Legislation has been introduced in the Pennsylvania State Senate to help the State’s declining solar renewable energy credit (“SREC”) market. Pennsylvania’s SREC market has been in decline as a result of oversupply. To increase the demand for SRECs Senate Solar Bill (SB 1350) proposes to: (1) increase Pennsylvania’s alternate energy portfolio standard solar carve out requirements starting with compliance years 2015 to 2015: (2) change the alternate compliance payment to $285 per SREC starting with compliance years 2013 to 2015; and (3) allow for solar thermal facilities to qualify. While previous versions of the Senate Bill included language to close the market to out of state systems such language was not included in the current version of the Bill. If passed this Bill would spur Pennsylvania’s declining SREC market.
IRS Provides Relief for LIHTC Projects Affected by Hurricane Sandy
The Internal Revenue Service has issued Notice 2012-68 in which it suspends certain requirements under § 42 of the Internal Revenue Code for low-income housing credit projects to provide emergency housing relief needed as a result of the devastation caused by Hurricane Sandy. The Services has provided that low-income housing outside the disaster area may be made available for any displaced household, regardless of income, on a temporary basis. Owners of low-income housing tax credit project must obtain approval from the applicable Housing Agency for the relief described in Notice 2012-69. The applicable Housing Agency will determine the appropriate period of temporary housing for each project, not to extend beyond November 30, 2013.
New Financing Models for Energy Retrofits
The energy retrofit of a building is the analysis and implementation of energy efficiency measures such as energy efficient equipment, air sealing, moisture management, controlled ventilation, insulation, and solar control so that dramatic energy savings are achieved alongside optimal building performance. One of the greatest barriers to improving energy efficiency in buildings is the high capital cost of projects. However, new financing techniques for energy retrofits have developed which include anchor tenant financing, shared saving agreements, capital leases, power purchase agreements, property assessed clean energy bonds, green leases, and on bill financing. These innovative financing methods now make it easier to complete retrofits which result in cost savings as well as an increase in the value of the property.
Third Circuit Denies Historic Boardwalk Petition for Rehearing
The petition for rehearing filed by taxpayer in the Historic Boardwalk case was reviewed the Third Circuit Court of Appeals judges who participated in the Historic Boardwalk case and the other available circuit judges of the Third Circuit Court of Appeals. The Third Circuit Court of Appeals noting that no judge who concurred in the Historic Boardwalk decision asked for a rehearing, and a majority of the circuit judges of the circuit in regular service did not vote for rehearing, denied the petition for rehearing by the panel and the Third Circuit Court of Appeals en banc. The only appeal left to the taxpayer in the Historic Boardwalk case is to the United States Supreme Court.
Petition Filed for Rehearing of Historic Boardwalk Case
Following the reversal by the Third Circuit Court of Appeals of the Tax Court’s decision in the Historic Boardwalk case, the taxpayer has filed a petition for a rehearing or rehearing en banc of the Historic Boardwalk Hall case. The taxpayer’s brief in support of the petition asserts that the Third Circuit Court of Appeals misapplied the reasoning of the U. S Supreme Court case of Commissioner v. Culbertson. Under Culbertson, a partnership exists if, based on the totality of the facts and circumstances, it is determined that “the parties in good faith and acting with a business purpose intended to join together in the present conduct of the enterprise.” The brief also contends that the Court of Appeals made a fundamental error in treating the historic tax credits as a return of capital. It is not common for cases to be reheard especially when there was no dissent on the panel. If the petition is denied the only appeal remaining is to the United States Supreme Court.
Creative Structuring Techniques in Real Estate Transactions – the Investor “Flip”
While interest rates for commercial real estate financing remain low, lender underwriting criteria remains very stringent. Lenders require substantial equity, guarantees, as well as strong tenants and general contractors when financing commercial real estate transactions. As a result, creative techniques are required when developing the capital stack of a commercial real estate transaction. One technique to attract equity to a project is to maximize the value of the federal tax benefits of the transaction. A partnership “flip” structure may be used to initially provide an equity investor 99.99% of the profits and losses from the development of the transaction. At a time when the equity investor receives a target yield the interests “flip” and the interests of the sponsor and investor are adjusted to reflect the intended “back end” equity ownership of the equity investor in the project. For the right investor this partnership “flip” structure can enhance the internal rate of return to the investor by combining cash flow with the cash value to the investor of the losses generated by the development of the project.
Developing Real Estate Projects – A New Look at Old Subsidies
The change in focus of the Federal New Markets Tax Credit Program to non-real estate businesses together with the high demand on the Program has deprived the real estate industry of a very valuable financing subsidy. Developers could use the New Markets Tax Credit Program to generate a subsidy of almost 20% of total project costs. The unavailabilty of the Program going forward will necessitate a new look at some old subsidies. For example, residential rental properties financed with volume cap tax-exempt bonds are eligible for the 4% Federal low-income housing tax credit without competition. The trade off for this subsidy is the restriction of the rental units to tax credit tenants for 30 years. However, this credit subsidy may be a very attractive where market and tax credit units are very similar or the project is focused on senior tenants. Similar traditional subsidies worth looking at in a new light include tax increment financing, financing through the EB-5 Program, and the variety of funding and subsidies available for green properties and properties using renewable energy. There may be some very creative uses for established subsidy programs in the development of new real estate projects.
Demand for NMTC Allocation Remains Strong
The Community Development Financial Institutions (CDFI) Fund announced that under the 2012 round of the New Markets Tax Credit (NMTC) program it had received 282 applications requesting an aggregate of $21.9 billion in NMTC authority. The CDFI Fund also described innovative uses of New Markets Tax Credit Authority which would be favored by the CDFI Fund. Innovative uses of NMTC Authority include the deployment of New Markets Tax Credit proceeds to underserved states, “qualified low-income community investments” (“QLICs”) of $2,000,000 or less, non-real estate QLICIs such as working capial and equipment loans, and revolving QLICs which would serve multiple “qualified active low-income community businesses”. In this vein, the emphasis on non-real estate QLICIs was recently supported by final NMTC Treasury Regulations which facilitate the redeployment of non-real estate QLICIs.
Treasury Issues Final NMTC Regulations
On September 28th the Department of Treasury issued final regulations modifying the New Markets Tax Credit Program to facilitate and encourage investments in non-real estate businesses in low-income communities. To address the concern that an investment in a non-real estate business would result in a liquidity event for the community development entity prior to the expiration of the 7 year compliance period, the final regulations provide that a CDE may reinvest a qualified low-income community investment during the compliance period in a “qualifying entity” provided that such reinvestment occurs within 30 days. A “qualifying entity” is defined as a certified CDFI or an entity designed by the Secretary of the Treasury. The regulations define a non-real estate qualified active low-income community business as any business whose predominant business activity (measured by more than 50% of the business’ gross income) does not include the development, management or leasing or real estate.
Duane Morris Forms Puerto Rico Renewable Energy Practice Group
Combining the capabilities of several strong practice areas of the firm, Duane Morris LLP has formed a Puerto Rico Renewable Energy Interdisciplinary Practice Group. This interdisciplinary practice group works with developers, lenders, investors, and private equtiy funds in the development of renewable energy projects in Puerto Rico. Dependent upon the importation of fossil fuels, Puerto Rico’s energy costs are very high making renewable energy a very cost effective alternative. In addition, the Puerto Rico Electric Power Authority has encouraged the development of renewable energy projects in the Island though the issuances of power purchase agreements with renewable energy developers. Members of the group consist of Larry Diamond and Marco Gonzalez of the firm’s Puerto Rico Practice Group, Jim McTarnaghan, and Phyllis Kessler of the firm’s Renewable Energy Practice Group, Nat Abramowitz ,who practices in the finance and bond field, and Art Momjian, who specializes in Federal tax credit programs including the federal renewable energy investment tax credit.