A Duane Morris team of lawyers including Art Momjian, Chris Winter, and Chris Bender represented South Jersey based Parke Bank in its investment in the Federal historic tax credits to be generated by the historic rehabilitation of 1831-1833 Chestnut Street in Philadelphia Pennsyvania. The property is formerly an office building being converted into residential rental apartments. The City of Philadelphia is replete with historic properties which are undergoing adaptive reuse and the Federal historic tax credit program is an important component of the capital stack to fund development costs.
The Pennsylvania Department of Community and Economic Development has awarded 15 projects in 10 counties in Pennsylvania the first $3,000,000 of Pennsylvania Historic Preservation Tax Credits. The projects receiving awards include buildings ranging from a church, schools, apartment complexes to a shore factory. The largest award was $369,015 and the smallest $13,895. The Pennsylvania Historic Preservation Tax Credit may be bifurcated from the Federal Historic Tax Credit and may be sold by an assignment of a certificate which enable developers to have separate investors for the state and the federal historic tax credits.
The Pennsylvania Department of Community and Economic Development is accepting applications for the Commonwealth’s new historic preservation state tax credit. The Commonwealth will issue no more than $3,000,000 of tax credits each year with no more than $500,000 to a qualified taxpayer in any year. The state historic tax credit may not exceed 25% of the qualified rehabilitation expenditures incurred in connection with the qualified historic rehabiliation of a building. The credit may be used to offset the tax liabilty of the Commonwealth of Pennsyvlania imposed on a taxpayer including Personal Income Tax, Corporate Net Income Tax, Capital Stock-Franchise Tax, Bank and Trust Company Shares Tax, Title Insurance CompaniesShares Tax, Insurance Premiums Tax, Gross Receipts Tax or Mutual Thrift Institution Tax. The tax credit provided may be carried over and applied to succeeding taxable years for not more than seven taxable years following the first taxable year for which the qualified taxpayer was entitled to claim the credit. A qualified taxpayer, upon application to and approval by DCED may sell or assign, in whole or in part, unused credits granted to another qualified taxpayer.
On Tuesday April 8, 2014 Art Momjian Chair of the Duane Morris Affordable Housing, Community Development, and Syndication Practice Group will speak at a continuing legal education program titled “The Historic Tax Credit Program: Who is a Partner after the New IRS Safe Harbor Rules and the Historic Boardwalk Hall”. The Program is scheduled for 12:30 pm EST at the Philadelphia Office of Duane Morris LLP. The program will also be video cast in most of the Duane Morris national offices. For further information and to register please contact either Art Momjian at firstname.lastname@example.org or Richard Weinstein at email@example.com.
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.
In an effort to stabilize the Federal Historic Tax Credit industry in the aftermath of the Third Circuit Decision in Historic Boardwalk Hall LLC , the Internal Revenue Service (the “IRS”) published Revenue Procedure 2014-12 (the “HTC Rev Proc”) which outlines a safe harbor for investors (an “Investor”) in Federal Historic Tax Credits (the “Tax Credit”). An Investor receives the Tax Credit through an ownership interest in a partnership which owns and develops a historic building or through the election of the partnership to pass the Tax Credit to a master tenant owned by the Investor. Continue reading “IRS Publishes Safe Harbor for Historic Tax Credit Investors”
The Novogradac Journal of Tax Credits featured on the cover of the September issue the historic rehabilitation of the Palmer Seminary in Wynnewood, Pennsylvania. Art Momjian, a partner and Chair of the Affordable Housing and Community Development practice group of Duane Morris LLP, represented the developer Cross Properties in the structuring of the historic tax credit transaction. The Palmer Seminary building was originally opened in 1919 as the Green Hill Farms and Apartments. Twenty years later theology students moved into the building when it became the Eastern Baptist Theology Seminary. After the historic renovation the building will consist of 112 rental apartments and 14,000 square feet of medical office space.
In the aftermath of the Third Circuit Court of Appeals reversal of the lower Tax Court decision of the Historic Boardwalk case while industrial investments in the Federal historic tax credits continue the Historic Tax Credit industry has been waiting from promised guidance by the Internal Revenue Service (the “IRS”) in the form of a Revenue Procedure. In this interim, transactions are being structured to address concerns of the IRS voiced in its appeal of Historic Boardwalk and some of the principles contained in Revenue Procedure 2007-65. On October 19th 2007 the IRS issued Revenue Procedure 2007-65 (the “Wind Rev. Proc. establishing a “safe harbor” for the “flip” structures for partners and partnership that own and produce electricity from qualified wind energy facilities under Section 45 of the Internal Revenue Code. The energy tax credit and the federal rehabilitation tax credit are investment tax credits under the Code and the Revenue Procedure to be issued by the IRS may mirror may of the provisions contained in Wind Rev. Proc. It is hoped that the Historic Tax Credit Revenue Procedure will be issued by the IRS by the end of the year.