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.

The partial government shutdown that took place in December and January has had far-reaching effects outside of the ever-increasing political divide in Washington.  Among the group of temporarily shut down government entities is the National Park Service, whose continuous review and approval of prospective historic rehabilitations is required to generate Federal Historic Tax Credits.  The slowdown has led to no Parts 1, 2, or 3 approvals, leaving projects currently in-progress at a standstill awaiting feedback to ensure the receipt of Tax Credits.  Additionally, new projects applying to the NPS have not been able to submit preliminary documentation, leading to uncertainty once the organization is up and running as to where the initial focus will be.  This has impacted historic work throughout the country, with the risk-averse development community not wanting to invest capital into projects, only to have the work ultimately rejected.

Moreover, the shutdown also impacts projects nationwide which are using grants or loans from HUD or other government agencies.  The uncertainty persists regarding Housing and Urban Development’s availability during the shutdown, and its efficiency in underwriting upcoming opportunities.  The limited staff and resources has led to a focus on crucial current housing situations, such as renewals of expired HAP contracts during the shutdown.  This could delay construction schedules for months as HUD restarts many processes to provide loans directly or through affiliated partners.

The current political battle continues without an end in sight, with fears of another full prolonged shutdown after a temporary re-opening agreed to by President Trump.  Before the matter is fully resolved in Washington, the situation for the historic development community is unsettled, without any certainty of the availability and efficiency of vital parts of developers’ capital stacks.

Clocktower Tax Credits, LLC has the expertise and experience to provide up-to-date information on short-term uncertainty and planning prospects around government hurdles.  Please contact Sue Ellyn Idelson at (978) 793-9574 or SIdelson@ClocktowerTC.com, and David Curtis (978) 440-0742 or DCurtis@ClocktowerTC.com, to discuss where your project stands and how we can help navigate the current murky waters in Washington to produce a successful Tax Credit investment during unstable times.

Sue Ellyn Idelson was recently elected by her fellow FBA (Florida Brownfields Association) members to the FBA Board of Directors.  This is a two-year term that expires in September 2020.  The purpose of the Association is to promote a wide array of Brownfields-related goals, objectives and initiatives, including environmental restoration, economic revitalization, natural resources preservation, conservation and recreational-based beneficial reuse, enhancement of financial and regulatory incentives, job creation and training, public health, environmental equity and justice, and community outreach and education.

You might be asking yourself, what value does a tax credit broker bring to the FBA?  One of the regulatory incentives Florida uses to clean up its contaminated sites is a tax credit known at the Voluntary Cleanup Tax Credit or VCTC.  Clocktower Tax Credits has represented the marketing of the VCTC since the credit’s inception in 2001.  In fact, our President, Jeff Jacobson was instrumental in helping craft the transfer process from Seller to Buyer.  Our experience over the years with both Sellers and Buyers of the VCTC positions us to know what programmatic changes would be beneficial to making the VCTC more marketable and thus a better vehicle to incentivize developers to clean up contaminated properties.

One area we would like to explore is removing the limitation of a one-time tax credit transfer.  The state issues the credits once a year in July.  Due to an exhaustion in annual state funding, there have been many years when tax credits have been issued two years after application.  If an award recipient of a tax credit certificate needs or prefers to liquidate its position and sell its tax credit interest, we would have the flexibility to buy the credit outright from the owner.  We would then have the opportunity to sell the tax credit later once it’s issued or when there’s greater investor demand.

Another area that would increase the marketability of the tax credit is a change in recapture rules.  We support a regulation stating that transferees are not subject to recapture.  Currently, there is a three-year period where the Department of Revenue can audit the cleanup project and if credits were inappropriately issued, they are subject to recapture.  This provision creates risk and uncertainty for Buyers of the tax credit certificates.  Credit pricing would increase if this risk was eliminated.

Sue Ellyn looks forward to her tenure on the Board.  Project owners looking to sell their VCTCs should contact Sue Ellyn Idelson at (978) 793-9574 or SIdelson@ClocktowerTC.com, for information and great results!

After much anticipation, the Massachusetts Department of Energy Resources (DOER) announced that the official start date of the Solar Massachusetts Renewable Target (SMART) Program will be November 26^th, 2018.  On that date, the existing SREC II Program will transition to the new SMART Program for both residential and commercial solar power generators.

Under the SREC II Program, energy generators would sell their renewable energy credits through an online marketplace to suppliers and other users of power to meet their renewable energy requirements, whether company or state mandated.  Conversely, the new SMART Program provides predictable payment rates to owners of solar generation by using a series of “declining blocks” dictated by the amount of total capacity in each block.  The first block will provide the highest rate of payment with the most capacity, and as more solar power generators become allocated and reach the limit of the block, the second block, with slightly less capacity and payment, goes online for the next wave of applicants.

It will be interesting to monitor the program this Fall as the early adopters of the SMART Program will reap the most benefit, but at the same time, be experimenting with a brand new renewable energy incentive program.  The use, payment, market structure, and law governing renewable energy credits will change drastically, but the goal of increasing Massachusetts’ use of renewable energy remains a top priority.

Please call Nathan Howe at (978) 460-4244 or NHowe@ClocktowerTC.com to learn more about the SMART Program and how we can help solar developers monetize their eligible 30% Investment Tax Credits on their solar system.

A tax incentive in real estate development is a great economic inducement; it decreases the equity required to develop property and helps contribute to the entirety of the community in which the property is located.  Consider the newly created economic development tool, Federal-designated Opportunity Zones (“OZone”).  This program uses garnered capital gains to reinvest into historically disinvested areas, while giving the developer the benefit of tax deferral and/or tax savings.  For more information on Opportunity Zones, see our article here.  But, what if there were a way to enhance the power of this tax incentive?  Two tax incentives will always be better than one and the nature of the OZone program, with its flexible terms of eligible investments, makes it an appealing tool for this incentive to be twinned with another existing incentive, such as a Federal Historic Tax Credit (“HTC”).

Although each incentive isn’t powerful enough to fill a project’s entire capital stack, each program individually could cover a significant portion of the capital stack, improving the overall return for the investor.  When paired together, it could make investing in historic preservation projects more economically feasible.  Fortunately, just about any historic property has a reasonable chance of being located in a Qualified Opportunity Zone (“QOZ”).  QOZ’s are low-income census tracts that are nominated by the governor of each state and U.S possession and are approved by the U.S. Treasury.  A great example of the potential of pairing the two incentives can be found in Missouri.  This state is making the most out of the twinned capability of the OZone Program with its own state Historic Tax Credit program.  The Missouri Legislature recently passed and signed into law S.B. 773, which will reserve $30 million of the state’s annual historic preservation tax credit allocation for eligible projects in Opportunity Zones.  We can expect the tax credit market for Historic properties in Missouri QOZ’s to strengthen significantly, and hopefully more states would follow.

The federal Historic Tax Credit program requires a taxpayer to remain in the ownership for a minimum of 5 years, due to the 5-year recapture period.  This a highly attractive attribute in the case of OZones, because the capital gains that are invested for 5 years would result in a 10% tax reduction on a taxpayer’s capital gain, along with the 5 years of tax deferral.  An additional 2 year holding period would result in a supplemental 5% tax reduction and 2 more years of temporal gains deferral.  Most investors would find the additional 2 year stay in a historic tax credit investment, for an amassed 15% tax reduction, to be worthwhile.  Further, in order to reap the full benefit of the OZone program, it would require an investment horizon of 10 years.  This duration provides the largest benefit to the taxpayer, which is permanent exclusion of any tax on gains accrued during the 10-year investment.

Clocktower Tax Credits, LLC has expertise in assisting taxpayers with monetizing a number of different tax credits, specializing in the Historic, Brownfields, and Affordable Housing Tax Credit markets.  Clocktower will be assisting developers in obtaining OZone funding, and helping OZone fund sponsors find profitable projects to invest in.

Please contact Tre Jones at (978) 793-9157 or TJones@ClocktowerTC.com with any questions that you may have regarding Opportunity Zones and Tax Credit monetization.