Senate Finance Committee Chairman Max Baucus (D-Mont.) released a summary of the Family and Business Tax Cut Certainty Act of 2012, as approved by the Senate Finance Committee. The Senate Finance Committee approved a package of more than $205 billion in tax cut extensions for families and businesses by a bipartisan vote of 19-5. The Bill, once finalized, will be posted on the Committee’s legislation website. The summary of the proposed Family and Business Tax Cut Certainty Act of 2012 describes an extension of the Federal New Markets Tax Credit Program for two additional years at $3.5 billion dollars of New Markets Tax Credit allocation each year.
Proposal to Extend Wind Production Tax Credit
On August 2nd the Senate Finance Committee voted to renew the wind power production tax credit that is set to expire at the end of this year with the proposed Wind Powering America Jobs Act. The bill is expected to go to the Senate floor when Congress returns from summer recess. Wind farms can generally choose to receive a continuing credit of 2.2 cents per kilowatt-hour of electricity produced or receive a one-time payment equivalent to 30 percent of the cost of developing a project. Currently the production tax credit and the option to elect the 30 percent renewable energy investment tax credit will expire at the end of 2012. In contract, the renewable energy investment tax credit for solar projects will continue through the end of 2016. However, it is unclear if the House will support a renewal of the wind production tax credit.
Duane Morris Works with Potential Middle Market Energy Tax Credit Investors
The expiration of the Section 1603 grant in lieu of the federal renewable energy tax credit has had a substantial adverse impact on the development of renewable energy projects in the Country. While some projects were able to grandfather the benefits of the Section 1603 grant by incurring the required costs in 2011, these projects will disappear during the year. In addition, although the grant provides money in lieu of the tax credit it does not monetize the losses associated with the project which most developers do not have the taxable income to use. As a result, less equity is generated for these projects. Historically the renewable tax credit investment community has serviced the very large utility size projects and not the middle market. Duane Morris attorneys are working with investors in the low-income housing, historic, and new markets tax credit industries to educate these investors to the structures and opportunities available for middle market renewable energy tax credit transactions. It is hoped that in the near future a group of investors will emerge to service middle market renewable energy tax credit transactions.
Pennsylvania Passes State Historic Tax Credit
On June 30, Pennsylvania became the 30th state in the Country to have a state historic tax credit with the passage of the Pennsylvania Historic Preservation Incentive Act. The Act will provide a 25% state tax credit for the rehabilitation of qualified income-producing buildings that also use the federal historic tax credit. The State tax credit will be equal to 25% of the “qualified expenditures” (as defined under Section 47(c)(2) of the Internal Revenue Code) incurred by the taxpayer. In order to qualify projects must be commercial in nature. To qualify as a historic structure, the building must be listed in the National Register of Historic Places or be part of a historic district listed in the National Register. The “qualified rehabilitation plan” itself must also be approved by the Pennsylvania Historical and Museum Commission, as reviewed against the Secretary of the Interior’s Standards and Guidelines of Rehabilitation. The Pennsylvania historic tax credit program is limited to $3,000,000 annually with an individual project cap of $500,000. The Pennsylvania Historical and Museum Commission and the Department of Economic Development will develop the program guidelines. The credit goes into effect July 1, 2012 but the first tax credits will not be issued until after July 1, 2013.
CDFI Fund Opens 2012 Round of New Markets Tax Credit Program
The U.S. Department of the Treasury’s Community Development Financial Institutions Fund (CDFI Fund) released today its 2012 Notice of Allocation Availability (NOAA) which officially opens the 2012 round of competition under the New Markets Tax Credit Program (NMTC Program). $5 billion in New Markets Tax Credit authority will be allocated by the CDFI Fund in the 2012 round, pending Congressional authorization. The CDFI Fund also announced September 12, 2012 as the deadline for the submission of an application for New Markets Tax Credit authority and October 31, 2012 as the deadline for issuance by prior allocatees of New Markets Tax Credit authority of qualified equity investments in the amounts required in the NOAA.
“Fairway” Financing – an alternative to the New Markets Tax Credit Program
Since the inception of the Federal New Markets Tax Credit program, the industry has evolved from the traditional phase of understanding how to use the program, to the tax credit investors driving the transaction, to most recently the community development entities with allocation controlling the benefits of the program. As a result of the scarcity of New Markets Tax Credit allocation, the historic equity benefit generated to the sponsors of projects has slowly diminshed. In contrast during the recent Duane Morris Real Estate and Finance Reception the guest speaker Bill Hankowsky described the extremely favorable terms of market rate financing for those borrowers in the “fairway”, e.g. meet the current underwriting criteria of conventional lenders. As a result, there is a diminishing gap between the cost of New Markets Tax credit subsidized financing and market rate financing for those sponsors who are in the “fairway”. Sponsors should consider whether they fall within the “fairway” of conventional financing when developing the capital stack of a project.
Forbearance Agreements in Renewable Energy Financing Transactions
With the expiration of the legislation which provided the 1603 grant in lieu of the energy investment tax credit, renewable energy developers must now “sell” the investment tax credit to a tax credit investor. Recapture of the investment tax credit to a tax credit investor occurs if the energy property is foreclosed by a lender during the 5 year tax credit compliance period. As a result, tax credit investors routinely require a lender to forbear exercising its rights against a borrower during the 5 year tax credit compliance period to avoid recapture of the investment tax credit. Obviously forbearance is contrary to the goals of a lender which wants the right to exercise any and all remedies in the event of a default by the owner of the energy property. As a result of the stress between the positions of the tax credit investor and the lender a variety of alternatives to absolute forbearance have evolved. These alternatives include limiting forbearance to solely the energy property, providing the lender with a security interest in the equity interests of the borrower and permitting the lender to exercise its pledge of the equity interests of the borrower, and the exercise of rights against the energy property only in the event of a major default and after notice and an opportunity to cure to the tax credit investor as well as providing the tax credit investor with a purchase right of the energy property. The syndication of the energy investment tax credit to the tax credit investor creates a conflict between the interests of the investor and the lender which can only be resolved by a negotiated forbearance agreement between the parties.
Third Circuit Hears Oral Argument in the Historic Boardwalk Case
On June 25th in Philadelphia Pennsylvania a three judge panel of the Third Circuit Court of Appeals heard oral argument on the appeal by the Internal Revenue Service of the Tax Court decision in the Historic Boardwalk case. The Tax Court had upheld the allocation of a Federal Historic tax credit to the tax credit investor member. One of the primary issues on appeal is whether the tax credit investor member had risk in the transaction. The Service argued that the tax credit investor was not at risk in the transaction and consequently was not a “partner” in the Historic Boardwalk investment entity and entitled to the allocation of the Federal historic tax credit. While it is clearly the intent of Congress that the Federal historic tax credit serve as an incentive for the rehabilitation of historic buildings, there is very little guidance on how the tax credit can be syndicated to investors. The historic tax credit industry has developed a structure in which the investor is a “partner” in the ownership entity, receives a preferential return, and is bought out of the investment entity through a put/call agreement after the expiration of the tax credit compliance period. The decision of the Court of Appeals may affect the structure of the syndication of future historic tax credit transactions.
Finding New Markets Tax Credit Allocation in Strange Places
With the demand for New Markets Tax Credit allocation at a historical high, available New Markets Tax Credit allocation is appearing in strange places. The downturn in the economy has hurt not only conventionally financed projects but also projects financed through government subsidized programs including the Federal New Markets Tax Credit program. Upon the foreclosure of a New Markets Tax Credit subsidized loan, the community development entity lender is obligated to redeploy the proceeds from the foreclosure in a new “qualified low-income community investment” to a new “qualified active low-income community business”. The requirement that a community development entity lender redeploy the proceeds of a previously extended New Markets Tax Credit subsidized loan presents an opportunity to sponsors to “reuse” New Markets Tax Credit allocation for a project. The new loan must satisfy the flexible lending product requirements of community development entity but may not contain a forgivable B note or a 7 year maturity.
Twinning the New Markets Tax Credit
While the Federal New Markets Tax Credit Program and the Federal Low-Income Housing Tax Credit Program are mutually exclusive – the former available for non-residential property and the latter available for residential rental property – the New Markets Tax Credit may be combined with other federal tax credits such as the Historic tax credit and the Renewable Energy tax credit. In the twinning structure – which is distinct from each tax credit being generated by a separate investment – the equity which generates the Historic or Renewable Energy tax credit is contributed as a qualified equity investment by an investor in a community development entity with an allocation of Federal New Markets Tax Credit authority. The result of twinning is to generate a New Markets Tax Credit on the Historic or Renewable Energy tax credit equity. While the pricing of a twinned credit will be more than the Historic or Renewable Energy tax credit without the New Markets Tax credit enhancement, the benefit may not always be significant when you factor in: (a) added transactional costs as a result of the complexity of the transaction; (b) the payment of the customary fees to the community development entity based on the amount of the “qualified equity investment”; and (c) the limited market of investors for the twinned credit. In a nutshell, a financial analysis of the net benefit of twinning the credits should be performed before pursuing the twinning of two federal tax credits.