Incentives for Historic Preservation in Detroit Michigan Tax

Incentives for Historic Preservation in Detroit Michigan Tax Incentives Part I: Michigan Historic Tax Credits and OPRA Presented by: Gordon Goldie gordon. goldie@plantemoran. com 248 -375 -7430 Detroit Athletic Club 0 June 5, 2008

Overview of Agenda Michigan Tax Incentives Ø Michigan Incentives Available § Historic Tax Credit § Obsolete Property Tax Freeze (OPRA) § Brownfield Incentives • SBT Credits • Tax Increment Financing (TIF) § Neighborhood Enterprise Zone (NEZ) 1

Incentives: Key Questions Michigan Tax Incentives Ø What are the benefits? Ø What are the eligibility requirements? Ø What else do you have to do? Ø What are the drawbacks/limitations? 2

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Michigan Historic Tax Credits Michigan Tax Incentives Ø What are the benefits? § § State tax credit • Credit = 25% of QRE • Must be reduced by available Federal credit Can be used to offset MBT or MI Income Tax Claimed in year completed rehab certificate is issued May be assigned (but not re-assigned): • To owners of pass-through entities • Can assign pro-rata or 100% to a single owner • Typically “sold” for $. 50 to $. 85 per $1 of credit 4

Michigan Historic Tax Credits Michigan Tax Incentives Ø What are the eligibility requirements? § Eligible property • Includes buildings, structures, sites, objects, features and open spaces o Individually listed on National or State Register of Historic Places, or o Located in National, State or local historic district • Can be non-income-producing (i. e. , owner occupied residence) • Tax-exempt use property o o Can be owned by tax exempt entity if leased to unrelated taxpayer Can be leased to tax-exempt entity on long-term lease 5

Michigan Historic Tax Credits Michigan Tax Incentives Ø What are the eligibility requirements (continued) ? § Eligibility of rehabilitation • QRE = same definition as Federal credit • QRE must exceed o 10% of SEV, or o 5% of appraised value, if no SEV • Certificate of completed rehabilitation must be issued not more than 5 years after the rehabilitation certified by State • QRE must be paid within 5 years of certification of rehab plan for historic resource not eligible for Federal credits 6

Michigan Historic Tax Credits Michigan Tax Incentives Ø What else do you have to do? § Secretary of Interior’s Standard Guidelines apply for Rehabilitation Plan § State Historic Preservation Office (SHPO) reviews federal Historic Preservation Certification Application § SHPO issues Verification of Eligibility after Federal Part III approval § Fee = $0 to $2, 500 § Credit claimed on Michigan Form 3581 § Credit is assigned by submitting to Michigan Department of Treasury Michigan Tax Credit Assignment Form 3614 and securing approval 7

Michigan Historic Tax Credits Michigan Tax Incentives Ø What else do you have to do (continued)? Contact Information: § § Robb Mc. Kay § Federal historic tax credits § 517 -335 -2727 Bryan Lijewski § State historic tax credits § 517 -373 -1631 8

Michigan Historic Tax Credits Michigan Tax Incentives Ø What are the drawbacks/limitations? § Credit reduces Federal deduction for state taxes § Construction costs to comply with rehab standards Reduced depreciation • Must reduce basis of building by amount of Federal credit (if any) • Can’t claim bonus depreciation on leasehold improvements Recapture • 5 year compliance period § § § • Prorata vesting Potential taxability of proceeds from “sale” of credits 9

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Federal Tax Impact of State Tax Credits Michigan Tax Incentives Ø State credit pricing depends upon federal tax treatment Ø Federal tax treatment depends upon assignment structure Ø Structuring alternatives § Credit transferred via sale of certificate § Credit transferred via partnership allocation Ø Pricing § Certificate = up to $. 90 § Partnership allocation = $. 50 to $. 75 11

Federal Tax Impact of State Tax Credits Michigan Tax Incentives (continued) Ø Assignor’s treatment - Generally § Credit transferred via sale of certificate ü Ordinary income upon receipt ü CCA 200211042 - Missouri § Credit transferred via partnership allocation ü Capital gain upon disposal of LLC interest (reversal of difference between inside and outside basis) ü Mandatory basis reduction could accelerate income and convert income to ordinary 12

Federal Tax Impact of State Tax Credits Michigan Tax Incentives (continued) Ø Assignee’s treatment - Generally § Credit transferred via sale of certificate ü Ordinary deduction when credit is used to pay state tax ü PLR 200348002 ü CCA 200445046 - Massachusetts § Credit transferred via partnership allocation ü Capital loss upon put/call exercise 13

Federal Tax Impact of State Tax Credits Michigan Tax Incentives (continued) Ø Can ordinary income/deduction treatment apply to credits transferred via partnership allocations? § Maybe – If substance (vs. form) of transaction is equivalent to the sale of a certificate credit ü AM 2007 -02 ü CCA 200704028 and CCA 200704030 § Risk that State could disallow assignment 14

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Obsolete Property Tax Freeze (OPRA) Michigan Tax Incentives ØWhat are the benefits? § Allows local government units to abate real property taxes on the value of renovations to blighted or obsolete structures in eligible communities. 16

Obsolete Property Tax Freeze (OPRA) Michigan Tax Incentives Ø How does it work? § § § Up to 12 year exemption from Ad Valorem property taxes on increased value of buildings and improvements Exemption does not apply to: • School operating millage and State Education Tax • Personal property Freezes value of building shell Land remains subject to regular taxes State Treasurer may exempt up to ½ of school taxes for up to 6 years (limit = 25 per year) Exemption may be transferred with approval 17

Obsolete Property Tax Freeze (OPRA) Michigan Tax Incentives Ø What are the eligibility requirements? § Property must be Blighted or Functionally Obsolete § Property must be either: • Commercial property • Residential rental property § Must meet “but for” test (wouldn’t occur but for exemption) § Rehab must exceed 10% of FMV before rehab 18

Obsolete Property Tax Freeze (OPRA) Michigan Tax Incentives Ø What else do you have to do? § § Qualified local governmental unit must establish an Obsolete Property Rehabilitation District Owner of obsolete property files application for exemption with local unit’s clerk (Form 3674) Local unit approves application State Tax Commission approves application and issues exemption certificate 19