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.

Over the summer, the Illinois General Assembly passed a bill expanding the role of state Tax Credits in the Historic rehabilitation marketplace in-state.  The new program expands the successful River’s Edge Tax Credit program to provide a state historic preservation Tax Credit to Historic projects all across the state.  This expansion from the previous 5 “River’s Edge” communities of Peoria, Aurora, Elgin, East St. Louis, and Rockford brings the State Tax Credit incentives on par with other flourishing programs in the Midwest.  The Credit will be issued separately from the existing River’s Edge program, allowing the existing structure for at-risk communities to continue to flourish.  The new bill was passed 110-11-1 in the state House of Representatives and 51-0 in the Senate, showing the bipartisan support for the rehabilitation of historic buildings in the Land of Lincoln.

The new tax credit will be non-transferable, requiring an existing owner to use the credit, or the introduction of a state tax credit partner to the development’s ownership entity to do so.  The credit will be awarded to applicants on a first-come, first-served basis, adding an annual allocation of up to $15 million of tax credits to the Illinois development marketplace, starting in January of 2019.  This will provide an additional piece of the capital stack to shovel-ready projects all across the state for the foreseeable future, and provide a nice tool for developers in nearby Missouri to explore investment in their neighbor, as the Missouri Historic Tax Credit program has been plagued by instability and reduction of annual allocation, leaving the development community at a stand-still.

Clocktower Tax Credits has facilitated dozens of Illinois Tax Credit transactions in the affordable housing and film programs, and we have the investor base, knowledge and experience in the Midwest development space to facilitate the investment in Illinois projects to reap the full benefits of this exciting new program.  As developers begin to apply for Credit awards, we can leverage our experience with state Tax Credit partnerships to provide a competitive edge.

If there are any questions on the program, or for developers seeking future Tax Credit equity for their prospective developments, please contact David Curtis at (978) 440-0742 or DCurtis@ClocktowerTC.com.

There’s a lot of buzz around Opportunity Zones (“OZone”), a tax-driven investment program created in 2017 by the Tax Cut and Jobs Act.  By most accounts, the program has been developing rapidly, with a tremendous amount of capital potentially available to be invested through the program.  The intent of the Federal program is to allow recently-harvested capital gains to be reinvested in economically depressed areas across the country.  It is estimated that there is about $6 trillion in such capital gains available domestically, which sit in investment accounts of banks, insurance companies, corporations, individuals, retirement accounts, and other taxpayers.  Only a small fraction of these funds would be considered for Opportunity Zone investment.  But even if only one-tenth of one percent of this money were committed to the program, the size would rival that of the Federal Low-Income Housing tax credit program as well as the Federal New Markets tax credit program.

Much has been written about the technical rules of the program (as well as the lack of current guidance).  But investors, hungry to shield their current capital gains from taxation, are pushing investment fund operators to quickly set up and activate Opportunity Funds.  Some of these fund sponsors come from the tax credit industry, while others emerge from other asset management or hedge fund origins.  It will be fascinating to see how the market develops, and the level of integration of traditional fund management with the tax credit universe more familiar with the rules of tax-advantaged investment.

In our estimation, the current demand for tax shelter is overwhelming the supply of well-structured, shovel-ready projects that can benefit from Opportunity Zone financing.  One important factor in assessing a project’s interest in OZone funding is the duration of the investment.  Funds seeking to maximize tax benefits want to keep their capital invested for the ten-year period that eliminates any tax on gain, the largest tax benefit.  Few traditional market-rate real estate projects are comfortable committing to that partnership timeframe, whereas NMTC and LIHTC projects are more accustomed to the 7- to 15-year horizons required under their program rules.

Investment returns are another area of interest.  Fund sponsors appear to be targeting returns in the range of 10-15% after-tax, which are generally in excess of most tax credit funds.  However, this may be below the rate required by typical hedge fund investors, and above the threshold that banks accustomed to CRA-driven investments require.  As in many new ventures, the first participants out of the box deliver the highest returns, and then over time, as investors become more comfortable and familiar with the program, returns drop and the more conservative money wins out, willing to accept lower returns for lower risk.  This is especially true in the current environment, where the industry is sorely lacking guidance from the US Treasury Department on key issues, but some very impatient money is seeking these early opportunities.

Clocktower Tax Credits, LLC is well-positioned to help develop this exciting new investment vehicle.  With 25 years of experience in tax-advantaged project financing, Clocktower will be helping developers obtain OZone funding, and helping OZone fund sponsors identify worthwhile and profitable projects in which to invest.

Please contact Jeff Jacobson at (978) 823-0200 or JJacobson@ClocktowerTC.com to discuss the current marketplace.

It takes a village to develop or rehab an affordable rental property.  The Low-Income Housing Tax Credit (LIHTC) Program was created in 1986 to encourage investment of private capital in the development of affordable rental properties.  To date, fifteen states have adopted their own State LIHTC program alongside the Federal Program.  This has created a substantial benefit to developers in those states.  The reliance on hefty prices from tax credit equity has recently changed due to tax reform that was enacted in December of 2017.  Developers are currently assuming lower pricing due to this change, which means that developers will have to find alternative sources of capital to fill the gap created by this reduction in tax credit equity.  Historically, tax credit financing has played a major role in successful affordable housing project funding, but that’s only half of the story.  It takes many other subsidies from state and local municipalities to make the numbers work.  For example, on one of Clocktower’s recent projects, 98 Essex Street in Haverhill, MA, the redevelopment of an historic Shoe and Leather Association Building into sixty-two apartments for low -and moderate-income households, the developer is using a myriad of financing to achieve its end goal.  Financing included $19.5 million in state and federal LIHTC equity, with Massachusetts Housing Investment Corp. syndicating the federal tax credits while Clocktower Tax Credits, LLC brokered the state tax credits.  The Massachusetts Housing Finance Agency provided a $1 million permanent loan and $600,000 from the agency’s Workforce Housing Initiative.  The Massachusetts Department of Housing and Community Development contributed an additional $2.5 million in direct affordable housing subsidy.  The Affordable Housing Trust Fund contributed $1 million, while the City of Haverhill and the North Shore Home Consortium contributed an additional $365,365.  Eastern Bank is providing $16.3 million in construction loan financing.  When completed, there will be fifteen one-bedroom, forty-one two-bedroom, and six three-bedroom apartments available for residents between 30 percent and 80 percent of area median income (AMI).  It truly took a village to make this project happen.

For more information, please contact Sue Ellyn Idelson at (978) 793-9574 or SIdelson@ClocktowerTC.com.