State of the States. Matt Meeker Novogradac & Company LLP. George Barry Foss and Company. Daniel Bergrin global X

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2 State of the MODERATOR PANELISTS States Matt Meeker Novogradac & Company LLP George Barry Foss and Company Daniel Bergrin global X Phill Geheb Munsch Hardt Kopf & Harr PC Tom Kasper Kasper Mortgage Capital Steve Stogel DFC Group Inc. Shawn Whitney Spencer Fane

3 Which States have HTCs? Indicates an Historic Tax Credit program for that state Legislation introduced to create an HTC program for that state

4 States with Largest Number of Projects with Total Development Costs SHTC Program State Projects TDC (Millions) Yes Missouri 1,150 $4,569 Yes Virginia 954 $2,565 Yes Ohio 697 $1,815 No Pennsylvania 493 $2,555 Yes North Carolina 484 $1,146 Yes Louisiana 423 $1,548 Yes Massachusetts N/A $2,811 Yes New York 266 $2,471 No California N/A $1,987 No Michigan* 240 $1,477

5 Key Legal Citations IRS CCA Massachusetts State Tax Credits Stated the IRS litigation position was that allocation of state low-income and historic tax credit were property, capital assets and had zero basis. IRS CCA Stated the IRS litigation position that certificated credits were capital assets, property and had a zero basis. Virginia Historic Tax Credit Fund 2001 LP v. Comm. 107 AFTR 2d US Court of Appeals Held the Allocated Credits were Sold as Section 707 Disguised Sale. No income was realized. Subsequent litigation dealt with the income tax effect.

6 Historic Boardwalk Hall ( HBH ) Third Circuit 2012 Decision The HBH Revenue Procedure simply stated the investor lacked a meaningful stake in either the success or failure of the partnership, so the investor was not a bona fide partner. Bad facts included: Investor capital not needed for construction Federal HTCs were an after-thought A governmental GP Exit pre-funded Lots and lots of other bad facts

7 Key Legal Citations Revenue Procedure Three times the Revenue Procedure made note of state tax credits: i. This Revenue Procedure does not apply to... state credit ii. iii. transactions. "It does not indicate the circumstances under which the Service may challenge...the circumstances under which a transfer of state credits by a partnership may be treated as a disguised sale..." "The Treasury Department and Service do not intend the inclusion of any particular criteria in the Safe Harbor to be an indication... of our views of the significance of that criterion with respect to any... state tax credit transactions.. Issued late 2013, and amended early 2014, to provide a safe harbor for partner status Negotiation with Treasury and IRS were done by the Historic Tax Credit Coalition.

8 Key Legal Citations (Continued) Gateway Hotel Partners, LLC v. Commissioner, TC Memo Final decision just entered. The structure the MO HTC certificate was a distribution of property against a GP capital account. Partial win for the taxpayer. Route 231 LLC v. Commissioner TC Memo Held the VA conservation tax credits, transferable as allocations, were property, and a disguised sale occurred. Tempel v. Commissioner, 10 th Circuit, 2014 Upheld the IRS that Colorado easement tax credits were taxable on property with zero basis on the date of the gift. SWF Real Estate, LLC, TC Memo Held the VA Conservation Credits were a disguised sale, and year of realization was the year the credit documents were recorded and funded, not the next calendar year when the certificates were issued under economic benefit test.

9 Emerging Legal Principles Tax Principles Emerging State Tax Credits have a Federal Tax Incidence Income Realization by the Development Partnership or a Partner must follow Special Allocation of Income under 702 The total gain needs to be 100 cents as state tax credits have a zero basis The 704(b) Rules apply No Loser Rule Year of Realization HTCs received over multiple years

10 Various Structures Available I. Pay tax on sale of state credits II. Donation structures Massachusetts Model GP donates credits to an unrelated party, and when the certificate or allocation is received, the charity sells the credit, and loans funds to the partnership with various sequential structures for that loan.

11 Various Structures Available III. HBH Impacts Allocations must be to a partner. Capital from State partner. Variable return Entrepreneurial risk Guarantees from Developers 702 and 704 rules apply

Bought and sold like any capital asset Payment upon delivery, immediate use against estimated or

12 State Tax Credits Certificated Tax Credits State Programs Vary: Film Production, Donation, Film Infrastructure, Brownfield, Renewable Energy, Historic, Urban Transit Hub, etc. Bought and sold like any capital asset Payment upon delivery, immediate use against estimated or current tax liability Availability vs. Income, Premium, Bank & Franchise Tax. States vary. Subject to inventory and pricing

13 Certificated Tax Credits FINANCIAL PROJECTIONS FORECAST FOR THE PERIOD BEGINNING JANUARY 31, 2017 AND ENDING MAY 15, 2019 INVESTOR BENEFITS SCHEDULE Texas Income Federal Payments Historic $1 less Deduction Tax Savings Cumulative Year for Credits Tax Credits Credit Price For State Taxes (Costs) Net Benefits $ - $ - $ - $ - $ - $ ,000,000 - $ - 3,000,000 3,000, ,790, ,000 $ - (73,500) 136,500 $ 2,790,000 $ 3,000,000 $ 210,000 $ - $ 2,926,500 Credit Price $ 0.93 XIRR 26.17%

generated by allocation of income from investment, K1 Statement Availability vs.

14 State Tax Credits Allocated Tax Credits State Programs Vary: Historic, Affordable Housing, Mill, Textile Mill, Renewable Energy Structured as Partnerships (pass-through entity) Capital Account generated by allocation of income from investment, K1 Statement Availability vs. Income, Premium, Bank & Franchise Tax. States vary. Subject to inventory and pricing Proprietary Foss Funds in NC, NY, MO, OH, VA, SC & more

15 Allocated Tax Credits INVESTOR BENEFITS SCHEDULE State Investor Contributions State Distributions Ordinary Amortization Gain or to Historic Tax Cash and Income of Put (Loss) on Tax Savings Cumulative Investor's Year Master Tenant Credits Distributions Credits (Losses) 50(d)(5) Option Disposal (Costs) Net Benefits Basis ,000 3,000,000-3,000,000 (2,230) ,000,781 2,999,781 (1,230) ,399, (3,500) , ,006 2,394, (1,200) ,426 2,393, (500) ,601 2,392, (298) 602,303 2,393, ,000 (2,388,420) $835,947 1,443,250 - $ 2,400,000 $ 3,000,000 $ - $ 3,000,000 $ (6,580) $ - $ 5,000 $ (2,388,420) $ 3,838,250 $2,400,000 Investor Credit Price $0.80 XIRR 28.11%

16 NEW YORK STATE HISTORIC TAX CREDIT PROGRAM Beginning January 1, 2007, New York State credit was only 6% (30% of the 20% federal credit) and subject to a $100,000 project cap. Further, users were limited to individual taxpayers (and certain trusts). So little activity. Beginning January 1, 2010, state credit was increased to parity with the federal credit at 20%, but subject to a $5 million cap per Certified Historic Structure. Only available for commercial properties located in census tracts with AMI at or below state-wide average. Credit was not bifurcatable and was available to a limited universe of taxpayers and excluded bank and insurance company taxpayers. In August 2010, legislative changes made the tax credit franchise and premium tax eligible so banks and insurance companies could participate. The tax credit was still not bifurcatable but can be carried forward with no limit. For projects placed-in-service on or after January 1, 2015, the state credit is now fully refundable. Still limited to $5 million cap per Certified Historic Structure and must be located in a QCT. Still cannot bifurcate but not necessary with full refundability. Follows federal rules as to recapture, certification, Secretary Standards and so forth.

18 VIRGINIA STATE HISTORIC TAX CREDIT PROGRAM Effective as of January 1, 1997 program commenced (credit percentage was phased in reaching its current rate of 25% in January Tax credit rate of 25% since 2000, broadly usable by major taxpayers (corporate, individual, franchise, premium). Can be specially allocated to partners, members or S Corp. shareholders. Certification not allowed. Credit can be carried forward 10 years. Cannot be carried back. No recapture provision after placed-in-service (disallowed for fraud). Part 3 approval from Virginia Department of Historic Resources requires CPA-prepared cost certification prepared to audit-level standards. In March 2011, 4 th Circuit Court case on the Virginia tax credit has had far-reaching implications. To date, there has been no project or state-wide annual credit cap, but now legislators are looking at a cap on all state tax credit programs.

20 Ohio Historic Tax Credit Program Initiated in Currently in its 17th round of award applications. Ohio has approved tax credits for over 300 projects projected to leverage, or have leveraged, over $4 billion in private capital for the rehabilitation of hundreds of historic buildings in the state. Application-based award, with a $5 million cap per project, with the exception of catalytic projects ($25 million cap). The Ohio Development Services Agency administers the program, which requires applicants to seek a final Part 3 certification of completion. Tax credit rate of 25%, usable by financial institutions, insurance companies, corporations* or individual taxpayers. Can be specifically allocated to partners, members, or corporate shareholders, but is not transferable. The credit can be refunded up to $3 million per taxpayer in a project. In addition, it can be carried forward for 5 years, but cannot be carried backwards. Great examples of program success can be seen around Cleveland, including the Metropolitan Hotel at the 9, where tonight s reception will be held.

21 State of the MODERATOR PANELISTS States Matt Meeker Novogradac & Company LLP George Barry Foss and Company Daniel Bergrin global X Phill Geheb Munsch Hardt Kopf & Harr PC Tom Kasper Kasper Mortgage Capital Steve Stogel DFC Group Inc. Shawn Whitney Spencer Fane

State of the States. Katrina Thompson. Warren Sebra. Andrew Sparacia. Renee Kuhlman. Steve Stogel. Steve Mount. Novogradac & Company LLP

State of the States. Katrina Thompson. Warren Sebra. Andrew Sparacia. Renee Kuhlman. Steve Stogel. Steve Mount. Novogradac & Company LLP State of the States MODERATOR Warren Sebra Novogradac & Company LLP PANELISTS Andrew Sparacia globalx Steve Stogel DFC Group Inc. Steve Mount Squire Patton Boggs (U.S.) LLP Katrina Thompson Barnes & Thornburg