Stacking Tax Credit Equity

 Federal and State Historic Tax Credits

  • Federal and state historic tax credits (HTCs) are an excellent source of equity for any historic commercial real estate project. The term “historic” in this case is related to the National or State Registers of Historic Places, a list of individual buildings or districts of buildings that are typically at least 50 years old.
  • This means that buildings built in the early 1970s can now qualify for historic tax credits. There is also no cap on the federal HTC program, so the amount of funding of all hard and soft costs directly attributed to the rehab of the building is very predictable.

Stacking and Twinning

  • HTCs work well as a standalone form of financing but are often just one source in the capital stack. They can be “stacked” or “twinned” with multiple types of credit or soft funds.
  • The most common twinning of historic credits is with Low Income Housing Tax Credits (LIHTC). Like the HTC, the LIHTC includes a federal program as well as many state programs. Interestingly, many of the state HTCs and LIHTCs have some of the same elements, such as transferable credits allowing for a sale to any taxpayer, unlike federal credits that can only be allocated to a partner in the project.
  • The federal credits require a level of structuring to bring in a third-party investor who makes an equity contribution in exchange for the tax credit. These investors often have an appetite for both credits, making the transaction slightly easier.
  • One aspect to consider when combining the federal credits is the amount of federal HTC received reduces the basis of the LIHTC, so if you have $2 million in federal HTC and $10 million in LIHTC, your basis for the LIHTC calculation is $8 million. This has not hampered the twinning of these credits as a larger portion of HTCs are used in the multifamily sector, and a substantial portion of that is for affordable housing projects.

New Markets Tax Credits

  • New Markets Tax Credits (NMTCs) are another credit program that exists at the federal level. As with HTCs, in some cases, NMTCs can be available at the state level.
  • The NMTCs program was established to attract new or increased investment in commercial, industrial, community, and mixed-real estate projects and operating businesses located in low-income communities, which are typically urban areas where historic buildings can be found.
  • These twinned credits can raise additional NMTC equity and often enhance the project. The focus of the NMTC does not work well with affordable housing, though it can be done, but it does support several diverse types of commercial real estate, including nonprofit entities.

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