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Rev. Proc. 2014-12: The IRS Rehabilitation Tax Credit Safe Harbor Response in Light of Historic Boardwalk Hall


The following article was issued as part of the New Markets Tax Credit Connection - Spring 2014 issue.

The federal government’s success in the Historic Boardwalk Hall case put a chill on rehabilitation tax credit deals. This credit is commonly referred to as the historic tax credit. In Historic Boardwalk Hall, the Third Circuit Court of Appeals found that that a tax equity investor did not have a sufficiently meaningful interest in the success or failure of the partnership to qualify as a partner in the partnership. In the Court’s opinion, the return of the investor from the partnership was fixed and its risk of loss was mitigated through guarantees and other means. Accordingly, the investor was denied its allocation of qualified rehabilitation tax credits. 

Consequently, the historic tax credit industry requested that the Treasury Department issue guidance as to what investment structures the Treasury would find acceptable. On December 30, 2013 the IRS issued Revenue Procedure 2014-22 (the “Safe Harbor”). This procedure set out safe harbor guidelines under which it would not challenge partnership allocations of the Section 47 rehabilitation tax credit.

In this article, we will summarize the safe harbor requirements and briefly discuss the implication this may have on twinned New Markets Tax Credit and Rehabilitation Tax Credit deals.

Safe Harbor Requirements

Developer/Sponsor Interests

  • Minimum 1% interest in each material item of income, gain, loss, deduction, and credit during the existence of the partnership.

Investor Interests

  • Minimum interest in each material item of income, gain, loss, deduction, and credit during the existence of the partnership of 5% of the highest allocation of any such items.
  • Bona fide equity investment. A bona fide equity investment is defined as one in which its reasonably anticipated value is commensurate with the investor’s overall percentage interest in the partnership, with such value contingent upon the partnership’s net income, gain, and loss and is not substantially fixed in amount; not substantially protected from loss from the partnership’s activities; and participates in partnership profits in a manner that is not limited to a preferred return that is in the nature of a payment for capital.
  • Value of the investor’s interest must not be reduced through fees (including developer, management, and incentive fees), lease terms, or other arrangements that are unreasonable when compared to similar arrangements for a real estate development not qualifying for rehabilitation credits.
  • 75% of the investor’s total expected capital contribution must be fixed in amount before the date the building is placed in service.]
  • 20% of the investor’s total expected capital contribution must be contributed before the date the building is placed in service, must be maintained throughout its investment in the partnership, and must not be protected against loss through any arrangement, directly or indirectly, by any person involved in the rehabilitation.
  • An investor may not acquire its interest with the intent of abandoning its interest. If an investor later abandons its interest, it will have to prove that there was no intent to abandon it at the time that the partnership interest was acquired.

Master Lease

  • A sublease of the building from the master tenant to the developer/sponsor or related party is generally not permitted unless mandated by a third party.
  • The duration of a sublease must be shorter than that of the master lease.
  • The master tenant lease from the landlord entity may not be terminated as long as the investor is a partner in the master tenant.

Guarantees and Loans

  • Unfunded guarantees are permitted for the performance or avoidance of acts necessary to claim the rehabilitation credit or that are not otherwise prohibited.  Examples of permissible, unfunded guarantees include completion guarantees, operating deficit guarantees, environmental indemnities, and financial covenants. Unfunded guarantees are those where no money or property is set aside to fund the guarantee or where a minimum net worth in connection with the guarantee is not required.
  • Impermissible guarantees include those that guarantee the investor’s ability to claim the rehabilitation credit, the cash equivalent of the credit, or repayment of any portion of the investor’s capital due to an inability to claim the rehabilitation credit; to pay the investor’s costs involved with an IRS challenge to the investor’s claim of rehabilitation credits; the investor will receive certain distributions from the partnership; or any funded guarantee.
  • Loans from the landlord, developer/sponsor, master tenant, or related parties thereto may not be made to the investor to fund the investor’s investment in the partnership or guarantee any indebtedness the investor incurs to acquire its interest in the partnership.

Puts and Calls

  • Call rights to acquire the investor interests are not permitted. A call right forces the investor to sell any or all of its interest in the partnership and would be held by a developer and exercisable at the developer’s sole discretion.
  • Certain put rights are permitted, if exercisable by the investor, and require the partnership or another party involved in the transaction to acquire the investor’s interest at a future date. This acquisition can be made at any amount equal to or less than the fair market value of the investor’s interest in the partnership, with the value determined on the date of exercise.

This Safe Harbor does not apply to federal credits other than the § 47 rehabilitation credit, and does not apply to state credit transactions. However, twinned NMTC deals involving rehabilitation credits that desire to work within this safe harbor will need to comply with the requirements noted above. One requirement that may prompt some restructuring of deals relates to the prohibition against loans from the landlord, developer/sponsor or master tenant, or parties related to them, to the investor. Loans from the sponsor/developer to the investment fund (those that would be used to leverage the investor’s equity to make the Qualified Equity Investment into the CDE where the CDE owns the master tenant) may need to be evaluated to be sure these loans comply with these safe harbor requirements.

Another provision of this Safe Harbor involves circumstances when the investor receives an allocation of rehabilitation credits from a master tenant. The investor cannot also invest in the developer partnership/Qualified Active Low Income Community Business (“QALICB”) other than through an indirect interest in the developer partnership held through the master tenant partnership. If investor equity is contributed to a master tenant, and the master tenant provides a leverage loan to an investment fund and the funds are ultimately lent or invested as equity in the developer partnership/QALICB, one should evaluate how this structure conforms to this Safe Harbor. This prohibition does not apply to separately negotiated, distinct economic arrangements.

What Does CohnReznick Think?
New Markets Tax Credit and Historic Tax Credit twinned deals are not unusual in the New Markets Tax Credit Industry. The IRS safe harbor ruling in response to the Historic Boardwalk Hall case introduces new rules that should be considered when structuring combined New Markets Tax Credit and Historic Tax Credit transactions.


For more information, please contact Joel Cohn, Partner, at 410-895-7820, or David Norton, Partner, at 410-895-7827.

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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