Heritage Ohio Historic Tax Credit Workshop September 18, 2009

Federal Historic Tax Credits Types of Credits 10% Credit for rehabilitation of a non-residential structure placed in service prior to 1936. 20% Credit for rehabilitation of a certified historic structure regardless of use or age. Structure must be listed on the National Register either individually or within an historic district. Rehabilitation requires certification by the Secretary of the Interior.

Types of Credits

10% Credit for rehabilitation of a non-residential structure placed in service prior to 1936.

20% Credit for rehabilitation of a certified historic structure regardless of use or age.

Structure must be listed on the National Register either individually or within an historic district.

Rehabilitation requires certification by the Secretary of the Interior.

Federal Historic Tax Credits Tax Implications Property must be a building Cannot be a personal residence Property’s depreciable base is reduced by the amount of the tax credits Compliance period – Five year holding period; 20% of the tax credits are earned for every full 12 months the property is held past the date the credits were taken. Recapture occurs if the five year holding period is not met.

Tax Implications

Property must be a building

Cannot be a personal residence

Property’s depreciable base is reduced by the amount of the tax credits

Compliance period – Five year holding period; 20% of the tax credits are earned for every full 12 months the property is held past the date the credits were taken. Recapture occurs if the five year holding period is not met.

Federal Historic Tax Credits Tax Implications (continued) At risk rules Do not apply if your investor is a widely held C Corporation. Property cannot be financed by a person or entity related to the buyer of the property. Non-recourse financing cannot exceed 80% of the credit base. Alternative Minimum Tax (AMT) – Prior to 2008 the tax credits were unable to offset AMT. Beginning in 2008 the tax credits are not limited by AMT.

Tax Implications (continued)

At risk rules

Do not apply if your investor is a widely held C Corporation.

Property cannot be financed by a person or entity related to the buyer of the property.

Non-recourse financing cannot exceed 80% of the credit base.

Alternative Minimum Tax (AMT) – Prior to 2008 the tax credits were unable to offset AMT. Beginning in 2008 the tax credits are not limited by AMT.

Federal Historic Tax Credits Tax Implications (continued) Unused credits can be carried back 1 year and forward 20 years. Tax credits are allocated based on profit percentage.

Tax Implications (continued)

Unused credits can be carried back 1 year and forward 20 years.

Tax credits are allocated based on profit percentage.

Federal Historic Tax Credits Credit Base Substantial Rehabilitation Rehabilitation must be at least $5,000 and exceed the adjusted tax basis of the property. Adjusted tax basis is acquisition cost or book value of the property excluding land. Measurement Period Generally a 2 year period beginning in the year rehabilitation commences and ending at the end of the second tax year; Note that the period may be more than 24 months.

Credit Base

Substantial Rehabilitation

Rehabilitation must be at least $5,000 and exceed the adjusted tax basis of the property.

Adjusted tax basis is acquisition cost or book value of the property excluding land.

Measurement Period

Generally a 2 year period beginning in the year rehabilitation commences and ending at the end of the second tax year; Note that the period may be more than 24 months.

Federal Historic Tax Credits Credit Base (continued) Measurement Period (continued) Optional 5 year period (phased project) if the project is divisible and there are written plans and specification prepared. Qualified Rehabilitation Expenditures (QREs) Generally costs related to direct construction and may include plumbing, electrical, HVAC, tenant finishes paid for by the landlord, etc.

Credit Base (continued)

Measurement Period (continued)

Optional 5 year period (phased project) if the project is divisible and there are written plans and specification prepared.

Qualified Rehabilitation Expenditures (QREs)

Generally costs related to direct construction and may include plumbing, electrical, HVAC, tenant finishes paid for by the landlord, etc.

Federal Historic Tax Credits Credit Base (continued) Qualified Rehabilitation Expenditures (continued) Soft costs – many soft costs qualify as QRE’s Regulatory costs such as construction period interest and real estate taxes. Construction related soft costs such as architect, engineering, legal, accounting, etc.

Credit Base (continued)

Qualified Rehabilitation Expenditures (continued)

Soft costs – many soft costs qualify as QRE’s

Regulatory costs such as construction period interest and real estate taxes.

Construction related soft costs such as architect, engineering, legal, accounting, etc.

Federal Historic Tax Credits Tenant Rehabilitation Expenditures The lease term at the time of completion must exceed the applicable recovery period (excluding renewal options). Residential properties – must be at least 27.5 years Non residential properties – must be at least 39 years

Tenant Rehabilitation Expenditures

The lease term at the time of completion must exceed the applicable recovery period (excluding renewal options).

Residential properties – must be at least 27.5 years

Non residential properties – must be at least 39 years

Federal Historic Tax Credits Pass through structures Landlord passes historic tax credits through to the tenant. Lease must exceed 80% of the applicable recovery period. 22 years for residential properties 32 years for non residential properties Tenant records the tax credit into income over the recovery period.

Pass through structures

Landlord passes historic tax credits through to the tenant.

Lease must exceed 80% of the applicable recovery period.

22 years for residential properties

32 years for non residential properties

Tenant records the tax credit into income over the recovery period.

Federal Historic Tax Credits Ownership Structures Limited Partnership Developer/owner/contractor/non-profit as the general partner, usually in corporate form. Minimal ownership in the entity, generally less than 1% Has control over the entity Investor(s) as the limited partner(s) Significant ownership No control over the entity

Ownership Structures

Limited Partnership

Developer/owner/contractor/non-profit as the general partner, usually in corporate form.

Minimal ownership in the entity, generally less than 1%

Has control over the entity

Investor(s) as the limited partner(s)

Significant ownership

No control over the entity

Federal Historic Tax Credits Ownership Structures (continued) Limited Liability Company Similar in structure to the limited partnership except partners are called members. Corporate member is not necessary due to the liability shield. Employment tax issue

Ownership Structures (continued)

Limited Liability Company

Similar in structure to the limited partnership except partners are called members.

Corporate member is not necessary due to the liability shield.

Employment tax issue

Federal Historic Tax Credits Ownership Structures (continued) Credit Value – the value of the tax credit to your investor is largely dependent on the following: Entity structure Investor’s pay in schedule Holding period Expected rate of return

Ownership Structures (continued)

Credit Value – the value of the tax credit to your investor is largely dependent on the following:

Entity structure

Investor’s pay in schedule

Holding period

Expected rate of return

Federal Historic Tax Credits Ownership Structures (continued) Credit Value (continued) Direct investment structures range from $0.85 to $0.92 Lease pass through structures range from $0.95 to $1.40

Ownership Structures (continued)

Credit Value (continued)

Direct investment structures range from $0.85 to $0.92

Lease pass through structures range from $0.95 to $1.40

Federal Historic Tax Credits Ownership Structures (continued) Investor Candidates Investment funds/syndicators Local financial institutions with unfullfilled community reinvestment requirements Profitable locally-based national company Generally, most local companies are not profitable enough to overcome AMT limitations Large national companies

Ownership Structures (continued)

Investor Candidates

Investment funds/syndicators

Local financial institutions with unfullfilled community reinvestment requirements

Profitable locally-based national company

Generally, most local companies are not profitable enough to overcome AMT limitations

Large national companies

Federal Historic Tax Credits Other Considerations Tax exempt tenants Cannot participate in the financing Cannot have a purchase option for a fixed sum Cannot have used the property prior to this lease Lease cannot exceed 20 years

Other Considerations

Tax exempt tenants

Cannot participate in the financing

Cannot have a purchase option for a fixed sum

Cannot have used the property prior to this lease

Lease cannot exceed 20 years

Federal Historic Tax Credits Other Considerations New Markets Tax Credits (NMTC) Ability to leverage historic tax credit equity with NMTC’s CDE credit allocation National Trust fund is available to Heritage Ohio members Financing First mortgage Bridge loans

Other Considerations

New Markets Tax Credits (NMTC)

Ability to leverage historic tax credit equity with NMTC’s

CDE credit allocation

National Trust fund is available to Heritage Ohio members

Financing

First mortgage

Bridge loans

Ohio Historic Tax Credits Types of Credits 25% credit on qualified rehabilitation expenditures (generally the same credit base as for federal purposes). Credit is refundable depending on the application round and the type of entity the credit is allocated to.

Types of Credits

25% credit on qualified rehabilitation expenditures (generally the same credit base as for federal purposes).

Credit is refundable depending on the application round and the type of entity the credit is allocated to.

Ohio Historic Tax Credits Tax Implications Credit is taxable to the recipient (federal and state). There is no recapture period or basis reduction. However, the fee owner must retain the tax certificate for a period of no less than four years after issuance.

Tax Implications

Credit is taxable to the recipient (federal and state).

There is no recapture period or basis reduction. However, the fee owner must retain the tax certificate for a period of no less than four years after issuance.

Ohio Historic Tax Credits Tenant Rehabilitation Expenditures – not applicable. Pass Through Structures – not applicable.

Tenant Rehabilitation Expenditures – not applicable.

Pass Through Structures – not applicable.

Ohio Historic Tax Credits Credit Value follows the same structure and taken into consideration with the federal credit. Valued between $0.50 and $0.85. Investor Candidates Same as for federal, but must have been liable for Ohio tax. Lends itself to be more applicable to individuals.

Credit Value

follows the same structure and taken into consideration with the federal credit.

Valued between $0.50 and $0.85.

Investor Candidates

Same as for federal, but must have been liable for Ohio tax.

Lends itself to be more applicable to individuals.

Ohio Historic Tax Credits Round One Applications (Inception to 3/1/08) Fee simple non governmental owner Listed on the National Register either individually or within an historic district. Rehabilitation work consistent with standards. Ohio tax credit is a major factor to the rehabilitation. Rehabilitation results in a net revenue gain to the state. Cost benefit analysis. Acknowledged that some applicants will amend expenditures to increase the credits.

Round One Applications (Inception to 3/1/08)

Fee simple non governmental owner

Listed on the National Register either individually or within an historic district.

Rehabilitation work consistent with standards.

Ohio tax credit is a major factor to the rehabilitation.

Rehabilitation results in a net revenue gain to the state. Cost benefit analysis.

Acknowledged that some applicants will amend expenditures to increase the credits.

Ohio Historic Tax Credits Round Two Applications (Submitted applications as of 3/1/08 and applications were approved on 10/16/08). Fee simple non governmental owner (no change). Listed on the National Register either individually or within an historic district (no change). Rehabilitation work consistent with standards for rehabilitation (no change). Ohio tax credit is a major factor to the rehabilitation (no change).

Round Two Applications (Submitted applications as of 3/1/08 and applications were approved on 10/16/08).

Fee simple non governmental owner (no change).

Listed on the National Register either individually or within an historic district (no change).

Rehabilitation work consistent with standards for rehabilitation (no change).

Ohio tax credit is a major factor to the rehabilitation (no change).

Ohio Historic Tax Credits Round Two Applications (continued) Cost benefit analysis replaced by the potential economic impact and regional distributive balance including the following: Timeliness to completion End use of the building Projected tax revenue from the building and its tenants Economic distress of the immediate area Physical scope of the project Additional investment leverage

Round Two Applications (continued)

Cost benefit analysis replaced by the potential economic impact and regional distributive balance including the following:

Timeliness to completion

End use of the building

Projected tax revenue from the building and its tenants

Economic distress of the immediate area

Physical scope of the project

Additional investment leverage

Ohio Historic Tax Credits Round Two Applications (continued) Capped at $5,000,000 per application Sufficient evidence of reviewable progress Viable financial plan Evidence of historic approvals Must be filed within 12 months of approval Evidence of secured and closed financing provided within 18 months of approval Failure to provide progress results in rescission and put back in pool.

Round Two Applications (continued)

Capped at $5,000,000 per application

Sufficient evidence of reviewable progress

Viable financial plan

Evidence of historic approvals

Must be filed within 12 months of approval

Evidence of secured and closed financing provided within 18 months of approval

Failure to provide progress results in rescission and put back in pool.

Ohio Historic Tax Credits Round Three Applications (7/1/09 – 12/31/09) $17.5 million in tax credits available Fee simple non governmental owner (no change). Listed on the National Register either individually or within an historic district (no change). Rehabilitation work consistent with standards for rehabilitation (no change). Ohio tax credit is a major factor to the rehabilitation (no change).

Round Three Applications (7/1/09 – 12/31/09)

$17.5 million in tax credits available

Fee simple non governmental owner (no change).

Listed on the National Register either individually or within an historic district (no change).

Rehabilitation work consistent with standards for rehabilitation (no change).

Ohio tax credit is a major factor to the rehabilitation (no change).

Ohio Historic Tax Credits Round Three Applications (continued) Scoring Criteria Regional Distributive Balance – Designed to ensure a balance in distribution of tax credits throughout Ohio. Higher points awarded to applications with fewer existing Ohio tax credit projects in their economic region, jurisdiction, and county.

Round Three Applications (continued)

Scoring Criteria

Regional Distributive Balance –

Designed to ensure a balance in distribution of tax credits throughout Ohio.

Higher points awarded to applications with fewer existing Ohio tax credit projects in their economic region, jurisdiction, and county.

Ohio Historic Tax Credits Round Three Applications (continued) Scoring Criteria (continued) Potential economic impact Financing secured Leveraged investment Jobs created Timeliness to completion Physical scope End use – maximize economic development potential Vacant property – extent occupied Green building

Round Three Applications (continued)

Scoring Criteria (continued)

Potential economic impact

Financing secured

Leveraged investment

Jobs created

Timeliness to completion

Physical scope

End use – maximize economic development potential

Vacant property – extent occupied

Green building

Ohio Historic Tax Credits Ohio Department of Development More information and applicable forms go to www.odod.state.oh.us

Ohio Department of Development

More information and applicable forms go to www.odod.state.oh.us

Historic Tax Credit Workshop Contact Information Dorinna Unger – RSM McGladrey 216-522-1463 [email_address] Craig Miller – Ulmer & Berne 216-583-7048 [email_address]

Contact Information

Dorinna Unger – RSM McGladrey

216-522-1463

[email_address]

Craig Miller – Ulmer & Berne

216-583-7048

[email_address]