HISTORIC TAX CREDITS 101 Presented by Bryan C

HISTORIC TAX CREDITS 101 Presented by: Bryan C. Keller, CPA Partner In Charge Real Estate Services Group Rubin, Brown, Gornstein & Co. LLP

HTC Guidelines v Greater than $250, 000 Independent CPA must perform a 100% audit of all available invoices and proof of payment § CPA must also document any and all accrued expenses § • If incurred but not yet paid, applicant must submit legal agreement outlining scope of work and time for payment 2

Documentation Guidelines v Back up documentation of all expenditures must be provided with Form HTC-E § Proof of payment is required 3

Examination v We have examined the accompanying Missouri Department of Economic Development Historic Tax Credit Program List of Itemized Project Costs (List) for the Project. This list is the responsibility of the Partnership’s management. Our responsibility is to express an opinion on the List of Itemized Project Costs based on our examination. 4

Examination v We conducted our examination in accordance with attestation standards established by the American Institute of Certified Public Accountants, and, accordingly, our procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the List and performing such other procedures as we considered necessary in the circumstances. We believe that our examination provides a reasonable basis for our opinion. 5

Examination v The List has been prepared on the basis of the accounting and reporting practices prescribed by the Missouri Department of Economic Development. These prescribed practices are a comprehensive basis of accounting other than accounting principles generally accepted in the United States of America. This report is intended solely for the information and use of the Missouri Department of Economic Development and is not intended to be and should not be used by anyone other than the Missouri Department of Economic Development. 6

Examination Opinion v In our opinion, the List presents fairly, in all material respects, the actual cost of the Project through Date on the basis of accounting described in the previous paragraph 7

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Qualified Rehabilitation Expenses v Qualified Rehabilitation Expenses only are eligible for tax credits § Qualified rehabilitation expenses include… • Any expenditures for a structural component of a building, including: – Walls – Partitions – Floors – Ceilings – Paneling 10

Qualified Rehabilitation Expenses v Qualified rehabilitation expenses include… § Any expenditure for a structural component of a building, including: • • • Tile Windows Doors HVAC systems Plumbing 11

Qualified Rehabilitation Expenses v Qualified rehabilitation expenses include… § § § Plumbing and plumbing fixtures Electrical wiring and lighting fixtures Chimneys Stairs Elevators/escalators Sprinkler systems 12

Qualified Rehabilitation Expenses v Soft Costs: § § § § Construction period interest, excluding acquisition interest Construction period taxes/insurance Architect fees Professional fees Engineering fees Construction management costs “Reasonable” development fees Construction financing fees/costs 13

Costs Ineligible for Historic Tax Credits v v v v v Acquisition costs, acquisition related interest Appliances Additions or enlargements (decks, porches, enclosing open areas, adding rooms/floors) Unattached cabinets Carpeting (if tacked in place and not glued) Demolition (interior demo includable) Fencing Financing fees (permanent financing) Furniture 14

Costs Ineligible for Historic Tax Credits v v v v v Leasing expenses Outdoor lighting Parking lots/paving Planters Retaining walls Sidewalks Signage Storm sewer construction Window treatments 15

Federal Credit Calculation Total Development Costs Ineligible Costs Credit Eligible Costs Federal Credit % Federal Historic Tax Credit Limited Partner Ownership % Federal Credit to LP Equity “pricer” Limited Partner Equity $10, 000 (1, 000) $9, 000 x 20% $1, 800, 000 x 99% $1, 782, 000 x. 90 $1, 603, 800 16

Who can use the credit? v The person(s) and/or entity who holds title to the property Widely held C corporations § Real estate professionals (subject to participation and eligibility rules) § Individuals (with limitations) § Limitations: § Passive activity rules • Credit not available against AMT • Unused credits can be carried back one year and forward for 20 years • 17

Who can use the credit? v A lessee of a building can claim the tax credit A lessee who incurs the cost of rehabilitation and who has a lease term greater than the recovery period, can claim the tax credit on qualified rehabilitation expenditures § A building owner, who is not tax exempt, who incurs the cost of rehabilitation, can elect to pass the tax credit to its lessee § 18

Claiming the Credit v v Federal Form 3468 Attachment to Form 3468 (1. 4 -12(b)(2)(viii) § § § Beginning/ending dates of measuring period Adjusted basis of building as of beginning of measuring period Amount of QRE incurred or treated as incurred during measuring period Copy of final certification of completed work by Secretary of the Interior If adjusted basis includes that of a 3 rd party, must attach statement by 3 rd party as first day of holding period, measuring period and adjusted basis calculation 19

Credit Recapture Rules Rehab credits are subject to recapture if the building is sold or ceases to be business use property. v No recapture required after 5 years from placed in service date. v Recapture Schedule: v Year 1 § Year 2 § Year 3 § 100% 80% 60% Year 4 Year 5 After Year 5 40% 20% None 20

State Credit Calculation Total Development Costs Ineligible Costs Credit Eligible Costs State Credit % State Historic Tax Credit Limited Partner State Credit % State Credit to LP Equity “pricer” Limited Partner Equity $10, 000 (1, 000) $ 9, 000 x 25% $ 2, 250, 000 x 100% $ 2, 250, 000 x. 80 $ 1, 800, 000 21

Other Issues/Topics Tax exempt entities v Disqualified leases v At risk rules – 704(b) v Combining with other tax credit programs v Deferred developer fees v Application/Final Approval/Transfer Forms v Federal § State § 22