Presenting a 90-Minute Encore Presentation of the Teleconference with Live, Interactive Q&A Historic Tax Credits: New IRS Safe Harbor Rules After Historic Boardwalk Hall Qualifying, Applying for and Using Tax Credits to Structure Real Estate Projects THURSDAY, JULY 24, 2014 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Peter J. Berrie, Partner, Faegre Baker Daniels , Minneapolis Anthony Ilardi, Jr., Member, Dykema , Detroit The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
FOR LIVE EVENT ONLY Sound Quality If you are listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and quality of your internet connection. If the sound quality is not satisfactory, you may listen via the phone: dial 1-866-871-8924 and enter your PIN when prompted. Otherwise, please send us a chat or e-mail sound@straffordpub.com immediately so we can address the problem. If you dialed in and have any difficulties during the call, press *0 for assistance. Viewing Quality To maximize your screen, press the F11 key on your keyboard. To exit full screen, press the F11 key again.
FOR LIVE EVENT ONLY For CLE purposes, please let us know how many people are listening at your location by completing each of the following steps: In the chat box, type (1) your company name and (2) the number of • attendees at your location Click the SEND button beside the box • If you have purchased Strafford CLE processing services, you must confirm your participation by completing and submitting an Official Record of Attendance (CLE Form). You may obtain your CLE form by going to the program page and selecting the appropriate form in the PROGRAM MATERIALS box at the top right corner. If you'd like to purchase CLE credit processing, it is available for a fee. For additional information about CLE credit processing, go to our website or call us at 1-800-926-7926 ext. 35.
FOR LIVE EVENT ONLY If you have not printed the conference materials for this program, please complete the following steps: • Click on the ^ symbol next to “Conference Materials” in the middle of the left - hand column on your screen. • Click on the tab labeled “Handouts” that appears, and there you will see a PDF of the slides for today's program. • Double click on the PDF and a separate page will open. • Print the slides by clicking on the printer icon.
Historic Tax Credits: New IRS Safe Harbor July 24, 2014 Anthony Ilardi, Jr. Dykema Gossett PLLC Peter Berrie Faegre Baker Daniels LLP
Outline • HTC Background and Requirements • Monetizing the Tax Credits • Pre-HBH Case Law Including Virginia Historic Tax Credit Fund 2001 • Historic Boardwalk Hall: Background and Tax Court Decision • Safe Harbor • Industry Reaction 6
History of Federal Historic Tax Credits • 1986 Tax Reform Act enacted current federal tax credits • Goals: – Reduce demolitions of historic structures – Decrease cost of renovation below value of building – Make rehabilitation competitive with new construction Photo: Wikimedia Commons/Local Hero Book-Cadillac Hotel, Detroit, MI 7
General • Two types of federal historic tax credits under Section 47 of IRC • Amount of credit under each is based on percentage of Qualified Rehabilitation Expenditures (QREs) – “Historic” Tax Credit = 20% of QREs – “Old Building” Tax Credit = 10% of QREs • (Note: the term “Old Building” Tax Credit is not used in the industry, so any attempt to impress insiders by using it will backfire.) 8
General (cont.) • The credit is a one-time credit available only to a taxpayer with an appropriate ownership interest at the time the project is placed in service. • The credit can be used entirely within one year, and to the extent not used, it can be carried-forward for up to 20 years. • The basis of rehabilitated buildings will be reduced by an amount equal to the credit earned. (But no basis reduction if credit is passed through to a qualifying tenant.) 9
Requirements to Obtain HTC • Rehabilitation must be substantial – In general, the qualified expenditures must exceed the building’s adjusted basis at the start of the testing period or $5,000.00 – The testing period is a 24-month period selected by the developer – Expenditures for personal property, acquisition costs, or enlargement costs are not QRE • Building must have been in service before rehabilitation • Renovations must be consistent with historic character of the Photo: Wikimedia Commons/Local Hero building Broderick Tower, Detroit 10
Five Year Recapture Period • The original owner must own the building and continue its historic features for five years • If not: – Full or partial recapture of credit – Recapture period • Starts: Building placed in service • Ends: Five years following – Recapture amount decreases by 20% each year of compliance period (e.g., only 80% of credits are recaptured if ownership transfer occurs in second year after PIS) 11
Basic Qualification for “Historic” (i.e., 20%) Tax Credits • 20% credit available for “certified historic structure” – Listed in the National Register of Historic Places or – Located in a registered historic district and certified as being of historical significance to the district • For certified historic structures, the rehabilitation expenditures must satisfy the Secretary of the Interiors Standards for Rehabilitation. • It should be noted that these standards typically increase the cost of the rehabilitation significantly. 12
Basic Qualification • T he National Park Service (“NPS”) formally has to approve the rehabilitation plan • Approval generally is delegated to the State Historic Preservation Office (“ SHPO ”) Application process: • Part 1: NPS evaluates significance to determine if “certified historic structure” • Part 2: Establish a rehabilitation plan prepared by an architect versed in historic rehabilitations, and request SHPO review • Part 3: Request for certification of completion from SHPO 13
Pre-1936 Buildings • Buildings erected before 1936 that do not meet historic criteria may qualify for a federal credit of 10% of QRE • The pre-1936 buildings must keep intact 50% of the external walls, use 75% of the external walls as either interior or exterior walls, and retain 75% of the existing framework • This credit (unlike the 20% credit) is not available for buildings that provide housing. • No governmental designation is required. 14
Pre-1936 Buildings Original Pre-1936 Building Renovated Building Original external wall still intact although no longer external 50% of original walls still 25% of original external wall intact as external walls demolished for expansion 15
Structuring Credit Deals — Before HBH Equity Investment Structure Master Tenant Structure • Investor must be a member of • The investor owns all, or the ownership entity (usually an substantially all, of the master LLC) before building is placed in tenant service – Master tenant subleases projects to end users • Investor receives 99.9% interest • Frequently, the developer group in entity and proportionate credit is the manager of the master allocation tenant and is responsible for leasing to the ultimate tenants 16
Equity Investment Structure — Before HBH Investor Member Managing Member 99.99% 0.01% ownership ownership Building Owner (Pass-Through Entity, e.g. LP or LLC) 17
Master Tenant Structure — Before HBH Master Managing Investor MT Managing Tenant Member Member Member 10 – 20% 80 – 90% 99.99% 0.01% Master Lease Building Tenant Owner Sublease(s) to ultimate users 18
Frequent Issues in HTC Cases Before and After Historic Boardwalk Hall Commissioner challenges HTC projects which use partnerships where: • Transaction’s substance does not match its form • Disguised sales • Investors not actually partners or partnership is a sham • Transaction lacks economic substance John Harvey House (Inn on Winder), Detroit 19
The Precursor to Historic Boardwalk Hall: Virginia Historic Tax Credit Fund LP 2001 • IRS Arguments: The IRS challenged the partnership’s tax return and argued – That the investors were not partners and their investment was a sale of state tax credits; or – Even if the investors were partners, the contribution was a disguised sale of state credits • The Tax Court rejected both of the IRS’s arguments and found that (i) the investors were partners and (ii) there was no disguised sale • The IRS appealed • The Fourth Circuit overturned the Tax Court 20
The Precursor to Historic Boardwalk Hall: Virginia Historic Tax Credit Fund LP 2001 (cont’d) • The Code presumes that a sale occurs if – There is a transfer of money to a partnership, and – There is a related transfer of property by the partnership to the partner – The Code presumes there is a sale if the two transfers occur within two years – The presumption is rebuttable 21
Recommend
More recommend
