Presenting a live 90-minute webinar with interactive Q&A Leveraging HUD Financing and Historic Tax Credits for Multifamily Housing: Pairing Forms of Financing Navigating Bridge Loans, HTC Investor Concerns and Loan Closing Coordination THURSDAY, MARCH 3, 2016 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Daniel Budihardjo, Shareholder, Kantor Taylor Nelson Evatt & Decina , Seattle Waller (Watt) Taylor, III, Shareholder, Kantor Taylor Nelson Evatt & Decina , Seattle 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 .
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Leveraging HUD Financing and Historic Tax Credits for Multifamily Housing WATT TAYLOR DAN BUDIHARDJO March 3, 2016 Kantor Taylor Nelson Evatt & Decina PC 901 Fifth Avenue Suite 4000 Seattle, WA 98164 http://www.KantorTaylor.com
Leveraging HUD Financing and Historic Tax Credits for Multifamily Housing HRTC Basics I. HUD 221(d)(4) Basics II. HRTC Financing Structure III. Historic Boardwalk & Rev Proc. 2014-12 IV. HUD Requirements for HRTC Master Lease V. HUD and HRTC Financing Considerations VI. VII. HRTC – Exit Strategy 6
Leveraging HUD Financing and Historic Tax Credits for Multifamily Housing I. HRTC BASICS 7
HRTC Basics IRC § 47; provides a tax credit for qualified rehabilitation expenditures made for qualified rehabilitated buildings Dollar for Dollar credit against federal income taxes Two Types of Credits Pre-1936 Structure Credit . Equals 10% of the “qualified rehabilitation expenditure” for a qualified rehabilitated building other than a historic structure ( cannot be residential ) Certified Historic Structure Credit. Equals 20% of the “qualified rehabilitation expenditure” for any “certified historic structure ” 8
Qualified Rehabilitated Building To qualify as a QRB, the building must satisfy the following: Structure being rehabilitated must be a “building” under Treas. Reg. § 1.48-1(e)(1) (excl. land or land improvements) Must have been previously placed in service by any person prior to rehabilitation Building must be substantially rehabilitated, i.e., the qualified rehabilitation expenditures for such Building during a 24-month period exceed the greater of (i) $5,000 or (ii) the adjusted basis of Building (including structural components) at the beginning of the 24 month period Depreciation or amortization in lieu of depreciation is allowable with respect to such Building; and Building must be located in the U.S. 9
Qualifications: Certified Historic Structure To qualify as a Certified Historic Structure, the Building must be: Individually listed in National Register of Historic Places; or Located in a registered historic district as defined in IRC § 47(c)(3)(B) and certified by the Secretary of the Interior as being of historic significance to district 10
Rehabilitation of Certified Historic Structure Rehabilitation must be “certified” as being consistent with the historic character of such property or the district in which such property is located (IRC § 47(c)(2)(C)): Historic Preservation Certification Application Part II – Description of Evaluation (Form 10-168a) Historic Preservation Certification Application Part III – Request for Certification of Completed Work (Form 10-168c) 11
Qualified Rehabilitation Expenditures Qualified rehabilitation expenditure (QREs) is defined as any amount properly chargeable to capital account: attributable to nonresidential rental property, residential property or real property with a class life of 12.5+ years; Incurred in connection with the rehabilitation of a qualified rehabilitated building; and Capitalized and depreciated using straight-line method over recovery period 12
Qualified Rehabilitation Expenditures QREs must meet each of the following requirements (cont.): Cannot include cost of acquiring or enlarging any building If in connection with a certified historic structure or building in an historic district, rehabilitation must be certified by National Park Service as being consistent with historic character Cannot include land improvement expenditures (i.e., sidewalks, parking lots, etc.) 13
Qualified Rehabilitation Expenditures QREs must meet each of the following requirements (cont.): Cannot include personal property expenditures (i.e., office equipment, furniture, etc.) that are not considered part of the Building Cannot include any costs allocable to part of the property that is, or could be, tax-exempt use property 14
Qualified Rehabilitation Expenditures Generally include: hard costs Insurance premiums Legal costs Development fees (must be reasonable) Architectural & engineering fees Interior demolition 15
Tax-Exempt Use Property Building is treated as tax-exempt use property if: it is owned by tax-exempt entity, or by partnership with tax exempt partners (whether direct or through a pass-through subsidiary) Exception : tax exempt entity can make election to be treated as a corporation taxable under IRC § 168(h)(6)(F)(ii) If more than 50% of the Building is leased to or from a tax-exempt entity under the “disqualified lease” rule. QRE eligible only on expenditures incurred for portion of Building not leased to tax exempt entity. “Tax - Exempt Entity” includes: Government agencies/political subdivisions thereof Entities exempt from taxation under IRC Foreign person or entity Tribal government 16
Disqualified Lease Rules A “ disqualified lease ” is defined in IRC Section 168(h)(1)(B)(ii) as a lease to a tax-exempt entity where any one of the following conditions apply: Part or all of the property financed with tax-exempt debt and the exempt entity participated in the financing Fixed purchase price or option to exempt entity Lease term exceeds 20 years (incl. renewals) Lease occurs after transfer of property from exempt entity that was prior user 17
Disqualified Lease Exception Property is leased for less than 3 years If any portion of the property is predominantly used by the tax- exempt entity in an unrelated trade or business, the income of which is subject to income tax. A subsidiary of a tax-exempt entity which is a member or partner of the partnership owning the Building would need to make an election to be treated as corporation taxable under IRC § 168(h)(6)(F)(ii) 18
Timing of Credit Can generally be claimed only in the year in which the rehabilitated property is “ placed in service .” (IRC § 47(b)) “Placed in Service” is not defined by statute, but generally parties look to issuance date of a certificate of occupancy as the Placed in Service date 19
Recapture Subject to recapture in the event of disposition (including destruction from casualty or condemnation) of property within five years of being “ placed in service” (IRC § 50(a)) Phased-in recapture amount of 20% per year over 5- year period No recapture for dispositions after Year 5 20
Leveraging HUD Financing and Historic Tax Credits for Multifamily Housing II. HUD (221)(d)(4) BASICS 21
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