Background MUNICIPALITIES AND DOWNTOWN REDEVELOPMENT IN SOUTH - - PowerPoint PPT Presentation

1 MUNICIPALITIES AND DOWNTOWN REDEVELOPMENT IN SOUTH CAROLINA: Expanding The Tool Kit

Background

• Over past 30 years, shift focus from remediation to

development

• Need for commercially vibrant, historically distinctive

downtowns

• Emphasis on quality of life, tourism, livability
• Existing governmental mechanisms (TIF districts; GO

bonds; utility revenue bonds) geared toward infrastructure and context. Good for setting the table but not putting anything on it

• Need to develop “product”

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Direct Government “Product”

• Libraries, museums, performing arts centers, parks,

recreation facilities, as well as government facilities

• Some new mechanisms to drive these in addition to

traditional tools (like GO bonds) include installment purchase revenue bonds, hospitality and accommodations bonds, new market tax credit financing.

• Development of collaborative and mixed use facilities
• Examples: Greenwood Arts Center; Francis Marion

Performing Arts Center in Florence; Florence County Museum

Greenwood Cultural Facility

• 1911 Federal Building
• Jointly redeveloped by City, County, Self Foundation

with federal, state, local governmental and private

• funds. Total Cost of $1,750,000
• 20,118 square feet housing museum galleries,

conference and recreational facilities, visitor and tourism center, foundation and arts council offices

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Greenwood Federal Building/Cultural Facility Francis Marion University Performing Arts Center

• 64,000 square foot facility built on site of abandoned

motel in downtown Florence

• Contains 850 seat main theater, 150 seat “black box”

theater, University classroom and office space, nonprofit offices

• $30M project, jointly developed by FMU, City, County,

and Drs. Bruce and Lee Foundation

• First FMU presence in City of Florence in the

University‟s 40 year history

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Francis Marion University Performing Arts Center Florence County Museum

• $12M, 28,000 square foot facility
• Jointly financed by County, State, and Drs. Bruce and

Lee Foundation

• Partnership with existing 501(c)(3) Florence Museum
• County portion funded with hospitality fee revenue

bond

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Florence County Museum Incentivizing Private Investment

• Expanding tax base, creating jobs
• Not much in standard municipal tool kit in this regard
• Most direct investment incentives at County level and

geared toward manufacturers

• A couple of tools that are available and that are driving

projects in South Carolina

• Special source revenue credits (direct subsidy resulting

in tax abatement with possibility of leverage)

• Federal and state rehabilitation tax credits (largely

coordination and facilitation role with some possibility

• f subsidy through participation)

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Special Source Revenue Credits

• South Carolina Code Sections 4-1-175 and 4-29-68
• Properties given multi-county business park (MCBP)

designation are eligible to receive credits against property taxes (which are “fees” generated by MCBP) to offset “cost of infrastructure serving the… project”

• Level of credits and duration flexible
• Credit granted by County Council
• Unlike FILOT, available to any commercial activity
• Can‟t overlay on TIF District
• Potential for leveraging through special source bonds

SSRC Project: Hotel Florence

• 53 room boutique hotel and 180 seat restaurant in 1905

building in downtown Florence

• $4.2M project
• Developer approached City and County for incentives
• Centerpiece was 7 year, 85% SSRC
• Would generate $533,000 in credits to developer/owner
• Existing TIF created problem
• Will generate approximately $1M in state and federal

historic rehab tax credits

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Hotel Florence Hotel Florence

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Rehabilitation Tax Credits

• Several Types
• Range from 10% to 25% of eligible project expenditures
• Federal historic rehab credit (10 or 20%, depending on

National Register status)

• State rehab credit (10%), follows federal
• State retail rehab credit (10%), minimum 40,000 sf
• Textile facility rehab credit (25%)
• Abandoned building rehab tax credit (25%); authorizing

bill died in General Assembly earlier this month

Old Florence County Library (Before)

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Old Florence County Library (After) Old Florence County Library

• 1925 County Library with 1970s addition
• Removed addition and returned building to original

appearance

• 24,000 sf leased by Turner Padget law firm
• $5M project
• Over $1M in tax credits
• Largest commercial investment in Downtown Florence

in 50 years

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Key Federal Tax Incentives

• Rehabilitation Tax Credit (IRC Section 47).
• New Markets Tax Credit (IRC Section 45D).

What is a Tax Credit?

Credits vs. Deductions A Credit Offsets Tax Liability Dollar for Dollar Deduction Credit Income $100 $100 Less: Deductions (20)

• Taxable Income

80 100 Gross tax Due @ 35% 28 35 Less: Credits

• (20)

Net Tax Due @ 35% 28 15

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How Tax Credits Deliver Capital

Sample Structure

• Federal tax credits not sold,

but passed to investors through partnerships

• Require structuring with

partnerships and equity contributions

• Generally, partnership

agreements contemplate exit

• f tax credit investor after

compliance period

Tax Credit Investor 99% Owner Project General Partner 1% Owner 99% Credits

Example 1: Historic Tax Credits (HTCs)

• Downtown office and retail
• Multiple phased project with

additional HTC equity expected for future phases

• HTC represented key piece of

financing to meet business requirements of developer

Developer Equity, $19.5 Hard Debt, $53.3 Soft Debt, $10 Project Total, $97.

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Example 2: Combining New Markets Tax Credit (NMTC) & HTC Halves Sponsor Equity

• Renovation of historic hotel
• Federal HTCs, State HTCs, Federal

NMTCs each with its own investor

• Multiple parties involved
• Low put price to exit tax credit

equity at compliance period

• Market lender cooperated with

structuring to increase money in first loss position and decrease exposure

Project Total, $19.7 NMTC Equity, $3.0

• Fed. HTC Equity, $3.0

State HTC Equity, $2.2 Developer Equity, $4.0 Hard Debt, $7.5 Tax Credit Equity, $8.2

Agenda

• Types of Federal Historic Tax Credit
• Calculating the Credit
• Qualifying for the Credit
• Claiming the Credit
• Current Deal Structures
• Questions

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The Rehabilitation Tax Credits

Internal Revenue Code Section 47

There are Two Types of Federal HTC:

10% & 20% Credit

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Important Dates in the History of the Rehabilitation Tax Credits

• 1976: First federal tax incentives for historic

preservation (accelerated depreciation/ amortization).

• 1978: First federal tax credit for rehab of historic

buildings (10%).

• 1981: Three tiered tax credit (25%, 20% and 15%),

including first credit for rehab of older, non-historic buildings.

• 1986: Current two tiered structure; passive loss

limitations imposed.

The 20% Rehabilitation Tax Credit Fundamentals

• Tax Aspects Administered by the IRS.
• Preservation aspects jointly administered by NPS and

State Historic Pres. Offices (SHPOs).

• Tax Credits = dollar for dollar reduction in tax liability

(contrast with deduction).

• RTC is the most important (in dollar volume) federal

preservation program.

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The 20% Rehabilitation Tax Credit Statistics

• 937 projects approved by NPS in 2011*
• In 2011, roughly 69% of HTC projects were for multi-family

housing, 16% for office space, 3% for commercial space*

• Of the 94.5% of Projects receiving Part 3 approvals that used other

incentives or publicly supported financing, 48% used state historic tax credits* *Source: Annual Report for Fiscal Year 2011: Federal Tax Incentives for Rehabilitating Historic Buildings National Park Service

Federal Approval Process

• 3 Part Application Process

– Part 1 – Historic Status – Part 2 – Design Approval – Part 3 – Project Completion

• State and National Park Service Review

– 60-Day Minimum Review

• Secretary of Interior‟s Standards for Rehabilitation

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What Types of Buildings Qualify?

• The IRS Rules: Depreciable Building Requirement

– Must be a “building”. Building is defined as a structure or edifice enclosing a space within its wall and usually covered by a roof. – Building must be depreciable. Depreciable buildings are generally those used for nonresidential (i.e. commercial) or residential rental purposes. (See Section 168(e))

What Kinds of Buildings Qualify?

• Almost Anything But a Personal Residence

– Apartments – Hotels – Office Buildings – Warehouses – Distribution Facilities – Back-Office Support/Computer/Call Centers – Sports Facilities – Mixed Use of Any of the Above

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What Types of Buildings Qualify? (cont‟d)

Option #1 Building is listed in the National Register of Historic Places.

The NPS Rules: Certified Historic Structure Requirement

What Types of Buildings Qualify? (cont‟d)

Option #2 Building is located in a registered historic district and certified by the Sec. of the Interior as being of historic significance to the district.

The NPS Rules: Certified Historic Structure Requirement

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Be Sure You Pass “The Test”

Standard Rehabilitation Test Phased Rehabilitation Test

Substantial Rehabilitation Test

• Look back from placed in

service date to basis in building 24 months prior or beginning of project, whichever is later

• QREs must exceed prior basis
• r $5,000, whichever is

greater

• Rolling 24-month window
• Must be evidence that project

will take longer than 24 months to complete prior to commencing rehab

• 60-month window
• Otherwise similar rules

What Types of Rehabilitations Qualify?

Definition of QREs

• “Qualified Rehabilitation Expenditures” (QREs) is the

tax term given to those development costs on which rehabilitation tax credits can be claimed.

• QREs are any amounts chargeable to a capital account

made in connection with the renovation, restoration or reconstruction of a qualified rehabilitated building (including its structural components), except as provided by law.

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• QREs include costs related to:

– walls, partitions, floors, ceilings; – permanent coverings such as paneling or tiling; – windows and doors; – air conditioning or heating systems, plumbing and plumbing fixtures; – chimneys, stairs, elevators, sprinkling systems, fire escapes;

What Types of Rehabilitations Qualify?

Definition of QREs (cont‟d.)

• QREs include costs related to:

– construction period interest and taxes; – architect fees, engineering fees, construction management costs; – reasonable developer fees

What Types of Rehabilitations Qualify?

Definition of QREs (cont‟d.)

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What is Not a QRE?

• Land & Interest Carry on Land
• Building Acquisition & Interest Carry on Acquisition
• Acquisition-Related Costs
• Site Improvements & Landscaping
• Enlargements & Demolition
• Personal Property
• Tax Exempt Use Property

Sample Development Budget

Qualified Depreciable Rehabilitation Non-Eligible Funded Total Expenditures Basis Expense Other Acquisition Costs-Land 40,000

• 40,000

Acquisition Cost- Building 120,000

• 120,000
• Construction Period Interest for Rehab

20,167 20,167

• Permanent/Construction Loan Fee

6,000 1,000

• 5,000
• Achitectural, Engineering

28,000 28,000

• Construction Contract

300,000 300,000

• Site Improvements

5,000

• 5,000
• Contingency

35,000 35,000

• Appliances

17,800

• 17,800
• Historic Tax Credit Application Fee

2,500 2,500

• Professional Fees

15,000 15,000

• Marketing & Leasing Reserves

20,000

• 20,000

Insurance and RE Taxes During Construction 15,000 15,000

• Development Fee

124,893 83,333 41,560

• TOTAL APPLICATIONS:

749,360 500,000 184,360 5,000 60,000

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Calculating the Credit

QREs $ 500,000 Credit Rate 20%* Credits $ 100,000

• Calculate the equity amount: $1.15 per credit multiplied

by $100,000 credits = $115,000 * Credit Rate is sometimes 10%.

What Triggers the Credit?

• Placement in Service

– CO or TCO is Evidence of Placement in Service

Is the building ready for occupancy?

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When Can the Credit Be Claimed?

• Generally, the Year Placed In Service - 100% of the

Credit Claimed

• Carry back One Year
• Carry forward 20 Years

Who Can Claim the Credit?

• Historic credits are shared among owners based on the

profits allocation

• „Profits‟ is considered to include the owner‟s share of:

– Taxable income – Operating cash flow

• These allocations must remain the same during the

recapture period

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Limitations of the Use of the Credit

• Passive Loss Rules
• Alternative Minimum Tax
• At-Risk Rules

– Companies whose stock is publicly-traded generally aren‟t subject to these limitations

How to Claim the Rehab Tax Credit

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How to Claim the Rehab Tax Credit (cont‟d)

• Credits are claimed by filing IRS form 3468 along with

the tax return for the year in which the taxpayer claims the credit.

• Part 3 Approval need not have already been obtained

(but generally must be obtained within 30 months of tax return filing date)

What is the Risk of Recapture?

• Triggering recapture

– Disposition of the property – Disposition of at least 1/3 partnership interest – Noncompliance with Secretary‟s Standards – Property becomes „tax exempt use property‟ – Total casualty loss

• Amount of recapture

– 100% of the credit in the first 12 months from placed in service – Declines 20% every 12 months thereafter – Possible recapture becomes zero after 60 months

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Other Tax Credit Issues

• Development Fee

– Amount – Payment

• Tax Exempt Use Property - Check The Tenants!
• Basis Adjustment-and impact on LIHTC

Single Entity Structure

Tenants Rental Payments Tax Credit Investor LLC Construction/ Perm Lender Managing Member (Developer Affiliate) Historic Tax Credit Equity 99.99% Credits, Profits & Losses and Cash Flow Loan Proceeds Debt Service Payments

Tax Credit, LLC (Property Owner)

Tax Credit Investor .01% Credits, Profits & Losses, Fees and Cash Flow Developer Equity Developer Dev. Fee

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Historic Tax Credit Syndication

The Credit Pass-Through Structure

• Landlord LLC owns fee simple, undertakes rehab,

enters into Dev. Agreement, and earns the Historic Tax Credit.

• Master Tenant, LLC leases the entire project from the

Landlord LLC for a fixed annual rental payment.

Historic Tax Credit Syndication

The Credit Pass-Through Structure (cont‟d.)

• Master Tenant, LLC operates the property, subleases to

end users and enters into the Property Management Contract.

• Landlord makes special tax election to pass the Historic

Tax Credit through to the Master Tenant LLC.

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Master Lease/Credit Pass-Through Structure

Sub-Tenants/ End Users Rental Payments Tax Credit Investor LLC Construction/ Perm Lender Managing Member (Developer Affiliate) Historic Tax Credit Equity 99.99% Credits, Profits & Losses, and Cash Flow Loan Proceeds Debt Service Payments .01% Credits, Profits & Losses, Fees and Cash Flow Developer Equity Master Tenant, LLC (Master Tenant) Landlord, LLC (Property Owner/Lessor) 99.99% Credits, Profits & Losses, Fees and Cash Flow Pass-through of Historic Tax Credits & Share of Lease Payment & Equity Investment

Investors Capitalize Project for Credit and Other Tax Benefits

Leveraged Lender (Bank) Tax Credit Investor Investment Fund LLC QALICB/Landlord LLC (Property Owner) Development Budget: $8M Sub-CDE LLC $4,312,030 $1,152,000 HTC Equity $2,007,720 NMTC Equity Load (4.5% of QEI) 321,750 Master Tenant, LLC 7,150,000 QEI Loan A 4,312,030 Loan B 2,837,970 100% Ownership Lease CDE: Community Development Entity QEI: Qualified Equity Investment QALICB: Qualified Active Low Income Business

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Thank you! More Information?

Joseph Wallace Reznick Group 704.837.7381 Joe.wallace@reznickgroup.com

• J. Christopher Riddle, Esq.

Haynsworth Sinkler Boyd, P .A. 843.673.5309 criddle@hsblawfirm.com Benjamin T . Zeigler, Esq. Haynsworth Sinkler Boyd, P .A. 843.673.5304 bzeigler@hsblawfirm.com