Historic Tax Credits: Leveraging History to Rebuild Legacy Cities Jason Yots, Esq. ~ November 14, 2016
Today s Discussion Why do legacy cities need tax credits? The historic tax credit program The Mattress Factory: a case study Hot Tax Topics Involving HTCs
Why do legacy cities need tax credits? Historic Tax Credits: Leveraging Heritage to Rebuild Legacy Cities
Source: www.legacycities.org
Source: www.legacycities.org
Capital Costs Capital Sources Rust Belt Real Estate 101: The Gap
The historic tax credit program Historic Tax Credits: Leveraging Heritage to Rebuild Legacy Cities
Historic Tax Credits - 1977-2015 $78.3 Billion Total HTC Investment 2.36 Million Total Jobs Generated 527,866 (28%) Housing Units ( Affordable )
State Tax Credit Programs Source: Sarah Vonesh
Source: Sarah Vonesh
Data Source National Park Service / Graphic: National Trust for Historic Preservation and Historic Tax Credit Coalition
State of New York Economic Impacts of HTC Investment, 2002-2015 Total Number of Projects Rehabilitated: 406 Total Development Costs: $3,874,334,894 Total Qualified Rehabilitation Expenditures: $3,215,697,962 Federal HTC Amount: $643,139,592 Total Number of Jobs Created: 49,249 Construction: 22,121 Permanent: 27,128 Total Income (Net of Taxes) Generated: $3,965,877,900 Household: $2,149,151,400 Business: $1,816,726,500 Total Taxes Generated: $893,531,600 Local: $135,045,000 State: $131,871,100 Federal: $626,615,500 Data Source National Park Service / Graphic: National Trust for Historic Preservation and Historic Tax Credit Coalition
1. Does your building qualify? Threshold Issues 2. Will your rehab qualify? 3. Estimate your project s costs and HTCs 4. Make a financing plan 5. Assemble your team: a. Architect b. Contractor c. Accountant d. Attorney e. Consultant
The Mattress Factory: a case study Historic Tax Credits: Leveraging Heritage to Rebuild Legacy Cities
Use: Use: Source: Source: Source: Source: Type Amount Lender HTCs Dev Equity Def Dev Fee Acquisition $700,000 $0 $700,000 $0 Hard Costs $4,000,000 $4,000,000 $0 $0 Softs Costs $600,000 $0 $600,000 $0 Developer Fee $500,000 $0 $165,675 $0 $334,325 Totals $5,800,000 $4,000,000 $1,465,675 $0 $334,325 SOURCES & USES OF FUNDS
Use: Use: Type Amount QREs Acquisition $700,000 $0 Hard Costs & FF&E $4,000,000 $3,800,000 Soft & Financing Costs $600,000 $570,000 Developer Fee $500,000 $500,000 Totals $5,800,000 $4,870,000 QUALIFIED REHABILITATION EXPENDITURES
QREs $4,870,000 Federal/NY HTC % x 40% Federal/NY HTCs $1,948,000 HTC investor s interest % 99% HTCs to HTC investor $1,928,520 Blended price for HTCs x $0.76 Gross equity invested $1,465,675
Percentage Invested Milestones 20% Loan closing; HTC investor admission 65% P.I.S.; Part 3 approval; Cost certification; Perm. loan conversion 15% Schedule K-1s; Tax returns filed
Year 1 2 3 4 5 Income, growth= 3% PGI 396,000 407,880 420,116 432,720 445,701 Misc Income 0 0 0 0 0 Less Vacancy 5% -19,800-20,394-21,006-21,636-22,285 Adjusted PGI 376,200 387,486 399,111 411,084 423,416 Expense, growth= 3% Real Estate Taxes 21,453 21,453 21,453 21,453 21,453 Property Insurance 7,500 7,725 7,957 8,195 8,441 Utilities 6,000 6,180 6,365 6,556 6,753 Property Mgt 6% 22,572 23,249 23,947 24,665 25,405 Admin, overhead 12,000 12,360 12,731 13,113 13,506 Maintenance 4,000 4,000 4,000 4,000 4,000 Reserves 0 0 0 0 0 Total Expenses 73,525 74,967 76,453 77,983 79,558 Net Operating Income 302,675 312,519 322,658 333,101 343,858 Debt Service Principal Payment 1st 41,310 43,424 45,645 47,981 50,435 Interest Payment 1st 139,062 136,948 134,727 132,391 129,937 Total Debt Service Payments 180,372 180,372 180,372 180,372 180,372 Net Available for Dist 122,303 132,147 142,286 152,729 163,486 Asset Mgmt Fee - HTC investor 2,500 2,500 2,500 2,500 2,500 Annual Priority Return - HTC investor 19,222 19,222 19,222 19,222 19,222 19,222 Repay DDF (80%) 347,957 80,465 88,340 96,451 104,806 0 Cash Flow after DDF 20,116 22,085 24,113 26,201 141,764 MM Distribution 201 221 241 262 1,418 IM Distribution 19,915 21,864 23,872 25,939 140,346 DSCR 1.68 1.73 1.79 1.85 1.91
Hot Tax Topics Involving HTCs Historic Tax Credits: Leveraging Heritage to Rebuild Legacy Cities
Hot Tax Topics Involving HTCs Safe harbor compliance - Rev. Proc. 2014-12
Historic Boardwalk Hall LLC vs. Commissioner of IRS IRS: sham partnership ; reallocation of historic tax credits U.S. Tax Court: IRS was wrong (2009) US Court of Appeals (3 rd Circuit): IRS was right (2012)
Terms Developer Minimum Interest Investor Minimum Interest Minimum equity contribution prior to P.I.S. Priority Returns Guaranties Cash Flow Put/Call Terms Before Historic Boardwalk Hall.01%.01% None 2% - 3% cash-on-cash annual preferred return 1.Tax credit recapture 2.Operating deficits 3.Environmental liability 4.Construction completion 5.Escrows permitted After waterfall, investor often is allocated 99% of $0 each year Call fair market value Put x% cash-on-cash After Rev. Proc. 2014-12 1% 5% 20% contributed; 75% fixed Varies, but generally lower, if meaningful cash flows to investor Similar, but developer may not guaranty deal structure or provide funded guarantees (other than limited operating deficit) More meaningful cash flow to investor Call: prohibited but flip OK Put minimum = FMV
Hot Tax Topics Involving HTCs Master lease transactions I.R.C. 50(d)
Organizational chart - 123 Main Street, Upstate, NY 2016 Borrelli & Yots PLLC Historic tax credit (HTC) syndication structure Manager Members Jill Sponsor Joe Sponsor Investor Members Multiple Investors 50% 50% 123 Main Street Managing Member LLC HTC Investor 1% 99% Managing Investor Member Member 123 Main Street LLC (Fee Simple Title Holder) Leases Residential and commercial tenants
Master lease structure chart - 123 Main Street, Upstate, NY 2016 Borrelli & Yots PLLC Historic tax credit (HTC) syndication structure Class A Members Joe Sponsor Jill Sponsor (50%) Class B Members Multiple Investors (50%) 123 Main Street Managing Member LLC 123 Main Street Master Tenant LLC 123 Main Street Managing Member LLC Upstate Bank 90% 10% 1% 99% Member Investor Managing Investor Member Member Member 123 Main Street LLC (Master Lessor, Fee Simple Title Holder) Master Lease and Tax Credit Pass-Through* 123 Main Street Master Tenant LLC (Master Tenant) Subleases Residential and commercial subtenants *Pursuant to an IRC 50(d) election, historic tax credits flow to 123 Main Street Master Tenant LLC
Partnership Structure Basis Adjustment Landlord Before I.R.C. 50(d) Regs No partnership basis reduction Basis Adjustment - Tenant No partnership basis reduction; Tenant partnership amortizes 50(d) income over shortest applicable recovery period 50(d) Income Treatment Partnership Level Item vs. 50(d) income increases partners outside basis in the Tenant partnership 50(d) income is a Tenant partnership level item Partner Level Item 50(d) Income Acceleration Some practitioners accelerated all or a portion of unamortized 50(d) income upon investor s exit from Tenant partnership
Partnership Structure Basis Adjustment Landlord After I.R.C. 50(d) Regs Same Basis Adjustment - Tenant Same 50(d) Income Treatment Partnership Level Item vs. Partner Level Item 50(d) Income Acceleration 50(d) income DOES NOT increase partners outside basis in the Tenant partnership 50(d) income is a PARTNER LEVEL item ( ultimate credit claimant ) NO ACCELERATION, unless actively elected upon exit
Sample 50(d) Income Calculation $1,000,000 Amount of federal HTC claimed 39 years Asset recovery period $ 25,641 Annual 50(d) income x 5 years HTC recapture period $ 128,205 50(d) income recognized $ 871,795 Unamortized 50(d) income
Questions? jasonyots@borrelliyots.com 716.440.0521