Its been about 13 months since the issuance of the 2017 Tax Cuts and Jobs Act transformed the 1-year Federal Historic Rehabilitation tax credit into a 5-year credit. While the credit had always vested over a 5-year period, under the new law the credit itself is to be taken and used by the investor ratably over a five-year period of time, beginning with the year the building was placed into service. While the industry was thrilled that the credit itself was pulled from the trash bin under some proposed legislation, the negative impact on the investor equity marketplace was foreshadowed. Coupled with the reduction in the federal corporate tax rate from 35% to 21%, and the creation of the Base Erosion and Anti-Abuse Tax, it appeared that a slowdown in investment activity, and the pricing in the equity marketplace, was inevitable.
While some of these effects have been felt, the results have been muted. The impact of the extension of the credit to five years has been delayed due as projects grandfathered as 1-year credits under the transition rules have dominated the closing agendas of most corporate investors. Up through Fall 2018, most investors would not even quote pricing on 5-year projects; their pipelines were full of projects hastened to close before the new rules took effect. And there was a wait-and-see attitude pervasive among most investors; each wanted to see how its competitors were pricing this revised credit.
By early winter, most investors were seeing a stream of 5-year credit projects, and have stepped up to provide active proposals with competitive price quotes. While early pricing reflected the predicted 10-15 cent per dollar drop in pricing, the marketplace quickly reflected the spate of investors jumping back in, and investors began sharpening their pencils. We are now seeing pricing in the low $0.80s per dollar of credit, reflecting a reduction of only 6-10 cents from the levels quoted for 1-year credits.
Under the new rules, investors are only building up a cache of tax credits at one-fifth of the previous rate. That is, an investor with an appetite of $50 million in 2019 tax credits can’t simply invest in $250 million in Qualified Rehabilitation Expenses (QREs) this year; rather, they’d have to invest in over $1 billion in QREs to reach their tax credit target. Thus, investors are needing to invest in more projects in the next few years, but fewer projects in the succeeding years once they have built a stream of 5-year credits. So the best timing is RIGHT NOW to bring a historic tax credit development opportunity to market. Clocktower stands ready and able to help developers do just that. Please contact Jeff Jacobson at (978) 823-0200 or JJacobson@ClocktowerTC.com to discuss your opportunities.