Historic Tax Credits

[Jeff Zimmerman]

Does anyone have experience with historic tax credit transferring with the sale of condos?

Our company has two historic developments in a historic district. We are renovating the properties to meet historic standard to qualify for historic tax credits at the National and State levels. We are converting the apartment buildings into condos to sell units to cover development costs.

We have been told that the tax credits can be transferred to the person/company that purchases the condo after development is complete. The project will be eligible for a tax credit of 25% of the total development cost ($1,000,000). Does anyone from BP have experience with this topic?

Thank you in advance,

Jeff

[Bryan Mills]

This is a multi faceted question. There are two areas of concern regarding transferability.

First, the condos cannot be transferred once the building is complete. The reason for this is that HTCs have a 5-year recapture period. So, once the building is placed I service, the ownership must remain static for 5 years. However, it is theoretically possible to sell the co dos prior to completion, and the condo purchasers would step into the shoes of the developer. The condo owners would get the benefit of the HTCs attributable to their individual condos. You generally wouldn’t see that scenario, as the credits are typically syndicated to institutional investors.

Second, the HTCs themselves. Federal HTCs are not transferable, so they are typically either absorbed by the developer/owners (if they have sufficient tax liability) or most often passed on to an HTC investor through an equity investment (in a complicated structure that would take too long to explain here). The latter option is usually preferred because the HTCs are effectively monetized and built into the capital stack. Transferability of state credits differs state by state, and some can even be refundable once you finish the project. However, be aware that the sale of credits (or refund) causes an immediate taxable event (since your cost basis in then HTCs is zero), which is another reason people often favor the equity investment route.

I’d say typically the condo portion of the building would be excluded from HTC calculations to avoid the complicated transferability limitations (which is the case for a project I am working on now). As you can see, there’s a lot to consider. Would be happy to talk your through it.