian Hall – A Case StudyMay 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
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
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’sNational Park Service
htc eligibility
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 eligibility1
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 eligibility2
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 eligibility3
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 eligibility4
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 eligibility5
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 eligibility6
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
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 credit1
HTC – Calculating the Credit

Calculation of Eligible Basis

Budget Eligible Basis

Acquisition $500,000 $0

Construction $5,380,000 $5,000,000

A/E $350,000 $350,000

Bond/Permit/Insurance/Taxes $150,000 $150,000

Appraisal/Survey $12,000 $12,000

Clerk $60,000 $60,000

Legal $80,000 $60,000

Title & Recording $10,000 $10,000

Environmental/Traffic Consultants $15,000 $15,000

Cost Certification/Accounting $10,000 $10,000

Marketing $10,000 $0

Construction Loan Interest $150,000 $110,000

Financing Fees $40,000 $20,000

Syndication Costs $33,000 $0

Developer Fee $750,000 $750,000

Operating Reserve $150,000 $0

Subtotal $6,820,000 $6,567,000

Capitalized Interest of Soft Debt $60,000

Total $6,627,000

htc calculating the credit2
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
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
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
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 credit1
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 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
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 nmtc1
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 nmtc2
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 nmtc3
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 nmtc4
Overview of NMTC

Lender

Leverage Loan

Investor

Entity

Credits and Return on Equity

Equity

CDE

Equity/Debt

Return on Equity/Debt

Qualified

Business

overview of nmtc5
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 nmtc6
Overview of NMTC

NMTC

Investor

NMTC Credits of $3.9 Million

HTC Credits of $1.8 Million

$3.5 Million

Investor

Entity

Lender

$6.5Million

$10 Million Equity

Credits of $5.7Million

$1.8MM HTC

Master Tenant

CDE

$1 Million Loan

$8.5 Million Loan

Debt Service

Master Lease and $2.8MM HTC

Qualified

Business

slide31
Photo: Joel Howe

Second Floor

slide36
Photo: Robert Schoen

Second Floor - Offices

slide37
Photo: Robert Schoen

Hibernian Hall

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