Novogradac Journal of Tax Credits
June 2016 | Volume VII - Issue VI
By: Richard Sidebottom, MacRostie Historic Advisors, LLC
Georgia Gov. Nathan Deal signed Georgia House Bill 308 into law May 12, 2015, retaining the 25 percent Georgia Historic Rehabilitation Tax Credit (HTC) rate and making significant changes to improve its value. The changes include modified definitions of a “certified historic structure” and “qualified rehabilitation expenses” to agree with federal language, a substantial increase in the maximum credit allowed for each project and a one-time transfer or sale of the tax credits.
Much praise has been heaped on these revisions by the historic tax credit industry, in particular the certificated nature of the credit and the increase in the project cap from $300,000 to $5 million ($10 million for projects creating more than 200 full-time jobs). However, after working with the new program, it is clear that there are restraints in the law, agency interpretations and growing pains that limit the benefits of the new program.
The most apparent limits to the new program are the annual statewide cap of $25 million and the first- come first-serve nature of the application process. The smallest projects may still take a guaranteed $300,000 credit without competing for an allocation. Any project with more than $1.2 million in rehabilitation costs though, faces a difficult decision of whether to pay the $7,500 preliminary review fee to apply for a larger credit allocation or accept the $300,000 guaranteed amount. Much of that decision is dependent on more reticent provisions in the regulations and interpretations promulgated by the State Historic Preservation Office (SHPO) and the Georgia Department of Revenue (DOR).
Allocation for Future Years
The new program awards tax credits for projects placed in service in 2017 and after. The Georgia SHPO reports that to date applications for developments projected to end in 2017 have already exceeded the program cap for that year. According to the regulations, state credits for future years have been allocated to projects in the order their applications were received at the DOR, with current applicants competing for 2018 or 2019 credits. While that approach grants a credit to every approved project, the value of the credit is diminished and is dependent on a sponsors’ ability to bridge their financing from the end of construction to the allocation year. Given the pace of applications, just a few $10 million cap projects could devour the remaining credit allocations left in the program through 2021.
Ownership and Timing
While HB 308 changed two key definitions to streamline the state and federal processes, there is one significant difference in the understanding of who may apply to the DOR for a state allocation. A project sponsor may submit a federal application with the consent of an owner, according to 36 CFR 67.3(a)(1). According to the DOR interpretation, Georgia tax credits are generated and claimed on a separate legal entity basis. So unless a tax credit statute provides otherwise, the same taxpayer must meet all of the approvals and certifications, incur the expenses and meet all statutory and regulatory requirements of a program. With this in mind, Georgia DOR allows only the current owner of a historic property or a qualified leaseholder who will claim the credit to apply for the state allocation.
For project sponsors that are not yet the owner of the property, this limited interpretation creates an aggravating timing problem. Properties with complicated ownership arrangements, those under a purchase-and-sale agreement, affordable housing projects also negotiating the HUD process, and those that want an approved rehabilitation program to complete acquisition may find that this difference in the federal and state historic programs means waiting on the sideline of the state allocation process until the transfer in ownership takes place. Or worse, it could mean the end of a potential deal where the HTCs are a cornerstone of financing.
At least two developments have been delayed or stopped by the current interpretation at DOR. One developer attempting to use the new credit gained preliminary approval from SHPO for the proposed work but was denied an allocation because the applicant entity did not yet own the building. Unfortunately, the acquisition was dependent on receiving the allocation. “If the purpose of the tax credit program is to attract investment in historic buildings, then the DOR should interpret the law in a way that is more helpful to fulfilling that purpose,” said the developer. Therefore, it behooves developers to be sure the entity claiming the credit is in place as the owner of the property when the application for precertification (Part A) is made to SHPO and application for the allocation is made to the DOR.
The inability for entities to apply before the transfer of property is also a potential time bomb for any developers that have an allocation but assumed that they will receive their preliminary certification before transfer, as the federal regulations allow. A development that applies for preliminary certification under a related entity with the thought of changing the applicant name or tax identification on signature sheets at project completion may foreclose on their opportunity to use the state HTC. Unfortunately for the program, any credits that are allocated but that do not achieve certification get returned to the state’s general fund, not to the rest of the tax credit pool.
Lastly, the high level of interest in the new program created a backlog of project reviews at the already-busy SHPO. The takeaway on this front is that as long as you are already the property owner, getting the application in as early as possible is critical.
A series of changes in the way the program is structured and the application process might allow for a more functional and valuable program. The tax credit community would be well served by considering the following changes:
Ask the Georgia DOR to interpret the law to correspond with the federal application process, making it clear that long-term lessees and contract purchasers may apply for an allocation as long as the entity receiving the credit is in place before incurring expenses.
Adjust the program cap to reflect a difference in project size so that $10 million cap projects are not competing with $5 million cap projects. This could be accomplished by setting a cap on how many large- cap projects could be allocated in a year or spread the credit on the largest developments over multiple years.
Allow the SHPO to directly use 100 percent of the preliminary fees from the tax credit program to hire additional staff to aid in making the process more efficient.
Lastly, the legislature could raise the annual cap to reflect the incredible interest in the program and further incentivize the rehabilitation of historic properties as a key tool in economic development.
The reaction to Georgia’s new state tax credit legislation has been overwhelming and indicates that the revised program is attractive to developers and investors alike. After some initial hiccups, project sponsors are beginning to understand the new program stipulations and how to manage them. There is some hope that legislators might assist with evaluating the law and how it has been put into practice. Opening a discussion on interpretations of the law and procedures for the program might make the positive changes passed in House Bill 308 more effective for rehabilitation of Georgia’s historic buildings.
Richard Sidebottom is the Director of MHA Southeast in Charleston, S.C. With more than 10 years’ experience with federal and state historic tax credit programs, Richard and his team provide services for a wide range of historic rehabilitation projects. Richard can be reached at firstname.lastname@example.org or (843) 203-5405. Visit www.macrostiehistoric.com for more information.
This article first appeared in the June 2016 issue of the Novogradac Journal of Tax Credits.
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