The reduction of the annual allocation of New Markets Tax Credit authority by the CDFI Fund from 5 billion dollars to 3.5 billion dollars after the expiration of Stimulus legislation and the increased awareness of the benefits of the Program have created a tremendous demand on community development entities who receive an allocation. of New Markets Tax Credit authority. Sponsors seeking to identify New Market Tax Credit allocation for projects should be aware that community development entities are focused on transactions which result in substantial job creation and supermarkets in designated food deserts. The good news for sponsors is that investors are paying higher prices for New Markets Tax Credits. Accordingly, while it has become more challenging to identify allocation, the equity generated for a project through an allocation of New Markets Tax Credits should be greater than in prior years.
With the expiration of the 1603 grant at the end of 2011, the development of renewable energy facilities has become more challenging. The Affordable Housing, Community Development, and Tax Credit Syndication Group of Duane Morris has developed a benevolent investor structure to provide renewable energy facilities to tax-exempt entities. Under the benevolent investor structure the renewable energy facility is purchased by a pass through entity, owned by a group of investors, which supports the tax-exempt entity, (collectively the “Benevolent Investor”). The Benevolent Investor enters into a power purchase agreement with the tax-exempt entity pursuant to which the Benevolent Investor provides power to the tax-exempt entity at below market rates. The tax benefits in the form of the renewable energy investment tax credit and the bonus depreciation, together with the income from the power purchase agreement and renewable energy certificates and rebates, if available, provide the Benevolent Investor with a positive return on its investment in the renewable energy facility. The Benevolent Investor has the option after the expiration of the tax credit compliance period to donate the renewable energy facility to the tax-exempt entity.
The Internal Revenue Service recently issued Private Letter Ruling 201214007 which concluded that in the acquisition by the taxpayer of a wind energy facility accompanied by a facility specific power purchase agreement the taxpayer was not required to allocate any portion of the purchase price to the power purchase agreement. The Internal Revenue Service reasoned that where a power purchase agreement is fulfilled by a specific energy facility, the power purchase agreement had no value separate from the energy facility. In the facts presented to the Internal Revenue Service the owner of the energy facility could not satisfy the power purchase agreement from any other energy source other than the specific energy facility. The effect of the Private Letter Ruling is to permit an increase in the tax basis of the facility which results in an increase in the renewal energy investment tax credit and the basis of the energy facility for purposes of depreciation.
Adam Taliaferro, a member of the Affordable Housing, Community Development, and Tax Syndication Practice Group of Duane Morris LLP, was elected to the Board of Trustees of Penn State University. Adam Taliaferro is based in the Firm’s Cherry Hill Office. He was the subject of the 2001 book, Miracle in the Making: The Adam Taliaferro Story (Triumph Books), which chronicled his recovery from a spinal cord injury he sufferred playing football his freshman year at Penn State University. Adam consults with professional athletes in the sponsorship of affordable housing and community development projects. His practice also includes the representation of clients with regard to the evaluation of National Football League contracts and he has created National Football League contract proposals for clients.
The Community Development Financial Institutions Fund (“CDFI Fund”) has completed the first stage of its transition to the new census data for eligibility under the Federal New Markets Tax Credit Program. The CDFI Fund has adopted a transition process which recognizes that community development entities may have already begun to structure potential “qualified low-income community investments” based on the 2000 census data. The CDFI Fund has announced that it will allow New Markets Tax Credit community development entities to use either the 2000 census data or the 2006-2010 ACS data applied for the 2010 census tracts to qualify for “qualified low-income community investments” closed between May 1, 2012 and June 30, 2012.
The use of tax-exempt volume cap bonds to finance apartment complexes not only lowers the cost of financing but also provides an opportunity to generate tax credit equity with respect to the required minimum of 20% of the units available for low and moderate income tenants. The use of the 80/20 tax-exempt bond structure to generate tax credit has long been popular for projects in New York City, and should be considered in any apartment project financed with volume cap tax-exempt bonds. In a nutshell, a residential rental project with at least 50% of the cost of land and improvements financed with volume cap tax-exempt bonds is eligible for 4% federal low-income housing tax credits outside of the competitive 9% allocation process of the state housing finance agency. In exchange for the 4% federal tax credits, a rental limitation is imposed in addition to the income limitation imposed by the tax-exempt bond program, and the units which generate the 4% tax credits are income and rent restricted for 30 years rather than the income limitation terminating upon the repayment of the bonds. In addition, it is possible to procure 9% federal low-income tax credits through the competitive allocation process for the required 20% low and moderate income units.
The Internal Revenue Service has appealed the decision of the Tax Court in the Historic Boardwalk Case to the Third Circuit Court of Appeals. The Tax Court decision upheld the allocation of 99.99% of the rehabilitation tax credits to a corporate investor, which contributed capital of over $18 million to the historic rehabilitation project in consideration for 99.99% of the tax credits, profits and losses including any residual. The basic structure of the Historic Boardwalk Case is typical of many historic rehabilitation transactions. A reversal by the Court of Appeals of the Historic Boardwalk Case may have severe negative implications for the historic tax credit industry. Oral argument in the Third Circuit in Philadelphia is scheduled for June 25, 2012.
With New Markets Tax Credit allocation from community development entities the most competitive it has ever been, consideration should be given to alternative and complimentary federal tax credit and subsidy programs. As example, mixed use projects with a residential rental component which may be financed through the New Markets Tax Credit program provided that the property is non-residential rental property should consider bifurcating the project into commercial and residential components. The New Markets Tax Credit program may then be used for the commercial component and the Federal low-income housing tax credit program for the residential rental component. 4% low income housing tax credits will provide approximately the same amount of equity as the New Markets Tax Credit Program and 9% low income housing tax credits will provide significantly more tax credit equity. The tradeoff is the restriction of the rental units with respect to both the income of the tenants and the rents paid for 30 years.
On May 2, 2012 Bill Hankowsky Chairman, President, and CEO of Liberty Property Trust was the guest speaker at the annual Duane Morris Affordable Housing, Community Development and Real Estate Reception held at The Morris Restaurant in Philadelphia. Liberty Property Trust is real estate investment trust with office and industrial space in more than 20 markets throughout the United States and the United Kingdom. The reception was attended by over 100 people. Mr. Hankowsky shared his insights with respect to the impact of technology on the future development and use of real estate as well as the benefits of the green development of real estate projects. The Affordable Housing, Community Development, and Tax Credit Syndication group of the Corporate Department and the Real Estate Department of Duane Morris host a Community Development and Real Estate Reception in the Firm’s Philadelphia Office in the Spring and in the Firm’s New York office in the Fall. Last Fall the guest speaker at the Firm’s Reception was Maxine Griffith who heads the seven billion dollar development of Columbia University’s new Manhattanville Campus in West Harlem, New York.