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 1
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 2
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 3
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 4
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 of subsidy through participation) 5
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 6
Hotel Florence Hotel Florence 7
Rehabilitation Tax Credits Old Florence County Library (Before) 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 8
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 9
Key Federal Tax Incentives What is a Tax Credit? Rehabilitation Tax Credit (IRC Section 47). New Markets Tax Credit (IRC Section 45D). 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 10
How Tax Credits Deliver Capital Example 1: Historic Tax Credits (HTCs) Sample Structure Federal tax credits not sold, but passed to investors General Partner 1% Owner Tax Credit Investor 99% Owner through partnerships Require structuring with partnerships and equity 99% Credits contributions Project Generally, partnership agreements contemplate exit of tax credit investor after compliance period Project Total, $97. Developer Equity, $19.5 Soft Debt, $10 Hard Debt, $53.3 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 11
Example 2: Combining New Markets Tax Credit (NMTC) & HTC Halves Sponsor Equity Agenda 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 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 Types of Federal Historic Tax Credit Calculating the Credit Qualifying for the Credit Claiming the Credit Current Deal Structures Questions 12
The Rehabilitation Tax Credits Internal Revenue Code Section 47 There are Two Types of Federal HTC: 10% & 20% Credit 13
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. 14
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* 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 *Source: Annual Report for Fiscal Year 2011: Federal Tax Incentives for Rehabilitating Historic Buildings National Park Service 15
What Types of Buildings Qualify? What Kinds 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)) 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 16
What Types of Buildings Qualify? (cont d) What Types of Buildings Qualify? (cont d) The NPS Rules: Certified Historic Structure Requirement Option #1 Building is listed in the National Register of Historic Places. The NPS Rules: Certified Historic Structure Requirement 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. 17
Be Sure You Pass The Test Standard 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 or $5,000, whichever is greater Substantial Rehabilitation Test Phased Rehabilitation Test 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. Rolling 24-month window 18
What Types of Rehabilitations Qualify? Definition of QREs (cont d.) What Types of Rehabilitations Qualify? Definition of QREs (cont d.) 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; QREs include costs related to: construction period interest and taxes; architect fees, engineering fees, construction management costs; reasonable developer fees 19
What is Not a QRE? Sample Development Budget 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 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 20
Calculating the Credit What Triggers the Credit? QREs $ 500,000 Credit Rate 20%* Credits $ 100,000 Placement in Service CO or TCO is Evidence of Placement in Service Calculate the equity amount: $1.15 per credit multiplied by $100,000 credits = $115,000 * Credit Rate is sometimes 10%. Is the building ready for occupancy? 21
When Can the Credit Be Claimed? Who Can Claim the Credit? Generally, the Year Placed In Service - 100% of the Credit Claimed Carry back One Year Carry forward 20 Years 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 22
Limitations of the Use of the Credit How to Claim the Rehab Tax Credit Passive Loss Rules Alternative Minimum Tax At-Risk Rules Companies whose stock is publicly-traded generally aren t subject to these limitations 23
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 24
Other Tax Credit Issues Single Entity Structure Development Fee Amount Payment Tax Exempt Use Property - Check The Tenants! Basis Adjustment-and impact on LIHTC.01% Credits, Profits & Losses, Fees and Cash Flow Managing Member (Developer Affiliate) Developer Equity Tax Credit, LLC (Property Owner) Tax Credit Investor LLC Historic Tax Credit Equity 99.99% Credits, Profits & Losses and Cash Flow Dev. Fee Tax Credit Investor Developer Loan Proceeds Debt Service Payments Rental Payments Construction/ Perm Lender Tenants 25
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. 26
Master Lease/Credit Pass-Through Structure Investors Capitalize Project for Credit and Other Tax Benefits Managing Member (Developer Affiliate) Tax Credit Investor LLC Leveraged Lender (Bank) Tax Credit Investor Developer Equity 99.99% Credits, Profits & Losses, Fees and Cash Flow.01% Credits, Profits & Losses, Fees and Cash Flow Historic Tax Credit Equity 99.99% Credits, Profits & Losses, and Cash Flow $4,312,030 Investment Fund LLC $1,152,000 HTC Equity $2,007,720 NMTC Equity 7,150,000 QEI Load (4.5% of QEI) 321,750 Landlord, LLC (Property Owner/Lessor) Loan Proceeds Debt Service Payments Construction/ Perm Lender Pass-through of Historic Tax Credits & Share of Lease Payment & Equity Investment Master Tenant, LLC (Master Tenant) Rental Payments Sub-Tenants/ End Users CDE: QEI: QALICB: Loan A 4,312,030 Loan B 2,837,970 Sub-CDE LLC QALICB/Landlord LLC (Property Owner) Development Budget: $8M Community Development Entity Qualified Equity Investment Qualified Active Low Income Business 100% Ownership Lease Master Tenant, LLC 27
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 28