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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 [email protected]
Christine Fedukowski, NTCIC 601 E. Del Mar Blvd. #408 Pasadena, CA 91101
626-792-6246 [email protected]
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