Last week we reported on the August 27, 2012 decision by the U.S. Court of Appeals for the Third Circuit that disallowed a tax credit award to an investor in a rehabilitation project in Atlantic City, N.J. At the time, Paul Edmondson, chief legal officer of the National Trust and John Leith-Tetrault, president of the National Trust Community Investment Corporation (NTCIC ) noted that the ruling in Commissioner of the Internal Revenue vs. Historic Boardwalk Hall (HBH) would be likely to result in increased caution on the part of tax credit investors.
This week, Leith-Tetrault reports on the experience of NTCIC in recent days as illustrative of what the wider industry may be experiencing. “From September 4 through September 11, closing calls on seven transactions were canceled while law firms huddled with their opinion committees to decide what a post-HBH deal should look like. These projects involve six different investors and five separate law firms. The week-and-a-half period of uncertainty put a lot of stress on developers trying to meet future tenant move-in dates or anticipating equity pay-ins to keep construction on schedule. We have seen one developer, out of frustration with his investor, close on a construction loan and begin construction without balanced sources and uses in the hope of securing an HTC investor after the market settles down. We have seen another developer threaten to secure a substitute investor to replace a committed investor that could not deliver an answer fast enough on how it would deal with the HBH decision.”
Given this, industry leaders, especially law firms, are scrambling to draft guidance on how to structure these deals in such a way as to minimize the risk of disallowance. Indeed, they are reminding tax credit users that the court upheld the investor’s right to seek mitigation of their investment risks. What the court found unacceptable was that, in the court’s opinion, the Boardwalk Hall investor effectively had no risk whatsoever, and no real share in any upside to the business venture other than the tax credits.
While the court was careful to assert that the Historic Tax Credit (HTC) was not under attack, whenever investors are denied tax credits (an extremely rare occurrence) it raises significant concerns that investors may look elsewhere, making it harder to attract funding for important rehabilitation projects. The urgent need for additional guidance by the Treasury Department is underscored by this ruling.
Of special concern to the National Trust and NTCIC is the future of nonprofit-sponsored transactions. The court criticized the Boardwalk project because the investor did not have a realistic opportunity for an economic upside from cash flow or later sale of its ownership interests. Many nonprofit transactions such as community theaters run an operating deficit that is addressed by annual giving or other financial sources. Thought needs to be given to how to count both earned income from operations and other sources to address this aspect of the Boardwalk ruling.
We will continue to share information about this ruling and its aftermath as it becomes available. In the meantime, we’d like to know what you are hearing and seeing your communities. Is there fallout from the ruling that is affecting historic rehabilitation projects in your community? Share your experiences in the comments section below.
For more on our work to raise awareness and save the historic tax credit visit: SaveHistoricCredit.org, and read "How Architect Robert Verrier Saved More than 150 Places with Historic Tax Credits" on the PreservationNation.org blog.