Friday, August 23, 2013

New Abandoned Buildings Tax Credit Could be a Gamechanger

South Carolina is on the cutting edge with its newest investment tax credit for the redevelopment of abandoned buildings.  It became the first state to enact an investment tax credit for the redevelopment or rehabilitation of abandoned buildings when it enacted the South Carolina Abandoned Buildings Revitalization Act earlier this year. 

The new act was modeled after the Textile CommunitiesRevitalization Act and works to expand on that incentive to many other types of buildings across the state.  Under the Abandoned Buildings Revitalization Act (the “Act”), any building that has had at least two thirds of its space “…closed continuously to business or otherwise nonoperational for income producing purposes for a period of at least five years…” meets the definition of an abandoned building and is eligible for the tax credit, with the exclusion of single family residences. 

The credit itself is equal to 25% of the rehabilitation costs incurred on the building site, but the credit that may be earned under the Act is limited to $500,000 per tax year, per taxpayer, per building site.  The credit can be used against either (i) South Carolina income taxes, South Carolina corporate license fees, or South Carolina insurance premium taxes; or (ii) real property taxes levied by local taxing entities.  If used against the first category of taxes, the taxpayer can only use the credit to offset up to fifty percent of either (a) the taxpayer’s income taxes or insurance premium taxes, or both; or (b) the taxpayer’s corporate license fees.  If used against the second category of taxes, real property taxes, the taxpayer must get local government approval through the process described in the Act.  In most cases, the cumbersome process of local approval makes the first category of taxes more attractive, because the income tax credits can be syndicated with an investor in order to infuse additional equity into project.  The income tax credit is earned in the year the project is placed in service, but taken in 5 equal annual installments.  Each installment can be carried forward for up to 5 years. 

There are some additional prequalification thresholds a taxpayer must meet in order to qualify for the credit.  First of all, the taxpayer must file a Notice of Intent to Rehabilitate with the Department of Revenue prior to beginning the rehabilitation.  Any costs incurred by the taxpayer before the Notice of Intent is filed will not be eligible for the credit.  The Notice of Intent must state the estimated rehabilitation expenses that will be eligible for the credit, and if the actual expenses claimed are less than 80% of the estimated expenses, the project will not be eligible for the credit at all.  On the other hand, if the actual expenses are greater than 125% of the estimated expenses, the allowed expenses will be limited to 125% of the estimated credits for purposes of calculating the tax credit.  With this in mind, note that it is better to be conservative and underestimate your expenses in order to avoid coming in at less than 80% of projected expenses and losing the credit altogether. 

Another limitation on the credit requires a certain amount of expenditures to be incurred by the taxpayer in the rehabilitation before the project will be eligible for the credit, depending upon where the project is located, and the population of such area.  An area for these purposes is considered to be either a city or, if the area where the project is located is unincorporated, a county.  The thresholds are as follows:
  • For areas with populations of more than 25,000 people, the expenditures on the project must be at least $250,000.
  • For areas with populations of 1,000 to 25,000 people, the expenditures on the project must be at least $150,000.
  • For areas with populations of less than 1,000 people, the expenditures on the project must be at least $75,000. 

This article merely serves as a general summary of the new tax credit law, so if you are interested in utilizing this incentive, you should seek legal counsel who is familiar with these types of incentives. 

The bottom line is that the Abandoned Buildings Revitalization Act adds a dynamic new incentive to encourage redevelopment and revitalization of all types of vacant or abandoned structures across the state of South Carolina.  Whether the developer of a project can use the credit themselves, or it is used as a tool to raise additional capital for the project, the credit adds tremendous value to struggling communities all over the state.

Monday, July 9, 2012

The Positive Economic Impact of Tax Credits


On this blog we have discussed at length the various ways tax credits can benefit a state. They circulate money back into an economy to increase spending, provide incentives to clean up dilapidated sections of town raising property values, and provide an engine for job creation. While we focus mostly on tax credits in the Southeast, particularly South Carolina, there are plenty of other parts of the country that have seen the benefits of such credits. Below are just three examples of many:


In order to boost a still recession injured economy, the Rhode Island Public Expenditure Council voted to temporarily reauthorize the already effective Historic Preservation Income Tax Credit. The credit is similar to South Carolina's recently stalled Abandoned Buildings Revitalization Act. The credit itself allows a developer to recoup 30% of the costs of approved rehabilitation work, providing an incentive to undertake potentially expensive projects that may not visit direct benefits on the developer. 

Both the economic and non-economic benefits of the tax credit are touted. In general, preserving buildings is not only cheaper than replacing buildings in many cases, but the process of declaring buildings historic (and therefore eligible for a tax credit) increases property values. Non-economic benefits include the “preservation of a culture and community” according to RIPEC, as well as aesthetically improving a neighborhood.

The authorization of this tax credit is only temporary - full reauthorization will only come as part of a full evaluation of the state’s tax policy. While RIPEC agrees with the need to perform due diligence, it strongly advocates the long-term economic benefits of such credits.


In a case of absence making the heart grow fonder, the Oklahoma state legislature ended a two-year suspension of an energy efficiency tax credit on July 1. Now, builders once again have the incentives to increase energy efficiency in newly built homes. Hopefully this will reduce the drop off in quality noted by the head of an Oklahoma City based green construction inspection company Guaranteed Watt Saver.

Some expenditures eligible for as much as a one-to-one tax credit include energy-efficient heating and cooling systems, roofs coated with materials to reduce heat gain, and improved insulation. The credit can range from $2,000 to $4,000. However, Todd Booze, vice president-secretary of the Oklahoma State Home Builders Association sees this as a valuable long-term investment. The long term housing stock will be improved and those who buy the energy efficient homes can save up to $2,000 a year.


If you are one of the millions of people who saw The Avengers this summer, not only did you see The Incredible Hulk put Loki in his proper place, but you also got a glimpse of metropolitan Cleveland, Ohio. This is largely due to the efforts of Ivan Schwarz and the Greater Cleveland Film Commission, who were largely responsible for encouraging the Ohio legislature to create a $20 million tax incentive for Hollywood movie makers to film in the city. By all accounts, the tax credit has been a resounding success.

The credit reimburses producers up to 25% of dollars spent in Ohio and up to 35% of money spent paying wages to Ohio employees. The credit has proved so popular that Governor John Kasich signed a bipartisan bill to double the available money for the tax credit to $40 million in both 2012 and 2013.  However, it’s not just big budget Hollywood films that are eligible for this credit—documentaries, commercials, and even video games are eligible for the $40 million tax credit pool.

Conclusion

According to a study by Cleveland University, Ohio has reaped a return of $1.20 for every $1.00 spent on tax credits, including ones for the movie industry. Ohio’s filmmaker’s tax credit, Rhode Island’s historic preservation credit, and Oklahoma’s energy efficiency credits are three of many examples of how such credits can create jobs, improve neighborhoods, create disposable income, and generally improve quality of life. Hopefully for the next legislative session South Carolina will follow the lead from other states and pass the Abandoned Building tax credit and other potential economy improving tax credits.

Friday, June 8, 2012

Abandoned Buildings Tax Credit Bill Dead

As the official term of the South Carolina Legislative Session ended yesterday, so did the chances for the Abandoned Buildings Revitalization Act to become law this year.  Supporters of the bill, including me, will try to revitalize the bill next year.  The bill would have provided a 25% tax credit on investments in abandoned buildings for income producing purposes.  In order to qualify, the building would have to be 66% vacant for a period of at least 5 years prior to the investment.

Wednesday, May 9, 2012

South Carolina Abandoned Buildings Tax Credits


One of the many casualties of the recession was the real estate market, and South Carolina is no exception. It is not uncommon to drive down the street and see derelict structures that once housed families or businesses. Abandoned buildings can wreak havoc on an area, lowering property values and becoming a magnet for unsavory activities and other forms of decay. The city of Florence alone has about 2,500 abandoned or dilapidated structures. It is in the best interest of the state to prevent these buildings from falling into disrepair. South Carolina state legislators agree, which is why they are proposing a new law that would help rescue these abandoned buildings. The law, entitled the “Abandoned Buildings Revitalization Act,” seeks to save these buildings through the strategic use of a tax credit.

There are several requirements that must be fulfilled to be eligible for this tax credit. First, the abandoned building must be revitalized for commercial use. Second, the building must have been abandoned for at least five years. The building will be considered “abandoned” if at least two thirds of its space has been vacant for those five years. Third, the business owner must invest at least $500,000 into the renovations. The taxpayer who revitalizes the site of the abandoned building would be eligible for a 25% state income tax credit. Like other state income tax credits, these credit could be syndicated, or “sold” in essence, to raise capital for the project.

The bill (H4802) was passed by the House of Representative on April __, 2012 by a vote of 108-0.  It was co-sponsored by state reps Rick Quinn (R-Lexington) and James Smith (D-Richland). So far, it has received significant bipartisan support with over 30 lawmakers signing onto the bill, and no one has voiced opposition to the bill. The proposed bill has also received the support of the State Fire Fighters Association, Police Chiefs Association, Palmetto Trust for Historic Preservation, the Greater Columbia Chamber of Commerce, and the Affordable Housing Coalition of South Carolina, among others.  The bill is now awaiting consideration in the Senate, where it stands a very good chance of becoming law this year. 

In addition to saving dilapidated buildings through tax credit incentives, the bill is also expected to create new jobs, further stoking an economy that is still recovering. Steve Wukela, the mayor of Florence, is another ardent supporter of the bill for precisely this reason. “If you can get the marketplace in there to revitalize these properties, it changes the whole complexion of the community, particularly downtown,” Wukela said of the bill’s potential to save his struggling city. This new tax credit, should it make it through the legislature and be signed into law, would provide the incentive necessary for these markets to “get in there and revitalize the properties.”

Source:Lawmakers propose tax breaks for revitalization efforts,” by Patricia Burkett, published at SCNow.com.

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Monday, February 27, 2012

Certain transactions can be construed as “disguised sales” under federal tax law (Virginia Historic Tax Credit Fund 2001, LP v. Comm., Cite as 107 AFTR 2d 2011-1523)


Developers, investors, and professionals beware... last year's decision by the Fourth Circuit Federal Court of Appeals involving Virginia state tax credits has game-changing implications for the tax credit industry. 

The state of Virginia has a program where it uses tax credits to provide an incentive for developers to renovate and rehabilitate historic property. Once the state approves and certifies the renovation, the developer becomes eligible for tax credits for up to 25% of expenses incurred, which can offset state tax liability. A partnership can allocate the tax credit disproportionately among the limited partners.

The principals in this case created funds structured as four linked partnerships that would then partner with historical property developers. The funds would provide capital for completed projects and, in exchange, receive state tax credits from the developers. These tax credits would then be used as incentives to solicit investors to become limited partners in the funds - in exchange they would be allocated a proportion of the tax credits. In practice, these limited partners would own a .01% interest in the funds and were explicitly told that they would not receive “any material amounts of partnership income or loss.”

From November 2001 to April 2002, investments in fifteen different projects generated an investment/tax credit ratio of $0.55 on the $1.00. In May 2002, the fund owners bought out all the investors for .1% of their contributions.

The principals of the linked funds reported the transactions as “partnership expenses.” The Commissioner characterized the transactions as disguised sales for the following reasons:

  • The investors were not “bona fide partners” in the funds, but rather mere purchasers. 
  •  The transactions between the partnerships and investors were “disguised” sales under I.R.C. § 707.

Something is considered a sale under § 707 if: (1) the transfer of money “would not have been made but for” the transfer of property in exchange; and (2) the later transfer “is not dependent on the entrepreneurial risks of partnership operations.”

Outcome:

The Appeals Court held that even if they accept that the investors were bona fide partners, the transactions were still “disguised sales.” The credits were considered property for federal tax purposes. The “allocations” of credits to the “limited partner” investors were really transfers of something valuable in exchange for money. The partnership status of the investors was “transitory” in nature, and the receipt of credits was not dependent on the success or failure of the partnership ventures.

Practical Result:

The holding in this case resulted in bad results for everyone involved.  The sale of the tax credits by the funds were treated as sales of capital assets in which they had no basis, such that all of the contributions recieved from investors were treated as taxable capital gains.  The investors were treated as having a basis in the tax credits equal to the amount of their investments, so when they utilized the credits to offset their state income, they also were taxed on capital gains to the extent the value of the credits exceeded their investments.  This result may diminish the value of the credits and hurt the market over time.

The important point to take away from the case is that the court was important to note that the Court's ruling was very narrow and was based on the particular facts of the case, with special attention being given to the structure of the partnership entities in which the investors contributed their investments.  These entities could have been structured in a different way that would likely not have given rise to the disguised sale treatment.  Any transaction involving the allocation of state tax credits to investors in exchange for capital should be carefully structured to avoid this result.

Monday, February 6, 2012

Don't forget the Bailey Bill

For developers doing their first historic rehabilitation tax credit deal in South Carolina, let me fill you in on a valuable piece of advice; make sure you don't sell yourself short on available property tax incentives that may accompany your historic rehab tax credits.  In South Carolina, state law authorizes local tax authorities to adopt, by ordinance, a special assessment for eligible historic rehabilitation properties and low income properties.  This little known incentive is known as the "Bailey Bill" to those who are familiar with it.  It can lock-in the assessed value on the property at its pre-rehab value for up to 20 years.  If you haven't had time to crunch your numbers, you should.  It could save you hundreds of thousands in property taxes over the life of the special assessment period.  The trick is to make sure you get preliminary approval for the Bailey Bill from the local tax authorities before you start construction.  First, verify that the local tax authority (city or county) has adopted the Bailey Bill by ordinance.  If they have, you should follow the ordinance carefully and make sure you have fully complied with their application process.  If they have not adopted the Bailey Bill by ordinance, you can request that they do so before you proceed with your project.  Just make sure you apply before you begin, or as soon thereafter as possible, or you may be out of luck.

Tuesday, May 31, 2011

Application for 2011 Round of New Markets Tax Credit Opens

Deadlines are June 22, 2011 for CDE Certification and July 27, 2011 for NMTC Allocation Applications.  Click here for more info.