Friday, December 21, 2012

The Atlantic City Boardwalk Decision: What Does It Mean for the Federal Historic Tax Credit?

A recent court decision on investor risk for the Atlantic City Boardwalk Hall has called the investment structures of the Federal Historic Tax Credits.  Matt Welch describes the problem and potential implications for preservation projects and the credits in part three of our series on State and Federal Historic Rehabilitation Tax Credits.

After a corporation invested in the rehabilitation of the historic Atlantic City Boardwalk Hall in New Jersey in 2000, the IRS disallowed the historic tax credit that the developer passed through to the corporate investor.  The IRS’s primary argument was that the investor lacked a significant assumption of risk (or reward) in the project, which, the IRS argued, meant that the corporate investor was not a genuine partner in the project for tax purposes.  Ultimately, a tax court ruled in favor of the investor; on appeal earlier this year, however, the Third Circuit Court of Appeals reversed the district tax court’s decision, ruling in favor of the IRS.  Indeed, the Court of Appeals agreed that the investor lacked any meaningful stake in the project: the payment to the investor was guaranteed, the investor did not contribute any capital until the developer actually secured the tax credits, and the investor reaped no benefits from any return on the project aside from its guaranteed distribution.  The Court’s decision seems to underscore the notion that the IRS expects a corporate investor to join a developer in a rehabilitation project as a legitimate partner, albeit one that may incidentally receive a disproportionate share of the tax benefits resulting from the project, rather than joining the project as a nominal partner that is indirectly purchasing tax credits.  In other words, Boardwalk suggests that the partnership between the developer and investor should demonstrate a business purpose (i.e. profit motive) for the investor.

But How Can a Non Profit Developer Use Tax Credits?

Non-profit developers like HBI use historic tax credits regularly for rehabilitation projects, which seems unlikely since we don’t pay taxes.  HBI Legal fellow Matt Welch answers Tax Credit Question #2 in this blog post

Because non-profit developers like HBI have no federal income tax liability to which they can apply the credit, they collaborate with private-sector investors who can utilize the credit.  In this type of situation, the developer/owner of the property typically forms an operating agreement with the investor, which, for tax purposes, often requires a complex multi-tier structure comprised of multiple entities.  The agreement terms differ from deal to deal based on the size of the project, the risk involved, and other factors.  Nevertheless, the basic transaction entails the investor making a capital contribution to the project and the developer/owner passing the tax credit through the ownership structure to the investor.  The significance of this development strategy should not be understated: it can be a crucial piece of financing for a non-profit developer that allows them to obtain capital for historic rehabilitation projects that the private sector otherwise would not undertake—exactly what Congress intended when it created the tax credit.  

Do You Really Know How Historic Tax Credits Work?

HBI is fortunate to have Matthew Welch, a recent graduate of the Boston University School of law, working here since September as a university-sponsored legal intern.  Among several projects he’s working on, Matt has been helping HBI formulate policies and procedures for utilization of the State and Federal Historic Rehabilitation Tax Credits, incredibly important incentives for preservation that are also very complex.  Matt posts answers here to HBI’s three most frequently asked questions about historic tax credits. 

To encourage private sector investment in the rehabilitation and preservation of historic buildings, the federal government began offering tax credits in 1976.  Since its inception, the federal historic tax credit program has encouraged the rehabilitation of more than 38,000 historic properties across the country representing $92 billion in private investment. This approach to community revitalization has been so successful that nearly half the states now offer similar programs. 

Thursday, December 13, 2012

HBI and Roslindale Main Street Select Development Partner for the Transformation of Historic Roslindale MBTA substation

Photo courtesy of the Boston Globe 

HBI and its partner, Roslindale Village Main Street (RVMS) have secured a purchase and sale agreement for the Higgins Funeral Home and related parcels of land, allowing for a larger mixed-use residential and commercial development project that includes redevelopment of the 1911Roslindale MBTA Substation building.  Working through various development options, our partnership interviewed and selected Rhode Island-based real estate development firm, Peregrine Group LLC, as a partner in the redevelopment of the combined site. 

The development concept will focus on a family oriented farm-to-table restaurant and specialty food market for the soaring two-story interior substation space. The adjacent Higgins property will be developed into market rate apartments. The program represents two years of intensive project planning and analysis by Roslindale Main Street and Historic Boston, but it results in an exciting project that brings new economic activity to Roslindale Village and re-activates a valuable historic resource.   The partnership of HBI and RVMS has been tentatively designated for development of the substation by the Boston Redevelopment Authority, owner of the historic structure.

While planning is in the very early stages, HBI and RVMS plan to update the Roslindale neighborhood at community meetings in January.

Read the Boston Globe article on the substation's redevelopment here.

Wednesday, December 12, 2012

Blower Doors and Compartmentalization in Historic Buildings

HBI set out to achieve a LEED (Leadership in Energy and Environmental Design) Silver rating for its rehabilitation of H.H. Richardson’s Hayden Building.  We enlisted Conservation Services Group to guide us through this process.  Conservation Services Group’s Consulting and Construction Services group works with owners, architects, and builders to achieve high performance buildings: healthy, durable, energy efficient, and affordable. A cornerstone of CSG’s work is in-field verification to support the successful implementation of smart designs. We asked Gabe Baldwin of CSG to write about the challenges of making the Hayden Building air tight.

The Hayden Building project is on track to meet Gold rating under LEED for Homes Midrise, a higher rating than initially planned. This process requires a series of third party inspections by the Green Rater (CSG) to verify that the claimed measures are integrated into the building. Measures include fresh air ventilation systems with MERV 10 filters and heat recovery, low flow water saving fixtures, reclaimed and sustainably sourced building materials, and an estimated 49.4% energy savings. 

Monday, December 3, 2012

Hip Holiday Happenings Down Dudley

Photo courtesy of
Check out the calendar of events here.