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Twin to Win Part I – How Combining Certain Tax Credits Can Benefit Developers

The act of combining (or “twinning”) tax credits, such as the New Markets Tax Credit (“NMTC”) and the Historic Rehabilitation Tax Credit (“HTC”), can offer developers an opportunity to bridge funding gaps and increase the amount of capital for certain historic projects located in low-income communities.

Both federal statutory programs, the NMTC Program is administered by the Community Development Financial Institutions Fund (“CDFI Fund”), an agency of the US Department of the Treasury and the HTC Program is administered by the National Park Service (“NPS”), an agency of the US Department of the Interior.

The NMTC Program was designed to encourage capital investment in low-income communities that lack access to capital. By providing investors with a federal tax credit, private capital is injected into businesses and properties located in these low-income and underserved communities. Similarly, the HTC Program was designed to promote preservation and economic development by making adaptive reuse of historic structures financially feasible, helping to mitigate higher rehabilitation costs that often lead to new builds instead of preserving historic structures. Like the NMTC, investors receive a federal tax credit for injecting private capital into historic preservation projects.

Often, deteriorating buildings with historical value are located in low-income communities. If a project qualifies for both programs, the available capital to spend on a project increases exponentially. Further, many states have passed legislation authorizing state NMTC and HTC programs. In these states, the impact of the credits can be even more substantial. If considering the preservation and rehabilitation of a historic structure, developers should determine whether the project qualifies for one or both programs, including state programs.

To qualify for the NMTC Program, the project must either (1) be located in a low-income community census tract or (2) provide services to, or employment for, a certain percentage of low-income persons. To qualify for the HTC Program, the project must be (1) listed on the National Register of Historic Places or (2)(a) located within a registered historic district and (b) contribute to the historic significance of the district. This is called Part I Approval for historic projects.

If a project qualifies for NMTCs, the project must receive an allocation of NMTCs from a Community Development Entity (“CDE”). This information is available on the CDFI Fund’s website. The NMTCs are monetized by institutional investors making equity investments into CDEs. The CDEs use the equity investments to make loans to projects with favorable terms, which are generally forgiven at the end of 7-years, thus resulting in the capital injection into the project.

Unlike the NMTC, where a project must receive an allocation for the project, the HTC is available to any qualifying historic building and can be coordinated through the state’s historic preservation office. The HTCs are monetized by institutional investors making equity investments via a pass-through master lease structure for the project. The project plans and specifications must be approved by the NPS, a process called the Part II Approval. Upon completion, the rehabilitation must be certified by the NPS, a process called the Part III Approval.

For example, NMTCs and HTCs were twinned to provide significant private capital to the redevelopment of the historic General Electric factory complex in Fort Wayne, Indiana. With over $280 million in project costs, this revitalization will transform the former industrial campus into an over 730,000 square-foot innovation district. Federal NMTCs and HTCs, Indiana HTCs and other applicable tax credits provided over $100 million in private capital to the project.

In addition, the Thad Cochran Mississippi Center for Innovation and Technology, a 51,000 square-foot historic building in Vicksburg, Mississippi, utilized Mississippi and federal NMTCs and HTCs to drive private capital to the project equal to over 25% of the $18 million project costs. The project will be a state-of-the-art accelerated technology transfer center where businesses and organizations will collaborate to generate economic opportunities in the otherwise economically distressed area.

Twinning NMTCs and HTCs provide significant incentives for developers to invest in the historic structures and neighborhoods of low-income communities. Inevitably, however, complex issues will arise when combining the programs, and consultation with experienced accountants, attorneys and consultants is critical to any twinned NMTC/HTC transaction.