Novogradac Journal of Tax Credits
August 2017 | Volume VIII - Issue VIII
By: Richard Sidebottom, MacRostie Historic Advisors, LLC
Birmingham. Mobile. Tuscaloosa. Montgomery. Anniston. Decatur, Demopolis, Dothan, Huntsville and Tuscumbia. In these Alabama cities you will find the 52 historic rehabilitations that were beneficiaries of the a three-year state historic tax credit (HTC) program (2014-2016), a program that is responsible for more than $384 million in investment. A 2016 economic impact study by Novogradac & Company LLP concluded that the Alabama Historic Rehabilitation Tax Credit, a 25 percent credit with a $60 million aggregate cap, would pay for the state’s investment by 2019 and contribute $3.90 for every $1 of tax credit over a 20-year period.
Positive and impressive statistics by most standards.
Nevertheless, the state Legislature failed in 2016 to renew the program despite studies and overwhelming support from lawmakers. The disruption in the future of the program led some developers to balk, especially in small towns where an understanding of the program was beginning to take. “We worked with projects in Fayette, Selma, Livingston and Union Springs that really needed the credit to make them happen,” said Brandon Hill, principal of Fusion Advisory Services, a consultancy that provides advice and capital for tax credit projects. “Without the historic tax credit, these projects withered on the vine. It is true that much of the credit went to larger projects in larger cities, but momentum was headed to rural communities in Alabama.”
With historic development of all sizes stalling, a yearlong campaign followed that pushed legislators to renew the popular program that motivated large real estate developments as well as developments in smaller communities.
Introduced by state Rep. Victor Gaston, HB 345 passed and was signed into law May 24. The new program will be in effect from 2018-2022 and aims to assuage concerns about the fair distribution of the credit across the state with a set of unique stipulations. These changes largely come out of a study commissioned by the Alabama Department of Revenue and conducted by the University of Tennessee at the request of state Sen. Del Marsh. The study gave the former program a “B” rating, indicating that while it was a successful program, the efficiency and evaluation methods for approving the credits could be improved.
In order to address some of the perceived shortfall of the former program, these changes will be part of the program:
A certified building must be 60 years old. In most HTC programs, including the federal version, the requirement is that buildings be 50 years or older, following the criteria for the National Register of Historic Places. By increasing this limit to 60 years, Alabama lawmakers are breaking with normal practice in the field and will limit redevelopment of some midcentury commercial buildings that could be essential to revitalization efforts. When the new program begins, this will mean that any buildings built after 1958 are excluded from participating. The majority of the historic building stock in the state dates from the industrial and commercial boom that took place in the late-19th century and early 20th century, safely past the 60-year mark. Additionally, some post-World War II housing and architecture will just make the cut, with some early Civil Rights era and modern 1960s civic buildings coming of age during the program’s four-year run.
40 percent of the annual credit allowance will go to rural counties for the first two quarters of the fiscal year. An annual program cap of $20 million is a carryover from the previous version of the state HTC. The new version provides that $8 million per year must be reserved for projects in the 60 counties with populations of less than 175,000 during the first six months of the fiscal year. After that, any unallocated funds from this rural set-aside may be made available for unfunded projects in the state’s seven most populous counties: Jefferson, Mobile, Madison, Montgomery, Shelby, Tuscaloosa and Baldwin.
The credit is refundable (but not allocatable). Alabama is joining a growing number of states that have an option to refund their state HTC. The new legislation requires that the entire tax credit be claimed in the year the project is completed and whether it will be claimed by the taxpayer that is the property owner or the transferee, the credit must first be applied to the taxpayer’s state tax liability and then shall be entitled to claim a refund on the difference. Individual projects in the new program are still limited to $5 million in credit but if a taxpayer’s credit exceeds that liability, the new program allows the remainder of the value to be refunded. The tax refund provision should make the program more desirable to outside investors as it is without major restrictions that would complicate or devalue the credit.
Less flexibility in transferring credits. As with the old program, the HTC is transferrable, but can only be transferred once to a taxpayer outside of the ownership. Unlike the old program, the credit can no longer be allocated before transfer. “This limitation reduces the flexibility in structuring option for project sponsors, so the tax effects and economics of future deals will differ in some cases from deals closed under the old program,” said Hill. Early counsel and planning will be needed to maximize the benefits of the program.
The value of the credit can be no less than 85 cents to the dollar. This change in the program aims to set a floor to the value of the credits when transferred outside of the ownership entity. Few HTC programs have such a provision but a similar provision exists in some low-income housing tax credit (LIHTC) programs to avoid devaluation of the credits. In the new program, any transfer will require reporting to the state to include review of the terms of transfer between taxpayers. Some professionals believe that this will have a limiting effect on the marketability of a transferred credit. While the price floor will create additional certainty in the capital stack that will make project sponsors feel more confident to move forward with rehabilitation once they receive an allocation, according to Hill, the additional changes to the program decrease the certainty of a project receiving the credit in the first place.
Evaluation and assignment of credits is to be conducted by a new committee. A new HTC evaluating committee will be responsible for reviewing applications and ranking them according to their merits. This structure differs from the previous program that allocated credits by submission date and lottery, if needed. The committee will be made up of employees of the Alabama Historical Commission, Alabama House and Senate members, and government appointees. Factors that influence the rankings include relative value of the proposed project to the particular community, including the maintenance of the historic fabric of the community; possible return on investment for the community in which the proposed project is located; the geographic distribution of projects; and strength of local support and financing for the project. While in concept this new evaluation process aims to reward the most deserving projects, the subjective nature of ranking by a committee and the introduction of legislators and appointees opens the door for politicized decisions.
After a two-year hiatus from the state HTC, developers in Alabama are happy to know what the immediate future will hold even if it means additional requirements. But there is uncertainty about how some of the changes may affect the attractiveness of using the program. Guidelines for the new program are expected in October and applications will begin Nov. 1. Expected in those guidelines are the establishment of quarterly deadlines and the schedule of meetings for the HTC evaluating committee. An early draft suggests that allocation decisions could take up to six months to be made by this new regulatory body, during which time the group will likely be lobbied by developers and project supporters.
Time will tell if the unique stipulations for rural economic development will accomplish the goals of the new legislation and if the efficiency and evaluation of the process improve. Nonetheless, the new HTC program, however altered, is good news for historic real estate and economic development in the state. And we will cheer it on.
Richard Sidebottom is the Director of MHA Southeast in Charleston, S.C. With more than 10 years of experience with federal and state historic tax credit programs, Richard and his team provide services be reached at email@example.com or (843) 203-5405. Visit www.macrostiehistoric.com for more information.
This article first appeared in the August 2017 issue of the Novogradac Journal of Tax Credits.
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