66thth Annual New Partners for Smart GrowthAnnual New Partners for Smart GrowthHistoric Preservation Tax Incentives Historic Preservation Tax Incentives

A Tool for Smart Growth A Tool for Smart Growth

Local Government CommissionLocal Government CommissionLos Angeles, CALos Angeles, CAFebruary 10, 2007

Linda Dishman, Los Angeles Conservancy523 W. Sixth Street #826Los Angeles, CA 90014213-623-2489 dishman@laconservancy.orgwww.laconservancy.org

Christine Fedukowski, NTCIC 601 E. Del Mar Blvd. #408 Pasadena, CA 91101

626-792-6246 chris@ntcicfunds.comwww.ntcicfunds.com

Presented By:

Tax Incentives for Smart Growth1976: Enactment of Federal Historic Tax Credit (rehabilitation tax credit)

Use for all income-producing (depreciable) propertyCertified historic rehabilitation of certified historic building (20%)Rehabilitation of older (pre-1936) non-historic and non-residential building (10%)

1986: Enactment of Low-Income Housing Tax CreditCreate construction and rehabilitation of affordable rental housing

2000: Enactment of New Markets Tax CreditApply to qualified businesses (real estate investments), excludes most housingCan “twin” with the Rehabilitation Tax Credit, but not with the LIHTC2003 – First Allocation of NMTCs to CDEs

Enactment of State Historic Tax CreditsEnacted at various datesRules generally parallel federal historic tax credit

National Impact of Federal Historic Tax Credits

National Trust Community Investment Corporation

In collaboration with

Rutgers University

Historic Preservation Industry

$7.017 Billion: Total Development Cost for Part 2 and 3 approved deals for FY2005 to 1st Qtr FY06

$3.63 Million: Taxes generated FY05 to Present

1,101: Proposed projects approved by NPS in 2005

Top 5 states ranked by Part 2 approvals (FY04): MO (164), OH (145), VA (126), MD (76), NC (64)

In 2005, 46% of HTC projects were for multi-family, 24% for office, and 27% for commercial

MO 843.43

PA 618.51

VA 464.03

MA 401.22

NC 369.24

OH 313.25

MI 299.30

IL 287.83

RI 287.53

CA 278.98

TX 270.05

NY 246.84

OR 174.87

WI 169.18

NJ 167.59

FL 166.79

MD 147.63

IN 140.45

TN 124.11

MN 105.50

IA 102.52

LA 102.19

CT 90.69

GA 87.67

NE 86.92

OK 71.99

SC 71.21

DC 70.51

WA 69.20

KY 52.83

KS 51.29

DE 41.02

UT 38.91

AL 33.96

AZ 22.28

WV 20.77

VT 20.27

AR 18.22

CO 18.00

ME 12.45

MS 12.31

ND 10.51

NH 9.35

SD 7.96

MT 6.58

ID 6.29

HI 4.50

AK 0.24

NM 0.19

NV 0.15

WY 0.00

Grand total $7,017,332,679 TDC FY05 to present

FY 05 to FY06 Total Development Cost Per State:

$363,739,653

MO $40,570,045.48

PA $32,156,571.63

VA $23,621,595.02

MA $19,624,646.89

NC $18,479,465.38

OH $18,004,368.09

NY $17,309,459.91

MI $16,210,325.34

CA $15,998,478.88

RI $15,746,632.98

Taxes generated FY05 to Present

Top states breakdown:

MO 5,995

PA 4,139

VA 3,167

NC 2,793

OH 2,245

MA 2,108

MI 1,801

RI 1,737

TX 1,631

IL 1,626

Construction Jobs FY05 to Present46,323

Top states breakdown:

MO 7,562

PA 5,426

VA 4,059

NC 3,450

OH 2,961

MA 2,557

TX 2,382

MI 2,366

CA 2,364

IL 2,258

Permanent Jobs FY05 to Present

59,265

Top states breakdown:

Key Trends:

QRE has increased slightly with an average of 7% over last 4 years but number of approved projects has decreased, trend towards more expensive projects.

QRE forecasted to continued slight growth in 2006. TDC per state is volatile, one large project may account for majority of annual TDC.

HTC generates high volume of permanent and construction job and taxes.

Historic Tax Credit Project Characteristics

Market-rate housing, office, retail, and mixed-use (ground floor retail with upper floor housing) projects. Common elements include:

Urban core, disinvested or relatively untested market nichesPublic sector supportLocated in areas targeted for redevelopment

Non-profit sponsored projects: Performing arts facilities, museums, schools, social service providersPublic – Private Partnerships – high level of public investment

FundamentalsTax Aspects Administered by the IRS

Preservations Aspects jointly administered by NPS and State Historic Preservation Offices (SHPOs) and local preservation offices

Tax Credits = dollar for dollar reduction in tax liabilities (contrast with deduction)

HTC is the most important (in dollar volume) federal preservation program

Federal New Markets Tax Credit

Designed to encourage investment in businesses and real estate projects in low-income communities.

Administered by the Community Development Financial Institutions (CDFI) Fund and the Internal Revenue Service of the U.S. Treasury Department

May be “twinned” with the Historic Tax Credit

Historic Tax Credit ResourcesNational Trust Community Investment Corporation

http://www.ntcicfunds.com/basics/index.html

IRS Rehabilitation Tax Credit - Real Estate Tax Tipshttp://www.irs.gov/businesses/small/industries/article/0,,id=97599,00.html

National Park Service Historic Preservationhttp://www.cr.nps.gov/hps/tps/tax/index.htm

New Markets Tax Creditshttp://www.cdfifund.gov

RE

REA Building-Sacramento, CAJuly 2005REA Building-Sacramento, CAJuly 2005

What is a Tax Credit?One dollar of tax credit reduces income

tax owed by one dollar.

20% Federal Rehabilitation Tax CreditCertified Rehabilitation of Certified Historic Structure

10% Federal Non-Historic Tax Credit Non-residential buildings built prior to 1936 that are not listed in the National Register or located in National Register Historic District

How Does the Program Work?

A Tax Incentive Program jointly administered by 2 Federal Agencies

U.S. Department of the Interior

State Historic Preservation Officer

National Park Service

U.S. Department of the Treasury

Internal Revenue Service

How Federal Credits are CalculatedHow Federal Credits are CalculatedTax Credit Calculation

Total Development Cost: $12.5MM

“Eligible” Costs:$10MM

Developer Fee:$2MM (20% x $10MM)

Eligible Basis:$12MM ($10MM + $2MM)

Tax Credits Generated:$2.4MM (20% x $12MM)

Tax Paid

Tax Liability: $8,000,000

Tax Due: $5,600,000

$8,000,000 -2,400,000$5,600,000

Qualified Rehabilitation Expenditures: QREs

QREs include costs related toWall, partitions, floors, ceilingsPermanent coverings such as paneling, tiling, carpeting (glued not tacked);Windows and doors;Air conditioning or heating systems, plumbing and plumbing fixtures; Chimneys, stairs, elevators, fire escapes;Construction period interest and loan fees; property taxes, utilities;Soft costs – A&E; developer fees

Qualified Rehabilitation Expenditures: QREs (cont.)

Costs excluded from QREs:Land and building acquisitionSitework (demo outside of historic building; landscaping, parking lot)New Construction (expands total volume)Personal property (furniture, appliances that “convey”); movable partitions and cabinets

IRS Rules and Regulations

1. The BuildingDepreciable Property, i.e. buildings used in trade or business that generate rental income

Certified Historic Structure (20% Historic Credit)

Built prior to 1936 (10% Non-Historic Credit)

IRS Rules and Regulations

Taxpayer, i.e. revenues generated must be subject to Federal Income Tax;

Must own the property prior to Placement-in-Service; and

Must own for 5 years beginning at Placement-in-Service.

Ownership may be in the form of Fee Title; or

Long-term (50 to 99 years) leasehold interest

2. The Building Owner

Recapture

TriggersDisposition of the property;Disposition of more than 1/3 partnership interestNon-Compliance with NPS requirements

Amount100% in the first 12 months from placement in service;Declines 20% every 12 months thereafter

IRS Rules and Regulations

Qualified Rehabilitation Expenditures (QREs)Include Hard and Soft Costs20% Developer FeeExclude acquisition, expansion of existing building, new construction, landscaping-sidewalks-paving, FF&E;Eligible Basis = Total QREs

Substantial Rehabilitation Rehabilitation Costs must exceed the greater of

(a) $5,000, or (b) the adjusted basis of the building(c) Measuring Period (24 or 60 Months)

3. The Project

Substantial Rehabilitation Measuring Period

General RequirementsStart and end dates at taxpayer optionMay be more than one measuring period for a project (rolling rehab)

Phased Rehabilitation:Must be documentation in a Part 2Part 2 must describe development stages –what will be completed and whenPart 2 must be dated prior to start of physical construction.

Timing Considerations: When are QREs incurred?

Beginning when the rehab (as described in the Part 2) project first started;

During the 24-month (or 60-month) period;

Through the End of the Tax Year of Placement in Service

Who Can Claim Tax Credits and When?

Tax payers owning property that is a Certified Rehabilitation of a Certified Historic Property

Credits can be claimed in the tax year that the property is Placed-in-Service and meets Substantial Rehabilitation Test

Property must be owned for at least 5 years to avoid Recapture

recapture amount reduced by 20% for each full year that passes after CO

20-year carry-forward and 1-year carry-back

Critical Dates and Timeframes24-month or 60-month measuring period(to determine whether meet “Substantial Rehabilitation Test”)

Placed in Service Date - Certificate of OccupancyInvestor must be Admitted by this date (Investor likely admitted not later than 1 month prior to PIS, more typically at the start of construction)If not individually listed, Part 1, must be submittedTriggers ability to claim Historic Tax CreditTriggers Start of Historic Tax Credit Recapture Period Beginning of 30-month period in which to obtain Part 3 (typically investors will not wait 30 months, will require for final pay-in)

Tax year in which credit is claimed5-Year Recapture Period (historic tax credit)7-year Recapture Period (NMTC)

Investor PartnershipInvestor Partnership

National Trust Community Investment Fund (NTCIF)

(Tax Credit Investor)

NTCIC .01% Managing Member

Banc of America CDC99.99% Non-Managing Member

Equity

Union Bank City of Seattle

Project Lenders Debt Service

Rehab, LLC Developer Affiliate, LLC:

.01% Managing Member

NTCIF: 99.99% Non Managing

Member

Equity

Rehab Developer, LLC

DeveloperDevelopment Services

Developer Fee

Tax Credits

Banc of America CDC Tax Credits

Construction Loan

Tenants

Lease Payment

Lease Agreement

NTCIC, Inc.

Single Entity StructureMaster Member

(Developer Affiliate)

Tax Credit Investor LLC Tax Credit

Investor

Tax Credit, LLC(Property Owner)

Developer

.01% Credits, Profits & Losses, Fees and Cash

Flow

Developer Equity

Historic Tax Credit Equity

99.99% Credits, Profits & Losses and

Cash Flow

HTCEquity

Credits, Profits, Losses, Cash

Flow

Dev.Fee

Construction& Permanent Lender

Debt Service Payments

Loan Proceeds

Tenants

Rental Payments

Master Lease Structure

Managing Member, LLC(Developer Affiliate)

Tax Credit Investor LLC

Landlord LLC(Property Owner/Lessor)90% Managing Member

(Developer Affiliate)10% Member

(Master Tenant, LLC)

Master Tenant, LLC(Master Tenant)

99.99% Member (Investor).01% Managing Member

(Developer Affiliate)

99.99% Credits, Profits & Losses and Cash Flow

Historic TaxEquity

Construction& Permanent Lender

Debt Service Payments

Loan Proceeds

Sub-Tenant/ End User

Monthly Lease Payments

.01% Credits, Profits & Losses, Fees and

Cash Flow

Developer Equity

Pass-through of HTC & Shared Residuals

Lease Payments & Equity Investment

and/or Loan

Lease Agreement

The Project . . .. . 111 E. Forsyth, Jacksonville, FL

Concept: 1st downtown lofts

City Participation:Permanent FinancingProperty Tax Abatement

Olympic Mills, Portland, OR

Concept: Industrial Campus:

“Affordable” Incubator Space

City Participation:Seismic Retrofit LoanProperty Tax Abatement

Triangle BioTechCenter, Durham, NC

Concept: Wetlab and Office Space “Affordable” Incubator Space

City Participation:CDBG FundsProperty Tax Abatement

AVANCE, San Antonio, TX

Concept: Headquarters for

Headstart Program

Governmental Participation:

CDBG Grants and LoansProperty Tax Exemption

Av

Avance-San Antonio, TXNovember 2004

Tax Issues for Nonprofits: Tax-Exempt Use Property

If a building is leased to a tax-exempt entity, the "disqualified lease" rules may prevent use of the rehabilitation tax credit.

35% ThresholdProperty used by governmental bodies,

nonprofit organizations, or other tax-exempt entities is not eligible for the historic tax credit if such entity enters into a disqualified lease (as the lessee) for more than 35% of the building.

1. Part or all financed with tax-exempt financing;

2. Fixed or determinable price for purchase of property by lessee (or related entity);

3. Lease term in excess of 20 years;4. Lease occurs after a sale or lease,

and the lessee used the property before such sale or lease.

A "disqualified lease" is triggered by any one of the following four events:

First Security – Salt Lake City, UTAugust 2004First Security – Salt Lake City, UTAugust 2004

OlyOlympic Mills Warehouse - Portland, ORSeptember 2005Olympic Mills Warehouse Olympic Mills Warehouse -- Portland, ORPortland, ORSeptember 2005September 2005

New Markets Process: CDFI to Project

National Trust Community Investment Fund

(CDE)

NMTC Allocation AwardsRound 5: September 2007

CDFI

HTC Equity Investment (QEI)Banc of America

CDC

(Investor) HTC and NMTCs

Rehab, LLC Developer Affiliate, LLC

.01% Managing Member

NTCIF 99.99% Non Managing Member

Equity Investment(QLICI)

QEI – Qualified Equity Investment

QLICI – Qualified Low Income Community Investment

QALICB – Qualified Low Income Community Business (Rehab, LLC)

How To Calculate and When to Claim?

Credit = 39% of dollar amount invested into a CDE with a NMTC allocation

Credits are claimed over 7 years

ExampleAn investor invests $1,000,000 in a CDE in 2005It receives $50,000 in tax credits in 2005-2007 and $60,000 in 2008-2011, for a total of $390,000 in credits

CDFI - Community Development Financial Institution

NMTC - New Markets Tax Credits

CDE - Community Development Entity

LIC - Low-Income Community

QEI – Qualified Equity Investment

QLICI - Qualified Low-Income Community Investment

QALICB - Qualified Low-Income Community Business

Glossary and Reference….

Federal RTCs NMTCsValue 20% of QREs 39% of Qualified Equity

Investment

When Claimed

Placement-in-Service

Over 7 years, beginning on date of QEI,

6% in each of first 4 years;

5% each year thereafter. Recapture Change of

ownership

Non-compliance with NPS requirements

•Fails “substantially all” test Less than 85% in QALICB

•CDE ceases to be a CDE

•CDE redeems investment

Community Benefits

Increased interest and competition in NMTC application programCDFI Fund standards for additionally distressed criteriaJob generation, community impact, outreach programs Additional requirements for projects

Links

www.cdfifund.gov Community Development Financial Institutions Fund

www.ntcicfunds.com National Trust Community Investment Corporation