Novogradac | - Twinning HTCs and NMTCs...• QREs are any amounts chargeable to a capital account...

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Transcript of Novogradac | - Twinning HTCs and NMTCs...• QREs are any amounts chargeable to a capital account...

Page 1: Novogradac | - Twinning HTCs and NMTCs...• QREs are any amounts chargeable to a capital account made in connection with the renovation, restoration or reconstruction of a qualified
Page 2: Novogradac | - Twinning HTCs and NMTCs...• QREs are any amounts chargeable to a capital account made in connection with the renovation, restoration or reconstruction of a qualified

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

Page 3: Novogradac | - Twinning HTCs and NMTCs...• QREs are any amounts chargeable to a capital account made in connection with the renovation, restoration or reconstruction of a qualified

The Rehabilitation

Tax Credit

Internal

Revenue

Code

Section 47

Page 4: Novogradac | - Twinning HTCs and NMTCs...• QREs are any amounts chargeable to a capital account made in connection with the renovation, restoration or reconstruction of a qualified

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.

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Page 5: Novogradac | - Twinning HTCs and NMTCs...• QREs are any amounts chargeable to a capital account made in connection with the renovation, restoration or reconstruction of a qualified

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.

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Page 6: Novogradac | - Twinning HTCs and NMTCs...• QREs are any amounts chargeable to a capital account made in connection with the renovation, restoration or reconstruction of a qualified

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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Page 7: Novogradac | - Twinning HTCs and NMTCs...• QREs are any amounts chargeable to a capital account made in connection with the renovation, restoration or reconstruction of a qualified

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

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Page 8: Novogradac | - Twinning HTCs and NMTCs...• QREs are any amounts chargeable to a capital account made in connection with the renovation, restoration or reconstruction of a qualified

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

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Page 9: Novogradac | - Twinning HTCs and NMTCs...• QREs are any amounts chargeable to a capital account made in connection with the renovation, restoration or reconstruction of a qualified

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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Page 10: Novogradac | - Twinning HTCs and NMTCs...• QREs are any amounts chargeable to a capital account made in connection with the renovation, restoration or reconstruction of a qualified

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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Page 11: Novogradac | - Twinning HTCs and NMTCs...• QREs are any amounts chargeable to a capital account made in connection with the renovation, restoration or reconstruction of a qualified

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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Page 12: Novogradac | - Twinning HTCs and NMTCs...• QREs are any amounts chargeable to a capital account made in connection with the renovation, restoration or reconstruction of a qualified

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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Page 13: Novogradac | - Twinning HTCs and NMTCs...• QREs are any amounts chargeable to a capital account made in connection with the renovation, restoration or reconstruction of a qualified

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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Page 14: Novogradac | - Twinning HTCs and NMTCs...• QREs are any amounts chargeable to a capital account made in connection with the renovation, restoration or reconstruction of a qualified

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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Page 15: Novogradac | - Twinning HTCs and NMTCs...• QREs are any amounts chargeable to a capital account made in connection with the renovation, restoration or reconstruction of a qualified

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.

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Page 16: Novogradac | - Twinning HTCs and NMTCs...• QREs are any amounts chargeable to a capital account made in connection with the renovation, restoration or reconstruction of a qualified

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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Page 17: Novogradac | - Twinning HTCs and NMTCs...• QREs are any amounts chargeable to a capital account made in connection with the renovation, restoration or reconstruction of a qualified

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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Page 18: Novogradac | - Twinning HTCs and NMTCs...• QREs are any amounts chargeable to a capital account made in connection with the renovation, restoration or reconstruction of a qualified

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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Page 19: Novogradac | - Twinning HTCs and NMTCs...• QREs are any amounts chargeable to a capital account made in connection with the renovation, restoration or reconstruction of a qualified

Common Investment Structures

• Single Entity Structure.

• Master Lease/Credit Pass-Through Structure.

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Page 20: Novogradac | - Twinning HTCs and NMTCs...• QREs are any amounts chargeable to a capital account made in connection with the renovation, restoration or reconstruction of a qualified

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

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Page 21: Novogradac | - Twinning HTCs and NMTCs...• QREs are any amounts chargeable to a capital account made in connection with the renovation, restoration or reconstruction of a qualified

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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Page 22: Novogradac | - Twinning HTCs and NMTCs...• QREs are any amounts chargeable to a capital account made in connection with the renovation, restoration or reconstruction of a qualified

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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Page 23: Novogradac | - Twinning HTCs and NMTCs...• QREs are any amounts chargeable to a capital account made in connection with the renovation, restoration or reconstruction of a qualified

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

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Page 24: Novogradac | - Twinning HTCs and NMTCs...• QREs are any amounts chargeable to a capital account made in connection with the renovation, restoration or reconstruction of a qualified

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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Page 25: Novogradac | - Twinning HTCs and NMTCs...• QREs are any amounts chargeable to a capital account made in connection with the renovation, restoration or reconstruction of a qualified

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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Page 26: Novogradac | - Twinning HTCs and NMTCs...• QREs are any amounts chargeable to a capital account made in connection with the renovation, restoration or reconstruction of a qualified

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.

Page 27: Novogradac | - Twinning HTCs and NMTCs...• QREs are any amounts chargeable to a capital account made in connection with the renovation, restoration or reconstruction of a qualified

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

Page 28: Novogradac | - Twinning HTCs and NMTCs...• QREs are any amounts chargeable to a capital account made in connection with the renovation, restoration or reconstruction of a qualified

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

Page 29: Novogradac | - Twinning HTCs and NMTCs...• QREs are any amounts chargeable to a capital account made in connection with the renovation, restoration or reconstruction of a qualified

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