Profitable Pre$ervation Accessing Historic Tax Credits Jason Yots, Preservation Studios www.preservationstudios.com
Historic Tax Credits 2012 - By The Numbers 57,783 - Jobs created by HTCs 17,991 - Housing units created with HTCs (47% of HTCs) 35% - Portion of that housing that is low-mod income $5.23 - Average HTC project cost (millions) $5.33 - Total HTC investment (billions) $1,045,255 - Average HTC project award (federal) Source: National Park Service’s 2012 Annual Report on the HTC Program
Historic Tax Credit Feasibility 3 Threshold Questions Is your building eligible? Does your rehabilitation work qualify? Do you need tax credits, cash or both?
Historic Tax Credit Eligibility 3 Possible Paths Individual listing in the National Register of Historic Places Contribution to an historic district listed in the NRHP Contribution to a “tax certified” local historic district www.nps.gov/nr/
Historic Rehabilitation Qualification The (Other) 10 Commandments Dept. of Interior’s Standards for Treatment of Historic Properties ... Rehabilitation (10) Preservation Briefs (47) Interpreting the Standards Bulletins (55) www.nps.gov/TPS/tax-incentives.htm
Using Historic Tax Credits 2 Options to Realize Value Fund the rehabilitation project and then claim the HTCs (for the year the project is placed-in- service) Syndicate the HTCs to an investor and receive discounted equity (in milestone installments during the project) HTC FAQs – www.irs.gov/pub/irs-utl/faqrehab.pdf
HISTORIC PRESERVATION AND REFUNDABLE CREDITS NYSAFAH Upstate Conference October 16, 2013 Prepared by: James S. DeBellis, CPA Salmin, Celona, Wehrle & Flaherty, LLP jdebellis@scwf-cpa.com
Two types of Federal Historic Rehabilitation Credits 10% Credit • Building first placed in service prior to 1936. • Not listed on National Register of Historic Places or not located in a Historic District. • Use must be Commercial.
20% Credit • Must be a Certified Historic Structure. • Listed on National Register of Historic Places or located in a Registered Historic District. • Use can be either Commercial or Residential.
Substantial Rehabilitation • Qualified Rehabilitation Expenses (QREs) must exceed greater of $5,000 or the adjusted basis of the building at the beginning of the 24 month measuring period. • Eligible QREs include amounts incurred prior to the first day of the 24 measuring period, during the 24 month measuring period and after the 24 month measuring period through December 31 of the year in which the 24 month period ends.
Alternate 60 Month Measuring Period for “Phased Rehabilitation” • Requirement that before the rehabilitation begins, written plans exist showing the Rehab is expected to be completed in phases and is reasonably expected to take more than 24 months. • Must formally elect to use the 60 month period.
Use of Multiple 24 Month measuring periods • Used to claim Historic credits in multiple years when the 60 month period is not elected. • Example – Acquire four story building in Dec 2012 for $100K. Top three floors will be residential and first floor will be commercial. Incur $1Mil of QREs to rehab residential space and place in service on 12- 15-14 ($200K of QRES incurred between Jan and June 2013). Incur $400K of QRE’s for commercial space in 2015 and place in service 6-30-15.
• First measuring period Dec 2012 – November 2014. • Adjusted basis at beginning of first measuring period is $100K. • Eligible QREs during the measurement period are $1mil. • Credits allowed in 2014 based on $1mil of QREs.
• Second Measuring period July 2013 – June 2015. • Adjusted basis at beginning of second measuring period is $300K (Acq - $100K plus $200K prior to beginning of second 24 month measuring period). • Total cost incurred during second measuring period are $1.2mil ($800K of residential plus $400K of commerical. • Since $1.2 mil of costs during second measuring period exceeds adjusted basis of $300K, substantial rehabilitation rule is met. • Credits allowed in 2015 based on $400K of QREs.
What qualifies as Qualified Rehabilitation Expenditures - QREs • QREs are costs chargeable to a capital account in connection with the rehabilitation of a qualifying building. • Only rehabilitation costs subject to 27.5 and 39 year straight line depreciation. • Hard costs such as windows, doors, walls, ceilings, floors, HVAC, plumbing, elevators, etc. • Soft cost directly related to the building such as architect & engineering fees, reasonable developer fees, real estate taxes, interest and utilities incurred during the construction period, amortized construction loan costs incurred during the construction period, etc.
What doesn’t qualify as a QRE • Land and related costs • Building Acquisition and related costs • Site improvements and Landscaping • Enlargements • Personal property – appliances, equipment, etc. • Tax exempt use property
When is Credit allowed • In the year the building is placed in service. • Placed In Service means that all or portions of the building is placed in a condition of readiness and is available for a specifically assigned function. • There is a five year recapture period.
Types of Entity structures used Single entity • Usually through the use of a Limited Partnership (LP) or an LLC. • Investor has 99.99% ownership interest. • Project developer has .01% ownership interest. • For tax depreciation purposes, must reduce basis of the building by the full amount of the credit.
Master Lease Structure • Landlord Entity (LP or LLC) owns the building and performs the rehabilitation. • Typically owned 90% by developer and 10% by Master Tenant. • Master Tenant Entity (another LP or LLC) is responsible for the operations of the building. Typically owned 99.99% by investor and .01% by developer.
• Master tenant leases the entire project from the Landlord Entity for a fixed annual rent. • IRS allows the Landlord Entity to make a tax election to pass the Historic Tax Credit through to the Master Tenant. • No building basis reduction required for depreciation. • Master Tenant Entity must include in gross income each year, a ratable amount of the Historic credit over the tax depreciation life of the building (either 27.5 or 39 years).
Tax Exempt Use Issues • Eligible QREs do not include expenditures allocable to “Tax Exempt Use” property. • Who is a Tax Exempt Entity - US Government and any state or local agency - 501(c)(3) organization - Any foreign person or entity - Any Indian tribal government
Residential Property • Tax exempt use property equals “the portion of any tangible property” leased to a tax exempt entity. • If 20% of residential space is leased to a tax exempt entity, then 20% of otherwise allowable QREs will not be eligible for the credit.
Nonresidential Property • Property leased to a tax exempt entity in a “disqualified lease” is treated as Tax Exempt Use property. • Exception – Only Tax Exempt Use property if the portion of property leased to tax exempt entities under disqualified leases is more than 50 percent of the property (35 percent prior to 2008).
Disqualified Lease is any lease of the property to a tax exempt entity in which • The project utilized tax exempt financing and the tax exempt entity participated in the financing. • The lease contains a fixed purchase price or an option to buy. • The lease term is in excess of 20 years. • There was a sale/leaseback with the Tax Exempt entity and the tax exempt entity used the property prior to the sale.
Partnerships & LLC’s with Tax exempt entities as owners. • Tax Exempt use property to the extent any allocation of partnership items to an exempt owner is not a “qualified allocation”. • Qualified Allocation – all partnership items are allocated to the tax exempt in the same proportion throughout its time of ownership. • If one or more partnership items are or can be allocated disproportionately, tax exempt use property will be equal to highest allocable share of any item.
• Also applies to Tax Exempt Controlled entities. • Tax exempt controlled entity is any corporation in which 50% or more of the stock is held by one or more tax exempt entities. • Tax exempt controlled entity can make a Code 168(H) election to be taxed as a for profit entity to prevent tax exempt use status.
New York State Historic Tax Credit • Credit is equal to 100% of the Federal credit subject to a maximum of $5 million per structure for tax years beginning before January 1, 2020. • For tax years beginning January 1, 2020, the credit will equal 30% of the Federal credit subject to a maximum of $100,000. • Building must be located in a qualified census track as determined by NYS. • For tax years beginning January 1, 2015, the credit will be refundable.
Historic Preservation Illustrated John Oster, Edgemere October 16, 2013
Edgemere is a housing developer Primary business: to equip our clients with the instrumental services necessary to enable them to develop residential projects
Recommend
More recommend
