Cal State Northridge Real Estate Development In 2012 Annotated Bibliography You must create an annotated bibliography relating Real Estate Development It

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https://link.springer.com/article/10.1007/s12076-015-0144-4

https://www-sciencedirect-com.libproxy.csun.edu/science/article/pii/S0264275117303967 Real Estate Development In 2012
John G. Cameron, Jr.
is a partner with the
Grand Rapids office of
Dickinson Wright PLLC.
His practice encompasses representation
of mortgage lenders,
and developers, drafting
construction contracts,
negotiating major
commercial leases,
and other real estate transactions. He has been listed in
Best Lawyers in America in the areas of real estate and
construction law since 1993 and 2003 respectively and
as a Top Super Lawyer in Michigan Super Lawyers since
2006. He is a member of The American Law Institute, The
American College of Real Estate Lawyers, the State Bar of
Michigan Professional Ethics Committee, and the State
Bar of Michigan Land Title Standards Committee. He has
written and spoken extensively on real estate-related
topics and is author of the ALI-ABA book, A Practitioner’s
Guide to Construction Law. (For more information, go to
www.ali-aba.org/B803K). He can be reached at jcameron@
dickinsonwright.com
Christina K. McDonald
is an associate with the Grand Rapids office of Dickinson
Wright PLLC. Her practice
includes assisting large and
small clients in a wide range of
real estate matters including
obtaining zoning approvals, due
diligence, commercial lending
tax incentives, ordinance
compliance, and environmental
and real estate litigation. She
can be reached at.
John G. Cameron, Jr. and
Christina K. McDonald
Tax credits and government grants can
make your project happen.
Investors are skittish. Capital is scarce. How,
then, are development projects being undertaken?
In many cases, the answer lies in the availability of
tax credits and government grants. These sources of
“real money” can help bridge the gap between available equity capital on the one hand and borrowed
money on the other. Myriad tax credits and grants are
available from all levels of government, based upon a
variety of rationales. This article focuses on the more
popular federal programs, but notes the existence of
programs available in many states.
NEW MARKETS TAX CREDITS • An increasingly popular, and certainly the most complicated,
source of benefits is the federal New Markets Tax
Credit Program (hereinafter the “NMTC Program”).
Its requirements are set forth in section 45D of the Internal Revenue Code (“Code”) (all section references
are to the Code unless otherwise specified). This article summarizes in general terms the process of ob-
The Practical Real Estate Lawyer | 25
26 | The Practical Real Estate Lawyer
taining benefits under the NMTC Program for a
project.
The proposed project must be a qualifying project located in a qualifying low-income community.
Among the projects that are not eligible for New
Markets Tax Credits are those that derive more
than 80 percent of their gross income from rental dwelling units, golf courses, racetracks or other
gambling facilities, country clubs, massage parlors,
hot tub facilities, suntan facilities, and liquor stores.
Treas. Reg. §§1.45D-1(d)(5)(ii) and (iii)(B).
A qualifying low-income community is referred
to as a “QLIC.” A QLIC is any population census tract if its poverty rate is at least 20 percent.
Alternatively, in the case of a census tract not located within a metropolitan area, the tract qualifies
as a low-income community when median family
income does not exceed 80 percent of the statewide median family income. A census tract located
within a metropolitan area will qualify as a lowincome community if the median family income
does not exceed 80 percent of the greater of the
statewide median family income or the metropolitan area family median income. Finally, if the census tract has a population tract of less than 2,000
and lies within a federal empowerment zone (discussed in more detail below) and is contiguous to
one or more low-income communities, it, too, will
qualify as a QLIC. Code §45D(e). Qualifying lowincome communities are listed on the Community
Development Financial Institution Funds website
(hereinafter the “New Markets Tax Credit website”). http://www.cdfifund.gov/what_we_do/programs_id.asp?programid=5 (last updated Jan. 13,
2012).
The proposed project must involve a “qualified
active low-income community business,” commonly
known as a “QALICB.” These include proprietorships, corporations or partnerships engaged in the
active conduct of a qualified business within a lowincome community, so long as at least 50 percent
of the entity’s total gross income is derived from
March 2012
the active conduct of a qualified business within a
low-income community; at least 40 percent of the
property it owns or leases is located in that community; at least 50 percent of its services are performed
in that community; and less than five percent of
the average of the aggregate adjusted basis of the
property of such entity is attributed to collectibles
or nonqualified financial property. Code §45D(d)(2)
(A); Treas. Reg. §1.45D-1(d)(4). In many cases, the
QALICB is the entity that will own the project. Special care must be taken to assure that the QALICB
will meet the “reasonable expectation of success”
test and various operating requirements. See Treas.
Reg. §1.45D-1(d)(6).One of the legal opinions that
will be required at the closing of a New Markets
Tax Credit transaction is that there is a “reasonable
expectation” of the project’s success.
A qualified community development entity
(“CDE”) is a domestic corporation or partnership
whose primary mission is serving low-income communities or low-income persons, is accountable to
residents of low-income communities, and is certified as such by the Secretary of the Treasury. Code
§45D(c). CDEs are defined in Code section 45D(c)
(1). A qualified CDE is an entity that has or will
receive a New Markets Tax Credit allocation from
the Community Development Financial Institution Fund (“CDFI”), which is administered by the
United States Department of Treasury, and may be
willing to make an allocation to the project. Eligible
CDEs are identified on the New Markets Tax Credit website.
When seeking the benefits of the NMTC Program, sponsors of a development project should
first identify the cost of the proposed project and
the amount of New Markets Tax Credit allocation
that will be requested. Then, a solicitation package
is prepared for delivery to the CDE. In evaluating
the request for allocation, a CDE typically considers the project’s eligibility, the level of distress in the
low-income community, the potential impact on the
low-income community, whether the project would
Development in 2012 | 27
go forth without the New Markets Tax Credit allocation, the financial viability of the project, the
background of the developers, and other matters
that may be of interest to a particular CDE. A request for allocation may be circulated to more than
one CDE, since CDEs do not always have a sufficient allocation of credits for any particular project.
Once a CDE has tentatively accepted a project, it
is common for the CDE and the project’s sponsors
to enter into a memorandum of understanding. At
this time, the QALICB is organized if it does not
already exist.
Next, the project sponsors must make, or cause
someone to make, a qualified equity investment in
the CDE. Code §45D(b). A qualified equity investment must be in cash. Code §45D(b)(1)(A). Qualified equity investments in a CDE are typically made
by an investment entity, although they may be made
by an individual. The qualified equity investment in
the CDE may be made wholly with the investor’s
own funds, but it often includes funds provided to
the investor through a leverage loan. The proceeds
of this loan either fund or refund a portion of the
equity investment and increase the leverage to be
gained from the tax credits. The leverage loan may
be secured, but it may not be secured with a mortgage on the project. Using the qualified equity investment, the CDE makes a qualifying low-income
community investment (“QLICI”) in the form of a
loan to or equity investment in the QALICB. Code
§45D(b)(1)(B).
The New Markets Tax Credits themselves are
then assigned to the persons making qualified equity investments by the CDE. See Code §45D(a). Interestingly, the tax credits begin to accrue in the year
that the investor or investor entity makes its equity
contribution to the CDE, regardless of whether the
CDE makes the QLICI in or to the QALICB in
that year. Id. The total credit for each project is 39
percent of the original qualified equity investment,
taken over a seven-year period. For the first three
years, the credit is five percent of the original quali-
fied equity investment, and in the final four years,
the credit is six percent of the original qualified equity investment. The investment is claimed on IRS
Form 8874, “New Markets Credit,” and may not
be repaid prior to seven years following the investment.
A simple New Markets Tax Credit transaction
might be described as follows: An investor makes a
$5 million qualified equity investment in a CDE.
The CDE then makes a $5 million loan to a QALICB. The investor receives a New Markets Tax
Credit allocation of $1,950,000 over seven years.
A more complicated NMTC structure, involving leverage, might be described as follows: A New
Markets Tax Credit investor makes a $5,400,000
equity investment in a leverage fund. That fund also
takes a $14,600,000 loan from a lender, resulting in
a total infusion of $20 million into the investment
fund. The $20 million is then submitted as equity
to a CDE, which in turn makes two loans (an “A”
loan and “B” loan) to the QALICB (one mirroring
the loan made to the leverage fund and the other
under different, possibly more favorable, terms and
conditions). The leverage fund investor receives
$7,800,000 in New Markets Tax Credits. In both
cases, the benefit to the QALICB is significant interest rate savings as a result of the New Markets
Tax Credit investor’s willingness to accept a lower
return on his or her investment in return for the tax
credit.
At the end of seven years, the New Markets Tax
Credit transaction is unwound. In the case of a leveraged New Markets Tax Credit transaction, the
loan the lender made to the leverage fund, which
in turn resulted in an identical loan from the CDE
to the QALICB, must be repaid in accordance with
its stated terms. The unwinding of the “B” loan (or
in the case of a non-leveraged transaction, the sole
loan) can occur in a variety of ways, some of which
do not involve direct payment. One of these employs a redemption of sorts. Under this method, the
CDE transfers the QALICB note to the investor or
28 | The Practical Real Estate Lawyer
leverage fund in exchange for that person’s equity
interest in the CDE.
When marketed, from an investor who or which
is not able to take full advantage of them, New Markets Tax Credits typically “sell” for approximately
70 cents on the dollar, in recent years ranging from
68 cents on the dollar to 72 cents on the dollar.
It is difficult to overstate the complexity and
expense involved in obtaining benefits under the
NMTC Program, and the foregoing summary is
a simplification. In addition, such transactions are
not without risk. For example, if the CDE ceases to
be a “qualified CDE,” or if substantially all of the
proceeds of the investment are no longer used for
qualified low-income community investments, or if
the investment is redeemed by the CDE, then the
New Markets Tax Credits can be recaptured. Code
§45D(g).
Historic Tax Credit Programs •
There are currently two federal tax incentive programs designed to preserve historical structures
— the federal Historic Preservation Tax Credit
(“Federal Credit”) and the 10 Percent Rehabilitation Credit (“10 Percent Credit”). In addition,
some states provide historic preservation tax credits. These federal programs are targeted at incomeproducing property having a substantial amount of
development costs.
Federal Historic Preservation Tax Credit
The National Park Service (“NPS”) and the
IRS jointly administer the Federal Credit. The program offers a tax credit equal to 20 percent of the
cost of rehabilitating a certified historic structure. It
is available to those who substantially rehabilitate a
depreciable structure used for commercial, industrial, agricultural, or rental residential purposes. The
credit permits a dollar-for-dollar reduction in the
amount of federal income tax liability. The Federal
Credit may not be used for rehabilitating structures
that are used exclusively as places of residence.
March 2012
A rehabilitation project must meet two main requirements to qualify for the Federal Credit. First,
the building must be a “certified historic structure.”
Code §47(a)(2). The Code defines a certified historic structure as a depreciable building that is listed in
the National Register of Historic Places or a building that is located within a registered historic district
and certified by the NPS as contributing to the historic significance of that district. Code §47(c)(2)(B)
(iv). A registered historic district is any district that is
listed in the National Register of Historic Places or
locally designated as such, if permitted by a local or
state ordinance that is certified by the secretary of
the interior. Code §47(c)(3)(B)(ii)(I).
Second, the project must constitute a “certified rehabilitation.” A certified rehabilitation is any
project that the NPS, while acting on behalf of the
secretary of the interior, certifies and approves as
maintaining the historic character of the property
or the district in which the property is located. Code
§47(c)(2)(C). The NPS highly recommends that the
owner/lessee apply for the tax credit before beginning rehabilitation work. See Historic Preservation
Tax Incentives, at http://www.nps.gov/tps/tax-incentives/taxdocs/about-tax-incentives.pdf (2009).
Long-term lessees are eligible to apply for the Federal Credit if the lease is over 27.5 years for residential property or 39 years for nonresidential property.
The application consists of three parts. Parts one
and two, as applicable, should be filed in advance
of any work.
Once the owner completes the rehabilitation
project, he or she must submit Part 3 of the Historic Preservation Certification Application, which
is a Request for Certification of Completed Work.
Application available at http://www.nps.gov/tps/
tax-incentives/application.htm (last revised 2011).
The NPS will evaluate the completed work and determine whether it comprises a certified rehabilitation, thus warranting the Federal Credit.
Development in 2012 | 29
IRS Requirements
The IRS has established many guidelines that
an applicant must follow before receiving the Federal Credit. Code section 47 covers the bulk of these
requirements:
•
The building must be “depreciable.” Code
§47(c)(1)(A)(iv). The building must be used in a
trade or business or held for the production of
income. As noted above, the building may be
used for office, commercial, industrial, or agricultural enterprises or rental housing. Federal
Historic Preservation Tax Incentives, at http://
www.nps.gov/tps/tax-incentives/taxdocs/
about-tax-incentives.pdf (2009);
•
The rehabilitation must be “substantial.” During a 24-month period, rehabilitation expenses
must exceed the greater of $5,000 or the adjusted basis of the building and its structural components. Code §47(c)(1)(C)(i). For rehabilitation
credit purposes, the adjusted basis of the building is determined as of the beginning of the first
day of the 24-month period or of the building’s
holding period, whichever is greater. Id. The
NPS defines the adjusted basis as (purchase
price – cost of land + improvements already
made – depreciation already taken). Federal
Historic Preservation Tax Incentives, supra;
•
If the rehabilitation is completed in phases, as
opposed to a 24-month period, the same rules
apply. However, instead of the 24-month measuring period, a 60-month measuring period
applies. Code §47(c)(1)(C)(ii). To qualify for the
“phase exception,” there must be a set of architectural plans and specifications for all phases
of rehabilitation in existence. In addition, the
owner or lessee must reasonably expect that all
phases of the rehabilitation will be completed.
Id.;
•
The owner must return the property to use.
Generally, the tax credit is allowed in the taxable year that the rehabilitated property is
placed back in service. Code §47(b)(1);
•
The building must be a “certified historic structure” when it is placed in service. If the building is not a certified historic structure by the
time it is placed in service, the owner must have
requested a certified historical designation from
the NPS on or before the date that the structure
is placed into service. Federal Historic Preservation Tax Incentives, supra;
•
A “qualified rehabilitation expenditure” is
one that is properly chargeable to a capital account (1) in connection with the rehabilitation
of a qualified rehabilitated building and (2) for
property for which depreciation is allowable
under Code section 168 and that is nonresidential property, residential rental property, real
property that has a class life of over 12.5 years,
or an addition or improvement to such property. Code §47(c)(2)(A). Rehabilitation expenditures that qualify for the Federal Credit include
costs associated with the work undertaken on
the historic building, architectural and engineering fees, site survey fees, legal expenses, development fees, and other construction-related
costs. All qualified costs should be added to the
basis of the property and determined to be reasonable and related to the services performed.
Such costs do not include the cost of acquiring
or furnishing the building; new additions that
expand the existing building; new building construction; or parking lots, sidewalks, landscaping, or other facilities related to the building.
Code §47(c)(2)(B).
Claiming the Federal Credit
Owners generally claim the Federal Credit on
IRS Form 3468 for the tax year in which the re-
30 | The Practical Real Estate Lawyer
habilitated building is placed in service. Form 3468
(2011) is available at http://www.irs.gov/pub/irspdf/f3468.pdf. With phased projects, if the substantial rehabilitation test has been met, the owner
or lessee may claim the tax credit before completing
the entire project. If the building remains in service during the rehabilitation project, the owner or
lessee may claim the Federal Credit when the substantial rehabilitation test has been met. The owner
or lessee must attach Part 3 of the Historic Preservation Certification Application to the tax return
when claiming the rehabilitation credit. If the NPS
has not given final certification, the owner or lessee
must file a copy of Part 2. Application available at
http://www.nps.gov/tps/tax-incentives/application.htm (last revised 2011).
Credit Recapture
Code section 50(a)(1)(A) establishes the rules for
recapture in disposition cases. The general rule follows:
“If, during any taxable year, investment credit property is disposed of, or otherwise ceases to be investment credit property with respect to the taxpayer,
before the close of the recapture period, then the
tax under this chapter for such taxable year shall be
increased by the recapture percentage of the aggregate decrease in the credits allowed under section 38
for all prior taxable years which would have resulted
solely from reducing to zero any credit determined
under this subpart with respect to such property.”
A building owner or lessee who disposes of the
structure within five years of receiving the Federal
Credit must repay the credit. An owner who disposes of the building within one year of receiving the
Federal Credit must repay 100 percent. If disposal
takes place between two and five years of receipt,
the tax credit recapture amount is reduced b…
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