New Markets Tax Credits

Ballard Spahr lawyers, Molly Bryson, Doug Fox, Wendi Kotzen and Linda Schakel, recently offered a  presentation regarding the Opportunity Zones established as part of the Tax Cuts and Jobs Act .  As a new program established to encourage capital investment in the over 8,700 Opportunity Zones selected by each of the states, District of Columbia, and U.S. possessions, this new program has the potential to provide investors in Opportunity Funds with deferral of tax on gains rolled over into an Opportunity Fund and potential elimination of tax on the appreciation recognized on the investment in the Opportunity Fund. Opportunity Funds and their investors will be looking to make investments in businesses and property located in Opportunity Zones. Investments in Opportunity Zones could be used in conjunction with the low-income housing tax credit and help bolster affordable housing and community development projects in these neighborhoods.

The linked materials and the session recording provide steps you can take to benefit from this new federal tax program, including:

·        Establishing and qualifying an Opportunity Fund

·        Investing gains into Opportunity Funds

·        Obtaining the maximum benefit of investing in Opportunity Funds

·        Structuring Opportunity Fund investments

·        Locating designated Opportunity Zones

·        Positioning your business or property to qualify as eligible for investment capital from an Opportunity Fund

·        Combining the benefits of an Opportunity Zone with other federal tax programs, such as Low Income Housing Tax Credits (LIHTC), Historic Tax Credits, and New Markets Tax Credits.

Should you have a project that you think could benefit from Opportunity Zones investments or are seeking ways to facilitate investments, please reach out to members of the Ballard Spahr team for guidance and help brainstorming around issues and questions.

As we know, the President has signed what was originally titled Tax Cuts and Jobs Act, the most significant overhaul to the U.S. Tax Code since 1986. The President signed the Act into law after the first of the year in order to avoid some automatic spending cuts.

In its final form, this Tax Code overhaul retains private activity bonds and the the low-income housing tax credit. However, according to A Call To Invest in Our Neighborhoods (ACTION) Campaign, the amendment of other critical provisions of the Tax Code, especially, the lowering of the corporate tax rate from 35 percent to 21 percent and the creation of a base erosion and anti-abuse tax, present concern for affordable housing, as these provisions can impact an investor’s tax credit appetite. In an analysis performed by Novogradac and Company, the final version of the bill “would reduce the future supply of affordable rental housing by nearly 235,000 homes over 10 years.” Further, it is anticipated that other changes to the Tax Code, such as those relating to bonus depreciation, depreciation, and interest expense limitations, will impact equity pricing.

The legislation also retains the new market tax credit, with no change to its expiration which is after the 2019 allocation. The 20% historic tax credit was also retained, but with significant modification, including claiming the credit ratably over 5 years.

Ballard Spahr’s Tax Group is also following the legislative developments of other provisions of the bill. Late yesterday, the Tax Group issued a thoughtful analysis of the final bill.

Please use our Tax Reform Alert Center as a resource to find more information on the bill and/or reach out to us directly.

 

 

After legislation to repeal the Affordable Care Act was pulled from the House floor last Friday, news headlines across the country began reporting that tax reform is next on the Trump Administration’s agenda. As noted in our prior blog post, tax reform that changes the corporate tax rate, the tax-exempt bonds program and the tax-credit programs will have significant impacts on the production of the affordable housing across the country.

In an effort to protect affordable housing programs, legislators have introduced amendments to the Internal Revenue Code (“IRC”) that either (1) create savings to be reinvested in affordable housing programs or (2) expand the availability of housing tax credits and fix related technical issues.

The following bills were introduced in the past 60 days –

  1. The Affordable Housing Credit Improvement Act of 2017 (S. 548) (the “Cantwell-Hatch bill”). According to The Affordable Housing Tax Credit Coalition, the bill builds upon prior bills (S. 2962 and S. 3237), also introduced by Sentor Maria Cantwell (D) and Senator Orrin Hatch (R), and includes “a new provision addressing planned foreclosures, a provision raising the cap to 30 percent from 20 percent on Difficult to Develop Areas (DDAs), additional criteria for community revitalization plans, a provision which codifies, rather than leaving up to Treasury regulations, the prohibition against any state QAP from including local approval or local contribution requirements, and other technical changes.” A section by section summary can be found here.
  2. Affordable Housing Credit Improvement Act of 2017 (H.R. 1661). The purpose of the bill, as reported in a press release issued by co-sponsor Representative Pat Tiberi (R), is to “make the financing of affordable housing more predictable and streamlined, facilitate housing credit development in challenging markets like rural and Native American communities, increase the housing credit’s ability to serve extremely low-income tenants, and support the preservation of existing affordable housing.” The bill is co-sponsored by Representative Richard Neal (D). A section by section summary can be found here.
  3. Common Sense Housing Investment Act of 2017 (H.R.948). The goal of the legislation, introduced by Representative Keith Ellison (D), is to expand the mortgage interest deduction to lower income homeowners and reinvest an estimated $241 billion in savings over 10 years into affordable housing. More information on the bill can be found here.

Bi-partisan support for these bills, especially S.548 and H.R. 1661, suggest that tax reform protecting housing tax credits is good policy. Monitoring the evolution of these bills; the President’s plan for tax reform and the industry’s response to anticipated changes in the IRC will be telling of the future affordable housing programs, especially those authorized under the IRC.

 

Wind Mills and Solar PanelsAs in prior years, the Obama administration’s FY 2016 budget includes a number of impactful, and generally positive, tax credit proposals. With respect to the Low-Income Housing Tax Credit (LIHTC), the budget retains many of last year’s proposed modifications, and adds a new proposal to remove the population cap for Qualified Census Tract designations. Specifically, the budget would modify the LIHTC program by:

  • authorizing States to convert up to 18% of their private activity bond volume cap into additional low-income housing tax credit (LIHTC) allocating authority (last year’s proposal limited the percentage to 8%);
  • allowing LIHTC development owners’ to elect a third possible low-income set aside in which at least 40% of a project’s units must be occupied by tenants whose incomes average no more than 60% of area media gross income (with the caveat that no low-income unit could be occupied by a tenant with income over 80% of AMI);
  • increasing the discount rate used in calculating LIHTCs for non-bond financed projects;
  • adding preservation of federally assisted affordable housing to Qualified Allocation Plan criteria;
  • removing the population cap for Qualified Census Tract designations (new proposal for 2016); and
  • implementing a requirement that LIHTC-supported housing protect victims of domestic abuse.

Among other non-LIHTC highlights, the budget would permanently extend the New Markets Tax Credit (NMTC) with a $5 billion annual allocation, and permanently extend both the renewable energy production tax credit (PTC) and energy investment tax credit (ITC). The ITC would be extended at its current 30% credit level (which is set to expire for properties placed in service after December 31, 2016), and the election to claim ITCs in lieu of PTCs for certain qualified facilities would be made permanent.

The U.S. Department of the Treasury’s General Explanation of the Administration’s Fiscal Year 2016 Revenue Proposals (the “Greenbook”) can be found here.

Although the Obama administration’s tax proposals generally tend not to get much traction with lawmakers, the FY 2016 budget is significant in that it adds another voice to the tax reform debate, and signals Presidential support for the NMTC and renewable energy tax credit programs.

In a previous Housing Plus blog post on January 7, 2015, I described the various updates to the CDFI Fund’s Frequently Asked Questions document for the New Markets Tax Credit (“NMTC”) program.  The most significant update may be the guidance relating to dissolving or decertifying subsidiary Community Development Entities (“CDEs”) at the end of the 7-year NMTC compliance period. The previous FAQ (released in September 2011) stated only that the CDFI Fund was “developing guidance” that it would issue at a later date. Needless to say, this led to some uncertainty in the NMTC community about when and how a subsidiary CDE could be dissolved.

The updated FAQ confirms that an Allocatee may dissolve a subsidiary CDE, or request that it become decertified as a CDE, at any time after the end of the NMTC compliance period. In order to do so, the Allocatee must submit information confirming the subsidiary CDE’s dissolution or request to become decertified as a CDE, confirm that the applicable NMTC compliance period for the subsidiary CDE has been met, and  certify that no further NMTC activity will be undertaken by the subsidiary CDE. Once the information has been submitted and reviewed, the CDFI Fund will provide an acknowledgement of the dissolution/decertification and confirmation that the applicable allocation agreement(s) no longer apply to the entity. Once acknowledged by the CDFI Fund, the Allocatee’s only continuing obligation with respect to the former CDE is that it would continue to be responsible for any additional information reporting and Events of Default reporting (to the extent applicable), as set forth in the termination section of the applicable allocation agreement(s).

On Friday January 2, the CDFI Fund released an updated Frequently Asked Questions document for New Markets Tax Credit (“NMTC”) questions relating to certification, compliance monitoring, and evaluation. The updated FAQ supersedes a prior document released in September 2011. The updated guidance addresses the following issues:

  • Dissolution of subsidiary – Community Development Entities (“CDEs”);
  • Termination of Allocation Agreements;
  • Designating a “non-real estate qualified equity investment” for purposes of Treasury Directive 9600;
  • Clarification of “real estate Qualified Active Low-Income Community Business (“QALICB”) versus a “non-real estate QALICB;”
  • Defining Material Events;
  • Restrictions on the use of bond proceeds under the CDFI Bond Guarantee Program in NMTC-related activities;
  • Process for amending Allocations Agreements, adding subsidiary CDEs, and changing Service Areas;
  • Meeting the requirement of Section 3.2(h) of the Allocation Agreement on Targeted Distressed Communities for a QALICB with tangible property in several census tracts;
  • Defining “Affordable Housing” for the purpose of meeting Section 3.2(k) of the Allocation Agreement;
  • Measuring “Innovative Investment” for the purpose of meeting Section 3.2(l) of the Allocation Agreement; and
  • Determining if a Qualified Low-Income Community Investment supports businesses that obtain HUB Zone certification.

 

ClockThe Senate passed the “Tax Increase Prevention Act of 2014” (H.R. 5771) on Tuesday night just before Congress adjourned for 2014. As Molly Bryson described in her December 5, 2014 post following the House’s passage of the bill, the tax extenders package provides a one-year retroactive extension of certain tax provisions that expired at the end of 2013. Some specific extensions that are of interest to the tax credit community include the following:

  • extension of 9% tax credit floor for low-income housing tax credit allocations made prior to January 1, 2015
  • extension of $3.5 billion in allocating authority for new markets tax credits for the calendar year 2014 round
  • extension of the production tax credit for wind and certain other renewable energy projects that begin construction in 2014
  • extension of 50% bonus depreciation for certain new equipment placed in service in 2014 (2015 for certain longer period production property)

The extent to which this legislation is beneficial really depends on the type of tax incentive involved.  This is a boon for the new markets tax credit community, because it guarantees another full $3.5 billion round of funding. The benefit to renewable energy projects is less clear, as eligibility for the production tax credit is subject to a year-end construction commencement deadline. It’s also not clear how many affordable housing projects will really benefit from a 9% credit floor this late in the tax credit allocation season. In any event, January 1, 2015, when these tax extenders expire, is going to feel a lot like January 1, 2014. It will be interesting to see if this two-week extenders package becomes the poster child for the need for permanent tax reform.

The NMTC is a great tool to finance temporary housing shelters and related facilities to combat chronic homelessness around the county.

Blanchet House of Hospitality – Portland, Oregon

In 2011, USBCDC, one of the largest New Markets Tax Credit investors, used the credit to finance a facility for Blanchet House of Hospitality, a social services nonprofit that provides three-meals-per-day, clothing and temporary shelter to the homeless and recovering addicts located in Portland, Oregon.  Blanchet House of Hospitality received commercial loans from U.S. Bank, investor equity from USBCDC, grants from the Portland Housing Bureau, and equity from a capital campaign to construct a $13,000,000 facility consisting of a commercial kitchen, dining facilities and transitional shelter and housing space for men with addictions, problems with unemployment or home and family problems.  To learn more about Blanchet House of Hospitality and to view photos of the finished product, please visit the Blanchet House website or this article.

Neighborhood Services Organization Bell Building – Detroit, Michigan

Neighborhood Services Organization of Detroit, Michigan used the New Markets Tax Credit and other sources of financing to renovate the historic Bell Building in Detroit in order to provide the NSO with an award-winning building that serves as its headquarters and 155 fully furnished, one-bedroom apartments for formerly chronically homeless adults.  The Bell Building also houses a health care clinic and facilities to provide mental health, addiction treatment, nutrition, financial literacy and other services for the needy and chronically homeless.  NSO estimates that the facility saves Detroit-area taxpayers more than $5,000,000 annually in costs of treatment for the chronically homeless.  The financing combined Low Income Housing Tax Credits, federal and state Historic and Brownfield tax credits, nearly $2,000,000 in NMTC allocation provided by CSH, and other sources of funds to contribute to the rehabilitation of the building.  Details about the Bell Building are avaialable on the NSO website.

Store FrontsThe Office of the Comptroller of the Currency, Treasury, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation are the federal agencies that implement the Community Reinvestment Act (CRA). These agencies also provide guidance to agency personnel, financial institutions and the public in the form of written guidance called “Interagency Questions and Answers Regarding Community Reinvestment.”

On September 8, 2014, the agencies published a a notice of and request for comments on revised Questions and Answers that provide additional guidance regarding several aspects of the CRA, including a discussion of the factors that contribute to community and economic development and examples of community development loans. One factor would consider a “size and purpose” test with a presumption that loans to certain entities (e.g., Small Business Development Company, Small Business Investment Company, Rural Business Investment Company, New Markets Venture Capital Company or a New Markets Community Development Entity) meet the test. Another would add renewable energy and energy efficient technologies as eligible activities for a community development loan, citing the role renewable energy  and energy efficiencies play in the affordability of rental housing, in reducing the cost of providing services and in creating jobs.  New questions and answers addressing community development services and the responsiveness and innovativeness of financial institutions are also proposed.

Comments on the proposed revisions to the Interagency Questions and Answers Regarding Community Reinvestment will be due sixty (60) days after publication of the Federal Register notice.

 

Last week, the CDFI Fund provided guidance for CY 2014 NMTC Program applicants by updating its 2014 NMTC Program Allocation Application Frequently Asked Questions.  Responding to various questions it received during its August 12th and August 14th conference calls regarding the application process, the CDFI Fund responded to many questions and concerns raised during those calls.

Among issues addressed by the update are:

  • The distinction betwee financing facilities owned by Operating Businesses vs. financing the development (construction of new facilities or rehabilitation of existing facilities), acquisition, management or leasing of real estate that will be sold or leased to third parties
  • Best practices for describing leverage structures
  • QLICIs closed after August 5, 2014
  • Explanation of “Baseline of activity for the past five years” in Application Question 20(a)
  • Completion of specific innovative activity requirements
  • HUD’s Promise Zone website

The deadline for the 2014 Round allocation application submission is 5:00 pm ET, October 1, 2014.  Applications may only be submitted online.