Has anyone worked with Historic Tax credits on distressed/value-add deals?
I'm curious, what is the federal "tax credit" that the developer receives? Since there are no federal level property taxes, and most development shops are pass-through LLCs, does it effect the individual developer's federal ordinary income/capital gains taxes?
You should google "tax credit" or "historic tax credit" before you post uneducated shit like this. Here is a link to wikipedia: https://en.wikipedia.org/wiki/Tax_credit
Tax credits are typically syndicated and monetized and used as a portion of the capital stack.
Let's cut the guy a break, he was just asking a question. Sure, he could have googled it and had a relatively easy answer or even read some white papers on it.
Agreed that it's ideal to use these tax credits in the capital stack, but a lot of banks underwrite it differently. They'll look at the tax credits as a cash flow a X time rather than an "equity". This works out alright too because a lot of developers will sell of these tax credits to monetize that value and bump up the IRR.
It often takes a long time to go through the historic tax credit process. You have to finish up the entire construction of the project before going through to the state. Which is another reason banks sometimes will underwrite it as a CF vs sticking it in the capital stack.
Having a bad day? I understand what a historic tax credit is , but not many sources (including the NPS) describe HOW exactly they are applied to the capital stack. I posed the question for a high level overview and perhaps examples from people who work with them. I thought that is what this forum is for. Unless the forum is solely for undergrads asking questions on how to secure analyst positions? My mistake. How exactly are the tax credits monetized? Since there are requirements to secure the tax credits from start to finish, are there some lenders/equity partners who do not want to get involved with that risk? These are the kinds of questions that are hard to find online without the help of people who have experience with them.
Equity investors buy the credits. For my firm, they are ancillary to the LIHTC that we purchase. The HTC simply gets modeled into the benefits schedule. The LP Agreements are long and complex and there are guarantees for delivery of the credits. Many investors also require the GP to purchase historic tax credit insurance.
This is not an area that traditional real estate guys can just dip their toes in. Most start to look into it as a source of "free money" and get blown away by the complexities. If they are thinking about making a strategic move into tax credit developments they will often bring on a consultant for a few years to teach them the ropes. It doesn't make sense to do these deals as one offs, the learning curve is too steep.
You sell them for xx% of face value to a big company like Exxon or whatever. Or I've heard construction lenders buying the credit as a one stop shop for builders. Price depends on current market, big credits are more desirable. Typically you'll hire a consultant to get property on historic list and get your plans approved, and then hire another consultant that will broker the tax credit sale and you need to make sure your docs are written correctly...
So capital stack is like 10% sponsor equity, 15% tax credit equity, 75% bank loan. Something like that.
Historic Tax Credit (Originally Posted: 09/14/2015)
Has anyone worked with HTCs in the cap stack? I don't have much experience with these, but if anyone has do you customarily know if there are any gaurantees to the tax credits for recapture by the City, and who gives customarily the gaurantee? What's market for purchase of the HTC by the investor putting in the equity? For ex, if a property qualifies for $20MM HTCs, is the new investor putting in 50% of the HTC customarily as equity into development? Not sure what's market here..
any insights would help..thanks!
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