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How Has Safe Harbor Impacted Tax Credit Projects?


June 2014

The following was distributed as part of the Affordable Housing News & Views - Spring 2014 newsletter.

Developers of historic projects and their investors who use federal historic rehabilitation tax credits (HTCs) received welcome guidance last December on how to properly structure their deals, thanks to Revenue Procedure 2014-12 (the Safe Harbor). How has this ruling impacted the HTC community, and what has it meant for HTC and LIHTC projects?

“The revenue procedure resolves some troubling questions,” says Joel Cohn, CohnReznick Partner. While affordable housing projects were spared any significant impact brought about by the Historic Boardwalk Hall case, HTC investment was impacted by the uncertainty that this court case created. However, Safe Harbor guidance from Rev. Proc. 2014-12 has now given the industry a jump start and is changing the way that HTC transactions are structured, including cash flow sharing arrangements, guarantees from project sponsors, and the timing of capital contributions from tax credit investors.

The Historic Boardwalk Hall Ruling

Issues started with an audit of the partnership engaged to update the Historic Boardwalk Hall in Atlantic City, N.J. into a modern entertainment facility using HTC. After working its way through the court system, the controversy reached its final conclusion when the U.S. Court of Appeals for the Third Circuit ruled in 2012 that the tax credit investor was not a bona fide partner in the developer partnership because it did not have a meaningful stake in the economic success or failure of the venture. Even though it invested over $19 million, the court concluded that the deal was carefully structured so that the investor would achieve the same yield whether or not the rehabbed entertainment facility turned a profit. As a result of the ruling, the investor was not entitled to any of the tax credits from Historic Boardwalk Hall.

The ruling gave some investors in “pure” HTC projects such as Historic Boardwalk Hall (those that did not include other tax credits such as low-income housing tax credits) more caution about investing. Unfortunately, as a result some pure HTC projects were then unable to find a tax credit investor.

Affordable housing projects that combine low-income housing tax credits (LIHTC) and historic rehabilitation tax credits had fewer challenges in light of Historic Boardwalk Hall. CohnReznick finds that those projects continued to find investors and the amounts which investors invest for HTC do not appear to be impacted, though the structure of the deals is changing slightly in response to the court ruling and the Safe Harbor guidance from the Treasury.

In addition, affordable housing projects already inherently avoid one concern presented by the Historic Boardwalk Hall court decision. Because they have rent restrictions that limit the profits that any property can generate, these transactions need not be engineered to force investors to forgo participation in a large upside participation in cash flow.

Fast Action from the Treasury

In response to the investor’s cautious reaction to the Historic Boardwalk decision, the HTC industry requested that Treasury provide guidance as to how HTC transactions could be structured and favorably viewed by IRS.

To encourage the Treasury to issue this guidance, a coalition of representatives from the historic rehabilitation tax credit industry, including CohnReznick, appealed to Treasury officials. The coalition clarified that jobs were being lost due to the uncertainty over how historic tax credit deals should be structured. CohnReznick representatives also attended public forums where the attorneys who wrote the revenue procedure answered questions about the safe harbor rules.

Consequently, the Treasury issued the Safe Harbor, which provided certain elements which must be included, as well as certain items that must be excluded in order for a transaction to have the protection of the Safe Harbor.

Overall, the industry was pleased with the timing of the issuance of the Safe Harbor. “Unusual for the Treasury, the ruling came out in just ten months,” says Cohn. Often, federal officials can take much longer to make clear statements that resolve ambiguities such as those raised by the Historic Boardwalk Hall court ruling.

How Has the Ruling Impacted Guarantees and Capital Contributions?

If a LIHTC and HTC transaction is structured to operate within the Safe Harbor, tax credit investors must now make their downside risk even more clear. For example, investors must now cut back on the guarantees they demand from developers. Developers cannot guarantee that tax credit investors will be able to claim the historic tax credits if, for example, the IRS challenges the transactional structure of the project. However, developers are still able to guarantee that they will fulfill specific responsibilities related to qualification for the HTC.

“The developer sponsor can still be on the hook for acts and omissions that impact the availability of the historic tax credits,” says Cohn. “You’re not guaranteeing the tax credits per se, but you are still guaranteeing the actions that make the tax credits available… substantively, there isn’t a lot of a difference outside of who bears structure risk.”

Guarantees that continue to be allowed include the following unfunded guarantees:

  • Construction completion guarantees
  • Operating deficit guarantees
  • Environmental indemnities 
  • Financial covenants


Guarantees can be made for acts or omissions such as the failure to apply for the National Park Service Part 3 final approval. Therefore, investors and their counsel work through the kinds of sponsor guarantees or indemnifications that will be required while complying with the safe harbor limitations.

Increased Participation in Construction Risk

The Safe Harbor also requires HTC investors to have some exposure to the construction risks. For example, the Safe Harbor sets limits on how long investors can wait prior to delivering certain of their capital contributions. At least 20% of the committed equity capital associated with HTC must be contributed to the developer partnership before the property is completed. Of that committed capital, 75% must be fixed in amount before the building is placed in service.

In the past, developers and tax credit investors negotiated the timing of when investors would contribute their funding to projects. The timing required by the IRS in the Safe Harbor is not sharply different from the schedules often negotiated in the past for typical HTC deals. However, developers benefit by having a limit as to how late investors can contribute some of their capital to a project. “It establishes a floor,” says Cohn.

Investors in pure HTC deals have much deeper changes to digest from the Safe Harbor. “The HTC community continues to work through the deal structuring process, as there are a number of factors which people are still deciding how to account for and still satisfy each of the requirements of the Safe Harbor,” says Cohn.

To read the previously issued CohnReznick alert on Rev. Proc. 2014-12, please click here.

For more information, contact Joel Cohn, Partner, at 410-895-7820, or Beth Mullen, Partner and Affordable Housing Industry Practice National Director, at 916-930-5750.

Circular 230 Notice: In compliance with U.S. Treasury Regulations, the information included herein (or in any attachment) is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing, or recommending to another party any tax related matters.

This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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