Historic Rehab Tax Credits Affected by Provisions in New Law
By Caitlin Jones & A. J. Johnson
5 min read
The new Housing and Economic Recovery Act contains four amendments affecting the federal historic rehabilitation tax credit.
One permits the historic tax credit to be used by corporate and individual taxpayers to offset their federal income tax liability under the alternative minimum tax. (AMT). The amendment, according to the law, applies to credits attributable to qualified rehabilitation expenditures “properly taken into account for periods after” 12/31/07. The Act and accompanying explanation by the congressional Joint Committee on Taxation don’t elaborate on what this means.
A second amendment increases to 50% from the previous 35% the safe harbor threshold that refers to the maximum portion of a building that can be leased to tax-exempt entities (e.g., government agencies, nonprofits) under disqualified leases, without a reduction in the historic tax credit amount. If this threshold isn’t exceeded, a building won’t be classified as “tax-exempt use” property. The change is effective for rehab expenditures “properly taken into account for periods” after 12/31/07.
The preceding two changes apply both to the 20% and 10% federal rehabilitation tax credits.
A third amendment promotes historic preservation in the federal low-income housing tax credit (LIHTC) program. Under this, the list of criteria that state housing credit agencies must consider as part of their “qualified allocation plan” to decide which proposed projects to select for housing credit awards must be expanded to add: (1) the historic nature of a project (e.g., encouraging rehabilitation of certified historic structures); and (2) the energy efficiency of a project. No further details are provided in the statute or accompanying explanation. This amendment applies to housing credit allocations made after 2008.
A fourth provision, affecting but not limited to historic tax credit projects, amends federal law governing national banks. The provision eases the definition of “public welfare investments” permitted by national banks, to drop a previous requirement that such investments primarily benefit low- and moderate-income families or communities. The U.S. Office of the Comptroller of the Currency has already issued an interim rule to implement this change.
Favorable Reaction
John Leith-Tetrault, president of the Washington, DC-based National Trust Community Investment Corporation (NTCIC), had a favorable reaction to all four changes, in comments to the Tax Credit Advisor. NTCIC, an arm of the National Trust for Historic Preservation, syndicates transactions with federal historic and new markets tax credits.
Leith-Tetrault said the change in the tax-exempt use threshold should facilitate simpler deal structures for historic tax credit projects that have nonprofits and/or government agencies as tenants, and reduce transaction costs. He noted that in his experience deals with nonprofit and government tenants have typically exceeded the 35% threshold, requiring the use of complex, more costly deal structures to assure and maximize historic tax credits. “What I’m finding is that 50% is a much better threshold,” he said, “because oftentimes the nonprofit or governmental uses are below 50%.”
Leith-Tetrault said exceeding the tax-exempt use safe harbor threshold triggers the “disqualified lease rules” with attendant problems for a deal. “You have difficulty using tax-exempt financing, the nonprofit [and government] leases have to be less than 20 years, you can’t have a pre-determined sale price back to the nonprofit that may want to buy the project back after the five-year compliance period, and you can’t have any kind of a sale-leaseback arrangement between an original nonprofit owner and an LLC set up for the purposes of the tax credit transaction,” he said. “All of those things go away if you’re under” the new 50% threshold, he explained.
Historic Nature, AMT
Leith-Tetrault also welcomed the change to require state agencies in deciding how to allocate federal housing credits after 2008 to take into account the “historic nature” of buildings competing for housing credit allocations.
“Prior to this [amendment], only a few states gave a priority to historic buildings” in their housing credit programs, he noted.
Leith-Tetrault didn’t think the AMT relief amendment will significantly boost corporate investment in historic credits – the universe of active investors in this product is small anyways. But he pointed out the provision could benefit developers, particularly of smaller historic rehab projects, since they could now use the historic credits from their project to reduce their own federal income tax liability under the AMT. Alternatively, if they can’t find an equity investor to buy their credits, he said a developer could sell the credits in exchange for equity to another individual – a qualified real estate professional – that they bring into the deal. Such individuals could also use the historic credits to offset any AMT tax liability. Qualified real estate professionals, including developers, also aren’t subject to the passive loss restriction that limits other individual taxpayers in the amount of historic and housing credits they can use to offset regular or AMT tax liability.
Leith-Tetrault also praised the amendment revising the standard for “Part 24″ public welfare investments. He suggested this could facilitate more investment by national banks in historic tax credit projects that don’t necessarily provide low- and moderate-income benefit, but still foster community revitalization, such as renovations of downtown historic buildings into loft apartments. He indicated the prior, more stringent previous standard had caused some national banks to shy away from certain historic tax credit projects without direct low- and moderate-income benefit.
