New Markets Tax Credits

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.

 

 

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.

PenniesOn Wednesday, December 3, 2014, the House of Representatives passed a one-year tax extender bill that will shore up two key housing and community development programs. The Tax Increase Prevention Act of 2014 (H.R. 5771) (the “Act”), passed 378 to 46, extends a favorable provision in the Low-Income Housing Tax Credit (“LIHTC”) program, by providing that the nine percent housing credit floor will be applicable for LIHTC allocations made prior to January 1, 2015.  Further, the Act funds an additional $3.5 billion of New Markets Tax Credit authority for the calendar year 2014 round, the competitive applications for which were due to the CDFI Fund on October 1, 2014.  While the extender package does not offer permanent support for these programs, it is an encouraging step for the myriad of stakeholders that rely on tax credit financing.

As reported by the National Council of State Housing Agencies, the Senate and President are likely to approve these measures by the end of the calendar year. For more on the Tax Increase Prevention Act, please see the House of Representatives webpage.

BuildingsOn November 5, 2014, the Philadelphia office of Ballard Spahr LLP hosted a lively and informative discussion of Tax Credit Hot Topics.  The panel, moderated by Ballard Spahr partner Monique DeLapenha, included representatives of all aspects of a tax credit transaction, providing each unique perspective on a variety of important areas in the tax credit arena.

Attendees were provided with a timely review of the impact that the midterm 2014 election will have on tax credits.  The Senate has passed the “tax credit extender” legislation, which would extend the life of approximately 100 tax credit provisions that have expired or are near expiration, including the 9% floor for Low Income Housing Tax Credits (LIHTCs) and the New Markets Tax Credit (NMTC) program.  The House has been working on individual bills, which are not likely to all get passed in the next two weeks before the end of the congressional session.  With the GOP controlling both the Senate and House in 2015, comprehensive tax reform is likely to take place, as it is a top priority of Republicans, which would impact all forms of tax credits. There is also the potential for legislative action on the Rental Assistance Demonstration (RAD) program.  Currently, HUD has been authorized to convert 60,000 units from public housing to Section 8 housing, in order to bring capital investment to address the physical needs of the aging public housing stock.  The program’s demand is exceeding the authorization, however, because there are over 100,000 units on a waitlist for RAD conversion.  Public housing authorities and developers are advocating for the cap to be lifted or extended, however some in Congress waiting to see how the current demonstration plays out before authorizing additional units and HUD and the affordable housing industry are working to provide data from the demonstration.

Another “hot topic” in tax credits is the subject of fair housing, and specifically those in the industry are watching the outcome of a case which the U.S. Supreme Court is slated to hear in the next term.  The outcome of the case could cement the standard that courts must use when fair housing claims are brought.  Under the Fair Housing Act, a claim may be brought by showing that there was intentional discrimination in a housing practice or policy, or by showing that a housing practice or policy has a disparate impact on a protected class.  In a recent case in Texas, Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, a trial court held that the Department of Housing and Community Affairs in Texas violated the Fair Housing Act when it awarded LIHTCs to projects that would be developed in low-income neighborhoods, because it had a disparate impact on a protected class.  The Supreme Court will review whether the disparate impact theory is a viable basis for fair housing claims.  It is a case being watched carefully by every participant in the housing tax credit world, from the state agencies that award LIHTCs to the equity investors to the affordable housing developers. The panel also provided detailed insights into how developers can make strong presentations to certified development entities for a NMTC allocation, how an affordable housing developers structure a RAD deal, and how the Historic Broadway Hall case provided more certainty for equity investors in structuring partnerships to be certain they do not have issues with the IRS in the event of an audit.

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.

 

Welcome back to the latest installment of “Get to Know a NMTC Housing Deal,” where we find ourselves in Baltimore, Maryland featuring the efforts of a local and national cast of participants to rehabilitate nearly 90 acres in east Baltimore.

Over the last several years, the east Baltimore development project has used the New Markets Tax Credit to receive $33.4 million dollars that it combined with money from traditional financing sources to demolish or rehabilitate blighted properties, create 1.7 million square feet of biotech, retail and office space, build or refurbish 2,100 units of mixed income housing, and construct a new public charter school.  The development project is a model of successful urban planning and innovative and efficient project financing.

Enterprise Community Partners, Inc. and its affiliated entities served as the Community Development Entity and worked to bring New Markets Tax Credits into the financing options.  Bank of America served as the Investor to provide $33.4 million dollars in capital to the project developers, including the East Baltimore Development, Inc., a 501(c)(3) developer overseeing the management and development of the east Baltimore project with other partners.  Additionally, the Annie E. Casey Foundation provided additional credit enhancement to secure the financing from the Investor.  Ballard Spahr represented East Baltimore Development, Inc. in the Phase I NMTC financing structure.

The NMTC indirectly subsidizes the cost of borrowing by providing a tax credit to the investor, which lowers the interest rate to the borrower or developer.  Some states have developed their own NMTC programs to work in tandem with the federal one, and the Ballard Spahr housing tax credit group is working to expand the credit to other states.

If you’ve got a housing project in a low-income community and are looking for creative and cheaper sources of project financing, the NMTC might be a great fit for your project.

Join us next time for “Get to Know a NMTC Housing Deal.”