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Combining Historic Tax Credits and New Markets …

Combining Historic Tax Credits and New Markets Tax Credits. Date July 14, 2016


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Combining Historic Tax Credits and New Markets Tax CreditsDate July 14, 20162What are New Markets Tax Credits?New Markets Tax Credits (NMTCs) are financial incentives meant to encourage investments in low-income communities that traditionally have had poor access to debt and equity NMTC is a 39% federal credit that is earned on a Qualified Equity Investment (QEI) into a certified Community Development Entity (CDE). The NMTC is claimed over a 7-year compliance period (taxpayer claims a credit equal to 5% of its equity investment over the first 3 years and 6% over the remaining 4 years). The CDE must make Qualified Low-Income Community Investment (QLICI) either in the form of an equity investment or a loan to a Qualified Active Low-Income Business (QALICB).Location of the QALICB s business must be in a qualified low-income census tract (QCT). QCTs are defined as areas with a 20% poverty rate or household incomes at or below 80% of the area or statewide median, whichever is greater. (Residential projects alone do not qualify for the NMTC but most commercial and mixed-use projects located in a QCT would qualify.)3What are Historic Tax Credits?There are 2 types of historic tax credits available to developers in Virginia. Historic Tax Credit (FTC). The FTC is a 20% income tax credit available for the rehabilitation of historic, income-producing buildings that are determined by the Secretary of the Interior, through the National Park Service, to be certified historic structures. The 20% credit is based on the owner s qualified rehabilitation expenditures incurred in connection with the rehabilitation of the certified historic structure. Historic Tax Credit (STC). The STC is a 25% income tax credit available for the rehabilitation of certified historic Would you use Tax Credits?To raise money to cover gaps in development funding. Rehabilitating historic structures in a manner which preserves the historic nature of the building is expensive!5Hypothetical FTC Equity CalculationFTC EQUITYQualified Rehab Expenditures = $10,000,000x Credit Rate 20%= Total Federal Credit$2,000,000x Tax Credit Investor Ownership99%= Total Tax Credits to Investor$1,980,000x Equity Price Per Credit$ Total Equity for FTC$1,782,0006Hypothetical STC Equity CalculationSTC EQUITYQualified Rehab Expenditures = $10,000,000x Credit Rate 25%= Total State Credit$2,500,000x Tax Credit Investor Ownership1%= Total Tax Credits to Investor$2,500,000x Equity Price Per Credit$ Total Equity for FTC$2,000,0007Hypothetical NMTC Equity CalculationNMTC EQUITY/LOAN PROCEEDSQEI$10,000,000*x Credit Rate39%= Total NMTC$3,900,000x Tax Credit Investor Ownership Total NMTC to Investor$3,899,610x Price Per Total Price Paid$3,509,649*QEI is often the aggregate amount of all leveraged development costs to include HTC, STC and NMTC equity plus developer equity8Benefits of HTCs and NMTCsThere are several tangible benefits to HTCs and private sector investment in urban of our historic buildings and creation and economic surrounding property tax revitalization 9TWIN NMTC/HTC HYPOTHETICAL ORGANIZATIONAL DIAGRAM WITH MULTIPLE CDESLeverage LoansLoan ABridge EquityLoan BCapital ContributionsDebt ServiceNMTCFederal HTC EquityDeveloper FeeOption 1:Master Tenant Loan to IFDebt ServiceQEINMTCQEINMTCReserve5,000Sub Allocation FeeSub Allocation FeeQLICI ReserveQLICI Reserve$$Capital ContributionCapital ContributionEquity QLICI Equity QLICI and/or Loanand/or LoanManagement Fee Asset Management FeeOperating Expenses Operating ExpensesOption 2: Master Tenant Loan to QALICB/Debt ServiceMaster Lease / Lease PaymentsOption 3: Master Tenant Invests Directly in QALICBCapital ContributionCapital ContributionsInvestment FundManagerNon-Profit/ Leverage LenderHTC/NMTC InvestorInvestment Fund, LLCMaster Tenant,LLC (10%)CDE Manager(.01%)Sub-CDE, LLCSub-CDE, LLCCDE Manager(.01%)QALICB, LLCC-Corp Blocker(89% if MT)/(99% if no MT)State Tax Credit Investor, LLC (1%)10Considerations When Using Tax credit transactions are complicated. Developers should engage experts in the tax credit field before beginning any rehabilitation project. Examples of experts needed are: historic consultants, architects, accountants and attorneys. Tax Credit transactions can be expensive due to the need for experts to guide you through the rehabilitation process. Any non-profit involvement adds significant complication to any tax credit of NMTCs. Unlike HTCs which have no annual volume cap, there are a finite amount of NMTCs available each year and receiving an allocation of NMTCs from CDEs is very Periods. HTC recapture period is 5 years. NMTC recapture period is 7 years. (Cannot transfer rehabbed property, either directly or indirectly, during recapture period.)11IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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