Impact Study: Tax Credit Equity Financing for Income Producing Real Estate Development
Ellis Lawhorne’s Business, Real
Estate, and Finance Practice Group helps real estate developers secure equity
generated from the sale of state and federal tax credits to finance income-producing
projects. The use of such credits often
makes an otherwise financially infeasible project not only possible, but
profitable. Available tax credits
include federal historic rehabilitation tax credits, state historic rehabilitation
tax credits, state (abandoned) mill tax credits, state (abandoned) retail
facilities rehabilitation credits, federal and state new markets tax credits,
and federal low income housing tax credits.
Example: Sale of tax credits in connection with the rehabilitation
of an abandoned upstate textile mill into loft apartments provides equity
financing for over 30% of total project costs.
A real estate developer recently approached
Ellis Lawhorne to assist in the rehabilitation and development of an abandoned
historic textile mill in Greenville, South Carolina, into approximately 200
loft-style apartments. The developer had
completed many successful projects, but had not previously utilized tax credits
to provide financing for a project.
Our attorneys proposed using
federal historic rehabilitation tax credits, state historic rehabilitation tax credits,
and state mill tax credits for this project. The federal historic rehabilitation tax credit is equal to 20% of the
total qualified rehabilitation costs and can be used to offset federal income
tax. The state historic rehabilitation tax
credit is equal to 10% of qualified rehabilitation expenses and can be used to
offset
South Carolina
income tax. The state mill tax credit is
equal to 25% of qualified rehabilitation costs and can be used to offset
South Carolina income
taxes or property taxes. Total estimated
costs of the project were approximately $20 million. The tax credit market and the amount
investors are willing to pay for an allocation of such credits is subject to fluctuation. Our attorneys negotiated a commitment from an
institutional investor to contribute equity to the project in exchange for the
tax credits at a price and on terms that were extremely competitive in the
market.
Our attorneys then structured the
transaction to accomplish a successful financial outcome for the developer
while adhering to the investor’s terms and requirements. The transaction was structured to accomplish
the following objectives:
- To allocate the tax credits to the investor;
- To allow the developer to maintain control of the project;
- To pay a substantial development fee to the developer (approximately $2.9 million);
- To allow excess cash flow to be retained by the developer when the project exceeded stated performance criteria;
- To provide an exit strategy for the investor after 5 years at the lowest possible cost to the developer (to preserve the historic rehabilitation tax credits the investor must maintain its investment in the project for at least 5 years after completion);
- To ensure that all requirements are met to receive
the tax credits and avoid recapture.
The investor will provide approximately $6.9 million in equity to help finance the project. The developer will receive a development fee of approximately $2.9 million over the life of the project, and the developer will be in a position to purchase the investor’s ownership interest in the project for a fraction of the investor’s equity investment (15% or less) in 5 to 6 years.
