Pre-Conference Workshop Historic Tax Credits 101: The Basics

Transcription

1 Pre-Conference Workshop Historic Tax Credits 101: The Basics Moderator Thomas Boccia Novogradac & Company LLP Panelists Christina Apostolidis Novogradac & Company LLP Frank Buss Novogradac & Company LLP Warren Sebra Novogradac & Company LLP Dirk Wallace Novogradac & Company LLP

2 Pre-Conference Workshop Agenda Introduction & Overview Types of Historic Tax Credits What expenditures qualify towards Historic Tax Credits? Program Requirements for Building and Rehabilitation Recapture events and calculation of loss of credits; other related federal and state tax provisions Deal Structuring Direct vs. Pass-Through Running the Numbers The HTC Application Process Concepts related to combining with Low-Income Housing Tax Credits and the New Markets Tax Credit Q & A Session

4 Section 47 Tax Liability Investor Partnership LLC S-Corp DEBT Equity Cost to Rehab Tax Liability Developer/ Owner Rehab exp. Tax credit % Tax credits LP % Price Equity $ x $ x x $ X,XXX,XXX XX% XXX,XXX 99.99% 0.XX XXX,XXX

6 10% Tax Credit Built Pre-1936 Rehabilitation Tax Credits 1. Built before 1936 (10% Credit) 2.

7 20% Tax Credit www/nps.gov/hr National Register Rehabilitation Tax Credits 1. Built before 1936 (10% Credit) 2. Listed in National Register (20% Credit)

8 20% Tax Credit Significant to district! Secretary of the Interior Rehabilitation Tax Credits Built before 1936 (10% Credit) Listed in National Register (20% Credit) OR Located in a Registered Historic District AND is listed as being of significance to that district (20% Credit)

9 20% Tax Credit Certified Historic Structure Rehabilitation Tax Credits Built before 1936 (10% Credit) Listed in National Register (20% Credit) OR Located in a Registered Historic District AND is listed as being of significance to that district (20% Credit)

10 Cannot be residential rental Internal/external wall preservation Rehabilitation Tax Credits Built before 1936 (10% Credit) Listed in National Register (20% Credit) OR Located in a Registered Historic District AND is listed as being of significance to that district (20% Credit)

11 IRC % Tax Credit IRC 48(g) Yrs

12 IRC % Tax Credit IRC 48(g) Yrs 76 Yrs 50 Yrs 2012

13 Internal and external walls 10% Tax Credit % existing external walls retained as external 75% existing walls retained as internal or external 75% existing internal structural framework retained in place

14 Internal and external walls 10% Tax Credit % existing external walls retained as external 75% existing walls retained as internal or external 75% existing internal structural framework retained in place

15 Certified Rehabilitation In order for a building to qualify for the 20% credit, the building must be a certified historic structure and the rehabilitation must be a certified rehabilitation. Defined as any rehabilitation of a certified historic structure which the Secretary of the Interior (NPS) has certified to the Secretary (of IRS) as being consistent to the historic character of such property or the district in which such property is located

16 The Two Tiers of the HTC Which credit applies? The IRS determines if the project qualifies for the 20% credit If the project qualifies for the 20% credit, then either the 20% credit can be taken or no credit at all The 10% credit cannot be claimed on a certified historic structure under any circumstance

18 Qualified Rehabilitation Expenditures (QREs) $8.45 mil $200K $47.4k $47.6k Acquisition Exterior demolition Rehab of existing building Enlargement Furniture, fixtures, etc. Other costs Total costs $ $ 155,000 47,400 8,450, ,000 47, ,000 9,000,000

19 Qualified Rehabilitation Expenditures (QREs) $9 Mil $1.52M Total Costs Equity 17% Qualified Rehabilitation Expenditures Tax credit % Tax Credits Investor % Price per credit Equity $ x $ x x $ 8,450,000 20% 1,690, ,520,848

20 Qualified Rehabilitation Expenditures (QREs) QREs include amounts incurred by a taxpayer in connection with the rehabilitation of a QRB that are capitalized to the building and depreciated using either a 27.5 or 39 year recovery period. Land Excluded Commercial bldg SL Residential rental building SL QRE Eligible (Rehab portion) Site work Personal property 200% DB 150% DB Excluded

21 Qualified Rehabilitation Expenditures (QREs) Generally includes: Hard costs Insurance premiums Legal costs Development fees Site survey fees Architectural & engineering fees Interior demolition Construction period interest and taxes Additions

22 Qualified Rehabilitation Expenditures (QREs) Legal costs Attorneys P ship Org. Costs Loan Fees Acq portion Rehab portion CAP EXPAmort. Rehab PIS QRE Eligible

23 Qualified Rehabilitation Expenditures (QREs) Development fees Portion of fee attributable to rehabilitation of building is eligible and included as a QRE. If the developer fee is paid to a related party, care must be taken so that the fee is considered reasonable

24 Qualified Rehabilitation Expenditures (QREs) Construction period interest and taxes Rehab Balance x Int Rate Capitalized Expensed Acq Capitalized Time PIS Date

25 Qualified Rehabilitation Expenditures (QREs) Additions (Included) vs. Enlargements (Excluded) New Floor

26 Qualified Rehabilitation Expenditures (QREs) Enlargements Any expenditure attributable to the enlargement of an existing building does not qualify as includable in HTC basis. It is important to differentiate between additions, which are includable in HTC basis and enlargements, which are not. Additions refer to additional rehabilitation that does not go beyond the physical planes of the original building Neither term is defined in the IRC, however, enlargement is defined in the IRS Regulations [ (c)(10)(i)] which states that a building is enlarged to the extent that the total volume of the building is increased. Therefore, any addition that does not meet this definition can be classified as qualifying.

27 Qualified Rehabilitation Expenditures (QREs) Enlargements In general a building is enlarged to the extent that the total volume of the building is increased. An increase in floor space resulting from interior remodeling is not considered an enlargement. The total volume of a building is generally equal to the product of the floor area of the base of the building and the height from the underside of the lowest floor (including a basement) to the average height of the finished roof (as it exists or existed). For purposes of the HTC rules, addition refers to additional rehabilitation that does not go beyond the physical planes of the original building, while enlargement refers to construction that occurs outside the physical planes of the original building.

28 Qualified Rehabilitation Expenditures (QREs) Generally excludes: Costs for personal-use property Acquisition costs Amounts treated as expenses and deducted Capitalized interest for existing building and land New building construction (i.e. enlargements)

29 Qualified Rehabilitation Expenditures (QREs) Other considerations Any expenditure that uses a depreciation method other than straight line does not qualify as includable in basis for the HTC Acquisition costs do not qualify as includable in HTC basis, only rehabilitation costs.

30 Qualified Rehabilitation Expenditures (QREs) Other considerations Any expenditure that uses a depreciation method other than straight line does not qualify as includable in basis for the HTC Acquisition costs do not qualify as includable in HTC basis, only rehabilitation costs.

31 Qualified Rehabilitation Expenditures (QREs) Tax-Exempt Use Property The IRC provides that the portion of any expenditure that is allocable to tax-exempt use property is not included in calculating QREs and, therefore, is not included in HTC basis.

32 Tax-Exempt Use Property Problems caused by the tax-exempt use property rules can arise in three ways: 1. For residential rental property: The allocable portion of the property leased to a tax-exempt entity to be treated as tax-exempt use property. 2. Nonresidential real property: Property that is subject to a disqualified lease may be treated as tax-exempt use property. Disqualified lease is: i. Tax-exempt financing used and lessee or related entity participated in financing. ii. Lease contains fixed purchase property or an option to buy iii. Lease term exceeds 20 years iv. Lessee involved in sale leaseback with tax credit entity 3. Special rules apply to partnerships with tax-exempt partners if the partnership agreement provides for allocations of partnership items that are not considered a qualified allocations. IRC applies highest % of any allocated item to determine tax-exempt use portion and amount disallowed

33 Tax-Exempt Use Property Can be a non-profit owner of the for-profit tax credit entity if non-profit elects to be taxed as a for-profit entity to avoid portion of property considered as taxexempt use property The IRC provides that the portion of any expenditure that is allocable to tax-exempt use property is not included in calculating QREs and, therefore, is not included in HTC basis Portion of property considered as non-tax exempt use property still available to earn HTCs

34 Qualified Rehabilitation Expenditures (QREs) Placed-in-service considerations Qualified rehabilitation expenditures generally shall be taken into account for the taxable year in which such qualified rehabilitated building is placed in service It is important to note that placing in service is not dependent on actual use, only that it is or was ready for its intended use

35 Qualified Rehabilitation Expenditures (QREs) Expenditures incurred by others Generally HTC is claimed by the taxpayer who owns the building at placed in service A taxpayer who purchased the building may claim the previous owner s QREs as long as the rehabilitation expenditures were not placed in service

37 What is a Qualified Rehabilitated Building (QRB)? The building must be located in the United States or in a territory of possession of the United States And must meet the four tests:

38 Qualified Rehabilitated Building (QRB) There are 4 tests to determine if the building is a QRB: 1. Building must be substantially rehabilitated 2. Building must have been originally placed in service before the beginning of the rehabilitation 3. In the case of any building other than a certified historic structure, during the rehabilitation process: percent or more of the existing external walls of such building are retained in place as external walls, percent or more of the existing walls of such building are retained in place as internal or external walls, and percent or more of the existing internal structural framework of such building is retained in place. There is no requirement regarding external walls for certified historic rehabilitations since they are subject to more stringent rehabilitation requirements imposed under the rules applicable to certified historic structures. 4. Depreciation must be allowable with respect to the building

39 Substantial Rehab Test QREs Tax credit % Tax credits $20,670,000 x 20% $ 4,134, Tax Return Adj. Basis Acquisition 24 mo. Measurement Period Rehab PIS Note that the end of the measurement period must be within the same tax year (we re using a calendar year) that the rehab is deemed placed in service

40 Substantial Rehab Test QREs Tax credit % Tax credits $ 800,000 x 20% $ 160, Tax Return Adj. Basis QREs during Measurement Period 24 mo. Measurement Period Acquisition Rehab PIS

41 Substantial Rehab Test QREs Tax credit % Tax credits $20,670,000 x 20% $ 4,134, Tax Return Adj. Basis 24 mo. Measurement Period Acquisition Rehab PIS

42 Substantial Rehab Test QREs Tax credit % Tax credits $ 800,000 x 20% $ 160, Tax Return Adj. Basis 24 mo. Measurement Period QREs during Measurement Period Note that the end of the measurement period must be within the same tax year (we re using a calendar year) that the rehab is deemed placed in service. (So it can t end earlier than the beginning of 2012.) Acquisition Rehab PIS

43 Substantial Rehabilitation Recap: The qualified rehabilitation expenditures (QREs) during the measurement period must exceed the greater of $5,000 or the adjusted basis of the property at the beginning of the measurement period The 24-month period must end within the tax year in which the rehabilitation is placed in service If 10% credit is planned to be taken, adjusted basis will exclude post additions to the property Unless the rehabilitation qualifies as a phased rehabilitation, the entire building must be substantially rehabilitated

44 Phased Rehabilitation For rehabilitations that are sufficiently large enough in scope that completion will require a greater amount of time than 24 months, a 60-month measuring period can be used. To qualify, the taxpayer must: 1. Elect to use the 60-month period with tax return filing, 2. NPS Part 2 filing must indicate project is a phased rehabilitation, and 3. The rehabilitation may be reasonably expected to be completed in phases set forth in architectural plans and specifications completed before the rehabilitation begins

45 Phased Rehabilitation (cont.) The rehabilitation must have been contemplated as a phased rehabilitation in the planning phase The 60-month rule cannot be used because the rehabilitation unexpectedly exceeded the 24- month measuring period

47 Placed in Service 100% 80% 60% 40% 20% 0% YR Recapture Period Qualified Rehabilitation Expenditures Tax credit % Tax Credits Investor % Price per credit Equity $ x $ x x $ 8,450,000 20% 1,690, ,520,848

48 HTC Recapture Recapture of the credit occurs if, within five years of placing in service: ownership of the property changes, the property ceases to be investment credit property, sale of a partnership interest, or reduction of a partner s interest to less 2/3 of original ownership interest The recapture amount is equal to 100 percent of the credit claimed and used to reduce tax if the recapture event occurs before the first anniversary of the placed in service date, and is reduced by 20 percent for each subsequent year.

49 HTC Recapture Recapture of the credit occurs if, within five years of placing in service: ownership of the property changes, the property ceases to be investment credit property, sale of a partnership interest, or reduction of a partner s interest to less 2/3 of original ownership interest The recapture amount is equal to 100 percent of the credit claimed and used to reduce tax if the recapture event occurs before the first anniversary of the placed in service date, and is reduced by 20 percent for each subsequent year.

50 Basis Reduction Requirements Depreciable basis reduced by amount of tax credits Reduction in basis is treated as a reduction in partners capital accounts Reduction in basis treated as accelerated depreciation for purposes of determining ordinary gain upon sale of property

51 Housing & Economic Recovery Act of 2008 Exempts the HTC from AMT HTCs can now reduce AMT for Qualified Rehabilitation Expenditures taken after December 31, 2007 Non-residential property is treated as tax-exempt use property only if the portion of such property leased to tax-exempt entities under disqualified leases is more than 50 percent of the property (previously 35 percent)

52 The State HTC Over 30 states have adopted a state historic tax credit program Programs vary from state to state Problems with state programs Annual Aggregate Caps or Individual Project Capping Lack of Transferability (prevent pass thru or sale) Some states allow credit to be refundable 52

53 The State HTC Over 30 states have adopted a state historic tax credit program Programs vary from state to state Problems with state programs Annual Aggregate Caps or Individual Project Capping Lack of Transferability (prevent pass thru or sale) Some states allow credit to be refundable

54 Allocated vs. Certificated State Tax Credit Allocated State Tax Credit Investor is a partner (directly or indirectly) in Owner Investor makes a capital contribution (non-taxable) Investor continues to be able to take a federal deduction for payment of state taxes Investor may be able to take a capital loss upon the disposal of its partnership interest depending upon the circumstances Certificated State Tax Credit Investor buys the credit from the Owner (or another party to whom it has been allocated or sold) Purchase price paid by Investor is taxable to seller Investor is able to take a federal deduction for payment of state taxes Investor is not a partner so no capital loss may be claimed

56 Basic Structure: Direct Investment Developer/ Owner GP Investor LP 99% Profits & Capital Interest P ship

57 Alternative Structure: Pass-Through Lease Pass-Through of Tax Credits to Lessee QRE s are incurred by Lessor/Owner Lessor and lessee make an election to Passthrough to the Lessee all or portion of the QRE s Lessee is deemed to have incurred QREs

58 Alternative Structure: Pass-Through Lease Investor MM 99% Profits & Capital Interest Developer/ Owner MM Master Lease LLC Master Lessee/ Sublessor Profits & Capital Interest LLC Fee Owner/ Master Lessor

59 Alternative Structure: Pass-Through Lease Requirements: Must be IRC Section 38 property Lessee must be original user of property Lessor must make election to treat QRE s as incurred by Lessee No mandatory basis reduction applies Lessee includes in gross income each year an amount equal to the HTC it received from the lessor ratably over the recovery period or tax depreciable life of the property in the hands of the lessor. Generally, the HTC that will be required to be recognized as income for residential property is 1/27.5th and for non-residential property is 1/39th

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63 Historic Building, LLC (Landlord) Supplemented Schedule of Forecasted Tax Credit Calculation

64 Historic Building, LLC (Landlord) Supplemented Schedule of Forecasted Tax Credit Calculation

66 Running the Numbers In addition to the other financing a project has received (construction/permanent loans, government subsidies, etc), the HTC provides additional equity financing in the form of limited partner capital 66

67 Example You wish to buy a qualifying building in a distressed area of an inner-city community and turn it into a commercial office rental building. Land & Building acquisition cost is $255,000 You estimate rehabilitation costs of $8,745,000 You secure a $3.75 million construction loan with a permanent loan commitment as a first mortgage You also secure loans from the local government and other private financing in the amount of $785,

68 Example (cont.) Given no other source of financing, this project would not be undertaken because the interim uses of funds outweigh the interim sources of funds. However, if the project owner structured the rehabilitation as a certified historic tax credit project this would lead to a potential historic tax credit for the taxpayer of $1,690,

69 Example (cont.) The project owner could court an investor to purchase an interest in the entity, say a percent interest, at a negotiated equity contribution based upon 90 cents for every $1 of historic tax credits the investor will receive. This equity contribution would amount to an additional source of $1,520,848 for the project. 69

70 Example (cont.) HTC qualified rehabilitation expenditures HTC factor for historic structures Historic tax credit amount for year of PIS = Investor interest in entity Investor s share of entity s HTC = Equity Investor s capital contribution amount = $8,450,000 x 20% $1,690,000 x 99.99% $1,689,831 x.90 $1,520,848 70

72 Application Process Consists of the preparation of Historic Preservation Certification Application - Form (Rev 2011) Part 1 Evaluation of Significance Part 2 Description of Rehabilitation Part 3 Request for Certification of Completed Work All parts of the application are submitted to the SHPO where staff members review the application for completeness and accuracy SHPO then sends application to NPS with recommendation

73 HTC Application Part 1 Presents information about the significance and appearance of the building Required for taxpayers wishing to claim the HTC for buildings other than those listed on the National Register of Historic Places Owners of buildings already listed on the National Register do not need to request this determination For claiming the 10 percent credit, this form must be used to certify that a building listed in a registered district does not contribute to the historical significance of the district.

74 HTC Application Part 2 Describes the condition of the building Used to document the rehabilitation of the structure Reviewed by NPS in order to determine whether the rehabilitation itself is consistent with the historic significance of the building or district and, therefore, qualify as a certified rehabilitation. Proposed work evaluated based upon the 10 rules referred to as the Secretary of the Interior s Standards for Rehabilitation The NPS strongly advises that the Part 2 application be filed before any rehabilitation activities commence, although this is not required.

75 HTC Application Part 2 (cont.) What can happen next after submission of NPS Part 2 application? NPS will rule as follows: 1. The proposed rehabilitation will meet the Secretary of Interior s standards but is preliminary pending a certification of the completed work, 2. The proposed rehabilitation will meet the Secretary of the Interior s standards if conditions that accompany the returned Part 2 application are met, or 3. The rehabilitation does not meet the Secretary of the Interior s standards and, therefore, does not qualify for the HTC (either credit percentage).

76 HTC Application Part 2 (cont.) NPS charges a fee with the Part 2 application. For proposed or ongoing rehabilitation, an initial fee of $250 A total fee between $500 and $2,500 is charged for review of completed rehabilitations (Part 3), and the initial $250 serves as a credit to the entire fee. As with Part 1, the review timeframe of the Part 2 application should take no longer than 60 days.

77 HTC Application Part 2 (cont.) The owner may resubmit its application again if it believes it has made sufficient changes to a previously denied rehabilitation proposal or wishes to modify its original submission due to a change in scope of the rehabilitation However, if work has commenced and a feature that NPS has denied as meeting its standards has been irretrievably altered, the entire project will be denied.

78 HTC Application Part 2 (cont.) The Part 2 application requires the owner to indicate: original construction type, the original use of the building, proposed use after the rehabilitation, and estimated total cost of the rehabilitation. Requires housing information before and after the rehabilitation for prior or future residential use, and the floor area in square feet before and after rehabilitation.

79 HTC Application Part 2 (cont.) Requests very detailed information about each feature and how it is to be rehabilitated. Must include drawings and sketches of the proposed work to show planned alterations or new construction. The Part 2 application may be provided to the IRS by NPS.

80 HTC Application Part 3 Upon completion of the rehabilitation work, the owner must provide a completed Part 3 Request for Certification of Completed Work. NPS determination on Part 3 is the final certification of whether the project does in fact qualify as a certified rehabilitation for purposes of the HTC. A representative of NPS or the SHPO will inspect the final product and make a determination on whether the proposed rehabilitation from the Part 2 application was in fact followed.

81 HTC Application Part 3 (cont.) If a negative determination is rendered on the completed work, the owner may appeal the decision with the Chief Appeals Officer within 30 days of the determination. The decision of the Chief Appeals Officer is the final administrative decision. Part 3 is required to be received no later than 30 months from date taxpayer filed tax return that claimed credits Part 3 is required to be supplied to the IRS by NPS and it is what allows credits to be claimed on the project.

82 HTC Application Part 3 (cont.) Part 3 requires the taxpayer to provide two key pieces of information: 1. The starting date of the rehabilitation and the date the rehabilitation work was completed and the building placed in service. 2. Requires that the owner estimate the total costs attributed 1. Solely to rehabilitation of the certified historic structure, and 2. To new construction associated with the rehabilitation, including additions, site work, parking lots and landscaping

84 Low-Income Housing Tax Credit The low-income housing tax credit (LIHTC) is a credit for providing affordable rental housing for low-income individuals. It can be claimed on newly constructed residential rental buildings or acquired and rehabilitated existing buildings used for residential rental. The LIHTC is generally a credit that is claimed for a 10- year period, and is calculated from eligible basis, or costs that are eligible to be included in the basis under IRC section

85 The HTC and the LIHTC Since the HTC is a rehabilitation credit, only existing buildings that are rehabilitated have the potential to claim both credits No 10 percent rehabilitation credit buildings will be able to couple with the LIHTC. The main disadvantage in coupling the HTC with the LIHTC is the mandatory basis reduction required under IRC section 50(c). This basis reduction applies to eligible basis for purposes of calculating the LIHTC. 85

86 Example: Basis Reduction LIHTC: Acquisition basis Eligible Basis Less: HTC LIHTC Credits HTC Credits $500,000 x 3.33% = $4,500,000 - $800,000 $3,700,000 x 9.0% = $16,650 $333,000 $349,650 + $800,000 Total Credits $1,149,650 By coupling with the LIHTC the project is losing eligible basis to calculate the annual credit amount, however, this is mitigated by being able to take the entire HTC all up front in the year the project is placed in service. 86

87 New Markets Tax Credit The new markets tax credit (NMTC) is a credit to encourage investment in low-income communities. Most businesses located in low-income communities could qualify for loans or equity investments using the NMTC. Typical firms could include: small technology firms, inner-city shopping centers, manufacturers, retail stores or micro-entrepreneurs. Residential rental property does not qualify as a qualified active low-income business. The taxpayer will be eligible to claim a tax credit equal to 5 percent of its equity investment for each of the first three years and a 6 percent credit for each of the next four years (39 percent total). 87

88 ROI Section 45D New Markets Tax Credit Tax Liability Investor(s) or Low-Income Community Thriving Community

89 CDFI Fund Investment Authority NMTC Allocation Application 39% I. Business Strategy Tax Liability II. Community Impact III. Management Capacity IV. Capitalization Strategy V. Info Re: Previous Awards CDE Investor(s) Corporations Partnerships LLCs taxed as corporations or partnerships $1.365 Bil NMTCs Low-Income Communities

90 CDFI Fund $3.9 Mil Tax Liability Investor(s) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Total $500k $500k $500k $600k $600k $600k $600k $3.9 mil Investment Authority 39% $10 M CDE QEIs NMTCs $1.365 Bil NMTCs QLICIs = Substantially All of QALICBs Low-Income Communities

91 CDFI Fund Investment Authority 39% $1.365 Bil NMTCs $3.9 Mil Tax Liability $10 M CDE QLICIs Investor(s) QEIs Year 1 $500k Year 2 $500k Year 3 $500k Year 4 $600k Year 5 $600k Year 6 $600k Year 7 $600k Examples of QALICBs Total $3.9might mil include but are not limited to: Community centers Libraries Health care facilities Boys and girls clubs Charter schools Museums = Substantially All of Grocery stores Drug rehab facilities NMTCs QALICBs Low-Income Communities

92 Program Definition Community Development Entities must use Substantially All of the proceeds from Qualified Equity Investments to make Qualified Low-Income Community Investments in Qualified Active Low-Income Community Businesses located in Low-Income Communities.

93 ROI Investor(s) QEIs NMTCs CDE

94 The Leveraged Structure ROI Loan Equity Lender(s) Investor(s) Interest Fund NMTCs Distribution QEIs CDE Interest

95 New Markets Tax Credit - Overview Qualified Businesses Any corporation or partnership (including nonprofits) engaged in the active conduct of a qualified business that meets all 5 requirements: Gross Income Tangible Property Services Performed Collectibles Nonqualified Financial Property 95

96 New Markets Tax Credit - Overview Qualified Businesses Excluded businesses: A business which develops or holds intangibles for sale or license A business which operates: a country club, golf course, massage parlor, hot tub facility, suntan facility, racetrack or other gambling facility or liquor store Certain farming businesses 96

97 Combined NMTC/HTC Transaction Assumptions: $1M HTC at $1 per Credit $1M HTC Equity $500k NMTC Equity $1M Developer Equity Related Party Rule Applies Federal Tax Credit Investor CDE Cash Distributions SMLLC Master Tenant (Disregarded for Federal Tax Purposes) Leases Tenants Developer/ Managing Member $1M Developer Equity MM Interest/ Cash Distr.?? Equity?? Loan Master Lease Owner (Rehabilitates Historic Building) Interest Payments/ Preferred Return

98 Combined NMTC/HTC Transaction with Allocated State Historic Tax Credit Assumptions: $1M HTC at $1 per Credit $1M SHTC at $0.75 per Credit $1M HTC Equity $500k NMTC Equity $750k SHTC Equity $1M Developer Equity Related Party Rule Applies Federal Tax Credit Investor CDE Cash Distributions SMLLC Master Tenant (Disregarded for Federal Tax Purposes) Leases Tenants $1.5M Equity Master Lease Interest Payments Developer/ Managing Member $1M Developer Equity MM Interest/ Cash Distr. Owner (Rehabilitates Historic Building) $750k SHTC Equity State HTC Investor

99 Combined NMTC/HTC Transaction with Certificated State Historic Tax Credit Assumptions: $1M HTC at $1 per Credit $1M SHTC at $0.75 per Credit $1M HTC Equity $500k NMTC Equity $750k SHTC Purchase $1M Developer Equity Related Party Rule Applies Federal Tax Credit Investor CDE Cash Distributions State HTC Investor $750k Purchase Price Developer/ Managing Member $1.75M Developer Equity MM Interest, 100% of SHTCs, Cash Distr. $1.5M Equity SMLLC Master Tenant (Disregarded for Federal Tax Purposes) Master Lease Owner (Rehabilitates Historic Building) Leases Preferred Return Tenants