While the demand for New Markets Tax Credit allocation is at a historical high the Duane Morris New Markets Tax Credit practice group has been successful in assisting clients identify allocation available from community development entities in which the benefit provided to the sponsor is in the form of a subordinate interest free loan in the amount of the net tax credit equity. This subordinate loan payable in 7 years and may be converted into an equity interest in the sponsor. While this form allocation may not be desirable to non-profit sponsors, the allocation provides for-profit sponsors with what is tantamount to inexpensive private equity. Projects which have the best opportunity to receive this form of New Markets Tax Credit allocation: (a) are located in non-metropolitan census tracts; (b) create significant permanent jobs: and/or (c) are supermarkets in a food desert.
Renewable Energy Opportunities in Puerto Rico and the Virgin Islands
Caribbean islands such as Puerto Rico and the U.S. Virgin Islands have historically been dependent upon imported energy for their energy needs. As a result electricity prices in these Caribbean islands are more than five times the average in the United States. The high cost of electricity makes renewable energy sources such as solar and winds a cost effective alternative. Duane Morris has been active in Puerto Rico and the Virgin Islands representing both governmental agencies as well as clients doing business in both Islands. With the recent dramatic decrease in the cost of solar technology and the availability of a renewable investment tax credit for both solar and wind projects, there should be execellent opportunities for the development renewable energy projects in both Puerto Rico and the Virgin Islands.
Release of 2012 NMTC Application to be Delayed by the CDFI Fund
The CDFI Fund had indicated that it would disseminate the 2012 NOAA and the New Markets Tax Credit allocation application absent the enactment of legislation to extend the Federal New Markets Tax Credit Program. It had been anticipated that the time table for the 2012 NOAA, and the distribution and return of the application for New Markets Tax Credit allocation would parallel the schedule employed by the CDFI Fund last year. However, the New Markets Tax Credit Coalition recently reported that the CDFI Fund advised it that release of the 2012 New Markets Tax Credit allocation application will not occur by the end of May as originally anticipated. Further, the New Markets Tax Credit Coalition was advised that the release of the 2012 NOAA and application is unlikely to occur by the end of June. The delay of the release of the 2012 NOAA and the New Markets Tax Credit application by the CDFI Fund may result in awards being made as late as the summer of 2013.
The Future of NMTC Targeted Population Transactions
In 2011 the Service released final regulations which provide how “targeted populations” may be treated as “low income communities” where projects are eligible for the New Markets Tax Credit. Similarly the CDFI Fund amended the form of its allocation agreement to elevate the “targeted populations” criteria to one of its four primary criteria. The result is that satisfaction of the “targeted population” requirements under the Code may alternatively qualify a project as located in a “low-income community” and the satisfaction of the requirements under the allocation agreement may elevate the project to “highly distressed” status. Historically “targeted population” transactions have been challenging because of the added requirements of initially qualifying individuals as “low-income individuals” and insuring that future individuals will qualify as “low-income individuals” during the 7 year tax credit compliance period. While the final Treasury regulations and the revision to the allocation agreement will encourage the use of the “targeted population” criteria, the qualification and compliance requirements of using the “targeted populations” criteria will continue to be a hurdle for both community development entities and tax credit investors for all but the most compelling projects.
Food Deserts: A New Markets Tax Credit Oasis
In its 2011 allocation agreement the CDFI Fund added the “Food Desert” as one of the two secondary criteria which a community development entity may use to qualify a site as “highly distressed” under the Federal New Markets Tax Credit Program. This change in the allocation agreement is significant in light of the President’s proposal to extend the Program for two additional years and designate that at least $500 million ($250 million per year) will support financing healthy food options in distressed communities as part of the Healthy Food Financing Initiative. The 2011 allocation agreement defines a Food Desert, as either: 1) a census tract determined to be a Food Desert by the U.S. Department of Agriculture (USDA), as identified in USDA’s Food Desert Locator Tool; or 2) a census tract that qualifies as a Low-Income Community and has been identified as having low access to a supermarket or grocery store through a methodology that has been adopted for use by another governmental or philanthropic healthy food initiative. In addition, the 2011 allocation requires that QLICI activities increase access to healthy food. As a result, with the extension of the Federal New Markets Tax Credit program there will be an increased focus by community development entities on the development of affordable food centers in food deserts.
Pennsylvania Senate Approves Historic Tax Credit Bill
The Pennsylvania state Senate on April 2, 2012 approved the “Historic Preservation Incentive Act”. Pursuant to this Act a taxpayer may apply to the Pennsylvania Department of Community and Economic Development for a tax credit certificate which would provide a state tax credit equal to up to 25% of the “qualified expenditures” (as defined under Section 47(c)(2) of the Internal Revenue Code) incurred by the taxpayer. The issuance of state tax credit certificates by the Pennsylvania Department of Community and Economic Development is: (a) limited to commercial buildings; (b) provided on a first come first serve basis; (c) limited to not more than $10,000,000 of tax credit certificates in any fiscal year; and (d) limited to not more than $500,000 in tax credit certificates to a single taxpayer in any fiscal year. The Act also provides that the applicant taxpayer may assign a tax credit certificate to another taxpayer. The bill is currently pending before the state House.
Crowd funding: A tool for non-profits developing new projects
The origin of the concept of crowd funding is attributed to 1997 efforts by fans who underwrote an entire U.S. tour for the British rock group Marillion. Fans of the band raised $60,000 with donations following a fan based internet campaign. More recently, the web based company Kickstarter elevated the original Marillion concept into a sophisticated model of raising funds for a variety of business ventures. At the Kickstarter site donations from the public are requested in return for gifts, memberships or pre-ordered products; however, donors are not given an interest of any kind in the venture. Another aspect of crowd funding is tied into the JOBS Act which allows for a wider pool of smaller investors with fewer restrictions. Crowd funding is a potential vehicle for non-profits to develop projects with the support of their donor base. As an example, a non-profit developing a renewable energy project may use crowd funding to appeal to supportors for donations in exchange for renewable energy certificates generated by the renewable energy facility. In states where the purchase of renewable energy certificates is not compulsory by utilities these certificates may not have much economic value but evidence an individual’s commitment to clean energy. This is one example of crowd funding as a potential tool for non-profits.
New Markets Tax Credit Demand and Pricing on the Rise
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.
Renewable Energy Benevolent Investor Structure for Tax-Exempt Entities
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.
IRS Rules Value of Power Purchase Agreement May be included in Tax Credit Basis
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.