TAX CREDITSAn 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 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

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 BasisBudget Eligible

BasisAcquisition $500,000 $0Construction $5,380,000 $5,000,000A/E $350,000 $350,000Bond/Permit/Insurance/Taxes $150,000$150,000Appraisal/Survey $12,000 $12,000Clerk $60,000 $60,000Legal $80,000 $60,000Title & Recording $10,000 $10,000Environmental/Traffic Consultants $15,000

$15,000Cost Certification/Accounting $10,000

$10,000Marketing $10,000

$0Construction Loan Interest $150,000$110,000Financing Fees $40,000 $20,000Syndication Costs $33,000 $0Developer Fee $750,000 $750,000Operating Reserve $150,000 $0

Subtotal $6,820,000 $6,567,000Capitalized Interest of Soft Debt $60,000 Total $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

CDE

QualifiedBusiness

InvestorEntity

LenderLeverage Loan

Equity Credits and Return on Equity

Return on Equity/DebtEquity/Debt

Overview of NMTC

CDE

QualifiedBusiness

InvestorEntity

NMTC Investor

Lender

$2 Million

Credits of $3.9 Million

$8 Million

$9.5 Million Loans

Credits of $3.9 Million

Debt Service

$10 Million

Overview of NMTC

CDE

QualifiedBusiness

InvestorEntity

NMTC Investor

Lender

$3.5 Million

NMTC Credits of $3.9 Million

HTC Credits of $1.8 Million

$6.5Million

$1 Million Loan

Credits of $5.7Million

Debt Service

$1.8MM HTCMaster Tenant

$8.5 Million Loan

$10 Million Equity

Master Lease and $2.8MM HTC

BRINGING BACK HIBERNIAN HALL

Terminal Garage - 1999

StorefrontPhoto: Joel Howe

Main StairPhoto: Joel Howe

Second FloorPhoto: Joel Howe

Dance HallPhoto: Joel Howe

Hibernian Hall-2005

Hibernian Hall

Dance Hall Restored

Second Floor - Offices

Photo: Robert Schoen

Hibernian Hall

Photo: Robert Schoen