Cherrytree Group Blog

2015: A Tax Credits and Politics Retrospective

[fa icon="calendar"] Dec 31, 2015 1:37:32 PM / by Warren Kirshenbaum

2015 has been an interesting and challenging year, beginning as years usually do with hope and expectation. On January 20, 2015, in Massachusetts, House Bill 2455, sponsored by Representative Antonio Cabral of New Bedford was referred to the Joint Committee on Revenue.  The Bill, if passed would broaden eligibility of the Massachusetts Brownfields Tax Credit (“BTC”), a transferable tax credit intended to encourage the reclamation of contaminated land as well as to enhance economic growth by fostering the rehabilitation of abandoned properties. House Bill 2455 proposes replacing the “lease” requirement with an “operating” requirement, such that the property operator, in addition to a lessee, would then be eligible for the BTC.  The Bill, which also proposes limiting Activity and Use Limitations (also known as AUL’s) to a particular time period is a good first step in the right direction for the Massachusetts Legislature on this particular issue. 


In October, 2015, a Massachusetts Superior Court ruled that the Department of Revenue’s (DOR) rejection of BTC applications filed by a property developer and non-profit universities was improper because it was based on an unlawful DOR Directive. The Court’s harsh rebuke of the DOR in 131 Willow Avenue, LLC v Massachusetts Commissioner of Revenue was so striking that it exceeded the expectations of those of us in the industry who had long railed against the DOR’s Directive. Specifically, the Court stated that “Directive 13-4 . . . appears to be nothing more than a naked, confiscatory attempt by a state administrative agency to appropriate private property to fill government coffers.” Although, the DOR is expected to appeal the ruling, with such an emphatic repudiation of the DOR’s inconsistent and uneven implementation of the BTC, we remain hopeful that Massachusetts will measure industry sentiment and respond with a more business friendly approach that will correspondingly lead to an increase, not a decrease in the Commonwealth’s revenue base.  


CBS News reported on November 30, 2015 that Oklahoma Senator James  released a report stating that Donald Trump received $40 million in tax credits to help pay for a new hotel at the Old Post Office building in Washington, D.C. This is an inaccurate misstatement by the GOP Senator from Oklahoma that shows his utter lack of knowledge about the Historic Tax Credit (HTC) Program, and its form and function. The Senator’s report, however, tees up a golden election year opportunity to clarify and explain the mechanics of a highly effective federal program that Donald Trump and The Trump Organization has used to great efficacy, and in the precise manner in which is was legislated to be utilized.   According to the National Trust for Historic Preservation, “[f]or more than three decades, the federal Historic Tax Credit has successfully implemented a national policy of preserving our historic resources and is the most significant investment the federal government makes toward the preservation of our historic buildings. Over the life of the program, the [HTC] has created nearly 2.5 million good paying, local jobs; leveraged more than $117 billion in private investment in our communities; generated a significant return on investment for the federal government (the HTC’s $24 billion cost has resulted in $28.6 billion in federal taxes); and preserved more than 40,000 buildings that form the historic fabric of our nation.”


To better explain how the HTC works, I need to make a few assumptions, but in general terms the numbers in a tax credit project such as Trump’s Old Post Office Building in D.C. will probably play out as follows: The Trump Organization was selected by the US General Services Administration in June 2013 to develop the Old Post Office. The Trump Organization with a $200 million rehabilitation budget to renovate the iconic property will act as sponsor, developer, and operator. The rehabilitation expenses that are tax credit eligible are known as qualified remediation expenses or QRE’s. Certain costs are excluded as QRE’s, and even for those that are includable, many costs are incurred pre-construction, and therefore, pre-tax credit approval. Specifically, these could be acquisition (or leasing) costs, soft costs, carrying costs, interest and other financing costs, as well as architectural, engineering, accounting, legal, and so forth, all of which are necessary to get a project to the point of being approved for the tax credit. These excluded costs will amount to millions of dollars, generally as much as 10-20% of the renovation budget, which in this case could exceed $20 million, and will need to be pre-funded by The Trump Organization. The Senator’s tax credit valuation was made because the HTC program allows a tax credit for 20% of the QRE’s, estimated here to be $200 million, which would generate a $40 million tax credit. The tax credit may be utilized by the developer, i.e. The Trump Organization, or it can be utilized by a partnership between The Trump Organization and an investment partner, which is a more likely scenario. In fact, The Trump Organization broke ground on the Old Post Office building in July 2014, and according to the company's website, the hotel will be completed in 2016, amounting to a 3-year pre-construction and construction period. The tax credit equity that such a partnership would generate would amount to around $34 million based upon current market conditions, and only around $11 million would be funded pre-construction. Additionally, in these partnerships there is a slight holdback in final tax credit equity contributions, such that over the 3-year pre-construction and construction period the tax credit equity would be funded at only about $30 million. Given that historic rehabilitation projects cost around 15-20% more than ground up construction, or $30 million in this case, when you factor in the tax credit pay-in schedule, excluded QRE’s, acquisition costs, and soft costs, The Trump Organization will be faced with a trailing equity requirement during the pre-construction period of around $50 million, far exceeding the tax credit amount. A developer, that is also the sponsor, such as The Trump Organization would require substantial financial resources, solid corporate and/or personal guarantees, which place balance assets at risk, and use of innovative bridge and/or construction financing to pull off such a project. While the tax credit equity is useful and will result in a lower net equity contribution by The Trump Organization, they are assuming great risks and tying up valuable resources all in the name of preservation. Specifically, based upon these assumed numbers, the total project cost would be upwards of $220 million, of which the tax credit equity would represent $34 million, and with debt financing amounting to around 80% of value, or $175 million, the net equity required by The Trump Organization, including closing costs might be $12-14 million, which is only a 7% net equity contribution. However, as stated above, The Trump Organization will have issued guarantees, tied up balance sheet assets, and funded up to $50 million out-of-pocket prior to reimbursement, and performed a public function in an efficient private sector manner. Specifically, The Trump Organization is saving a building from demolition that is arguably a national treasure and part of the historic fabric of our country, it will have created jobs, provide the federal government a 19% return on its investment, and fostered a major capital infusion into a Washington DC neighborhood that will result in expanded economic activity and vitality for years to come. This tax credit that The Trump Organization received is a shining example of public-private efficiency, and therefore, needs to be reported as such.


Undoubtedly, the year’s crowning achievement came on December 18th when <h1>Congress passed and President Barack Obama signed the $1.1 trillion Consolidated Appropriations Act of 2016 and the tax-extending, $680 billion, Protecting Americans From Tax Hikes (PATH) Act of 2015. These bills include provisions to permanently extend the minimum 9 percent low-income housing tax credit (LIHTC), extend the new markets tax credit (NMTC) for five years at $3.5 billion annually through 2019, extended the renewable energy tax credit (ITC) through 2019, and then gradually phase down the ITC, extend the production tax credit (PTC) through 2021, extend bonus depreciation for five years through 2019, make permanent the research and development tax credit (with some modifications), extend the section 179D energy-efficient deduction for commercial and multifamily buildings (and increase section 179 expensing limits), and funded (but did not reauthorize) the Historic Preservation Fund for FY16 with a $9 million increase over the FY15 budget.


In terms of the ITC, particularly for commercial solar photovoltaic installations, the tax credit equity market was experiencing a deep chill, given that it was widely expected that the December 31st 2016 sunset date for the solar ITC would be unavoidable, particularly with the dysfunction displayed by Congress over the past several years. The industry and marketplace would have had to prepare to underwrite new deals on a 10% ITC following the sunset of the 30% ITC, which may have required increased electricity rates to make projects feasible. Accordingly, the extension of the solar ITC through 2019 was most welcome news and a joyous holiday gift that despite all our prognostications we didn’t see coming.


Sometimes the hopefulness of a new year quickly devolves into the reality of the challenges ahead, and 2015 year was no exception. Like the New England Winter, by Spring 2015, our landscape was still a dense snow-covered hilltop of issues. In hindsight, however it appears that we traversed the hilltop with fortitude and inspiration, and nothing quite brought the joy home as to see Congress and the President come together on an important tax extenders package contained in the Omnibus Spending Package and the PATH Act of 2015.

Here’s to 2016, which should be quite a ride for our industry and our nation as a whole!

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Topics: Year In Review

Warren Kirshenbaum

Written by Warren Kirshenbaum

Warren is the President and CEO of the Cherrytree Group, a tax credit consulting, brokerage, and syndication firm.

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