New Markets Tax Credit, Historic Tax Credits, and Affordable Housing

Revenue Procedure 2014-12 (the “Rev Proc”) which establishes a safe harbor for structure Federal Historic tax credit transactions provides guidance on the staging of capital contributions by the Historic Tax Credit investor. First, the Rev Proc requires that at least 20% of the tax credit investor’s aggregate capital contribution be contributed before the project is placed in service. In this vein at least 75% of the tax credit investor’s aggregate capital contribution must be fixed at the time of placement in service of the project. The effect of these two requirements of the Rev Proc is to limit the provision in the sponsor’s partnership agreement or master tenant agreement which would adjust the capital required to be contributed by the tax credit investor to 25% of the scheduled investor capital contribution of the tax credit investor. Finally the Rev Proc provides an example to illustrate that the tax credit investor’s expected fixed capital commitment may be conditioned upon the achievement of mutually agreed upon milestones (e.g., receiving National Park Service approvals, leasing the Building to tenants).

Revenue Procedure 2014—12 (the “Rev Proc”) issued by the Internal Revenue Service creates a safe harbor for investors in the Federal Historic Tax Credit. Traditionally the tax credit investor has obtained a guaranty with respect to the benefit of the Federal Historic tax credit from the sponsor of the transaction. However, the Rev Proc prohibits funded guarantees and certain “impermissible guarantees. “Impermissible” guarantees are defined as guarantees: (1) to insure the Investor’s ability to claim the historic tax credit, or the repayment of any portion of the Investor’s contribution due to inability to claim historic tax credit in the event the Internal Revenue Service (the “Service”) Service challenges all or a portion of the transactional structure of the Partnership; (2) that the Investor will receive Partnership distributions or (3) to pay the Investor’s costs or indemnify the Investor for the Investor’s costs if the Service challenges the Investor’s claim of the historic tax credit. The Rev Proc defines permitted guarantees as guarantees: (1) for the performance of any acts necessary to claim the historic tax credit; (2) for the avoidance of any act (or omissions) that would cause the Partnership to fail to qualify for the historic tax credits or that would result in a recapture of historic tax credit; and, (3) that are not described as impermissible guarantees . The Rev Proc also provides the following as examples of unfunded guarantees permitted: completion guarantees, operating deficit guarantees, environmental indemnities, and financial covenants.

Revenue Procedure 2014—12 (the “Rev Proc”) issued by the Internal Revenue Service creates a safe harbor for investors in the Federal Historic Tax Credit. It is anticipated that in the aftermath of the Rev Proc changes will be made in the underwriting and structuring of Federal Historic Tax Credit transactions. The Rev Proc requires that a tax credit investor receive reasonably anticipated value, exclusive of tax benefits, as a result of its investment in developer partnership or master tenant. The issue of value may be satisfied by the traditional preferential return although a preferential return cannot be guaranteed and must be dependent upon the success of the project. With respect to the back end, the Rev. Proc prohibits an option to the developer to purchase the Investor’s interest but does permit the traditional “put” right of the tax credit investor to sell its interest to the sponsor as long as the sale is for not more than the fair market of the value of the investor’s interest and the tax credit investor does not abandon its interest. Accordingly it appears that the traditional preferred return to the tax credit investor and the investor “put” right are preserved by the Rev. Proc provided that the preferred return is not guaranteed and the economic interest of the tax credit investor is not reduced by “unreasonable” fees and expenses which would distort the economic benefit to the tax credit investor.