In the past few years, the real estate industry has grappled with fluctuating demand, rising labor and material costs, and the impacts of a sluggish economy. While adaptation is key, real estate developers, investors and owners can proactively strengthen their equity stack, and lessen the blow of a fluctuating market, by taking advantage of tax credits and incentives.
In particular, historic tax credits, new market tax credits, low-income housing tax credits, energy tax credits, and state credits and incentives can be powerful tools for boosting equity and improving the bottom line.
Historic Tax Credits
The historic tax credit (HTC), also known as the rehabilitation tax credit, is a federal general business credit available for developers who own certified historic buildings that undergo rehabilitation efforts for income-producing uses.
The National Park Service, in conjunction with the State Historic Preservation Office, certifies each structure and determines project eligibility. The HTC is calculated as 20% of Qualified Rehabilitation Expenditures (QRE’s), which represent capitalized rehabilitation expenses incurred by the taxpayer. The tax credit is taken ratably over a 5-year period.
In addition to the federal credit, many states offer rehabilitation tax credits that often mirror elements of the federal program with important varying distinctions. The state credits can generally be used in combination with the federal credit or used independently depending on the state program.
HTCs can be utilized by the taxpayer incurring the credits, or the credits may be monetized. When monetizing federal HTCs, the investor contributes equity directly to the project through a capital contribution. The investor subsequently receives the HTC through a tax credit allocation provided on a Schedule K-1.
The investor must maintain their ownership for five years after the final QRE’s are placed in service but will typically exit after the expiration of the five-year compliance period. The state credit can be monetized, however, each participating state has its own legislation and historic tax credit program. These state historic credits are either allocated through a partnership structure or directly sold to an investor depending on the state.
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Cherry Bekaert is committed to assisting companies with navigating HTC resources and revitalizing abandoned buildings. These revitalization efforts create new economic opportunities and preserve a state’s history and culture.
New Market Tax Credits
New market tax credits (NMTCs) are another type of federal tax credit that can be a powerful way to attract investors and lenders to a real estate project in a low-income community, which often otherwise lacks access to traditional capital. Through NMTCs, investors, in exchange for investing in a Community Development Entity (CDE), are awarded a tax credit equivalent to 39% of equity invested.
Administered by the Community Development Financial Institutions Fund (CDFI Fund), a division of the Treasury, CDEs and Community Development Financial Institutions (CDFIs) apply to the CDFI Fund on an annual basis for allocation of NMTCs. The CDFI then invests these tax credits in projects located in low-income census tracts. The CDEs and CDFIs partner with investors who make an equity contribution in exchange for NMTCs that are generated by their investment over a seven-year period. The NMTCs can be used to offset the investor’s federal income taxes.
NMTCs are an essential gap-filling financial tool and traditionally offset 10% – 20% of total project costs, making additional traditional investments in the project more financially feasible. In addition, the NMTCs often spur additional private investments in the surrounding community, which can have a positive impact on property values and economic development.
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Cherry Bekaert can help companies in navigating NMTC resources for various projects. Read the case studies below to see how our professionals assisted with a 10,000-square-foot space in Athens, Georgia, as well as a repurposed mill in South Carolina, which is now used for non-profit, health and wellness, and retail businesses.
- Case Study: New Markets Tax Credit Case Study for 100 Prince
- Case Study: NMTC Case Study for Judson Mills
Low-Income Housing Tax Credits
The Low-Income Housing Tax Credit (LIHTC) is a good way for developers and investors to partner together to provide much-needed affordable housing in communities around the country. The LIHTC is a federal credit that is earned based on the amount of eligible costs spent on a project. New construction and substantial rehabilitation of residential developments can qualify as a LIHTC project.
Developers and tax credit investors form a partnership to facilitate the project and deliver the credit. While the credit does have a 15-year compliance period, investors can claim the credit over a 10-year period. Tax credit equity can account for 30-70% of the equity needed for a project. Not only does this program provide affordable housing for low-income families, it can be coupled with other federal and state incentives to help revitalize communities and strengthen economically distressed areas.
Energy Tax Credits
Newly enhanced renewable energy tax credits, and sustainability incentives created under the Inflation Reduction Act, help cover the costs of renewable energy investments and the proliferation of energy-efficient buildings, with the credit worth up to 70% of investment. These credits and incentives can be used to offset a portion of the cost of installing renewable energy equipment, such as solar panels, wind turbines and geothermal systems. Other incentives also create accelerated deductions for investments in HVAC, interior lighting and overall building envelope.
The aforementioned credits (IRC Section 48) can be worth up to 30% of the system costs while the accelerated deductions (IRC Section 179D) can be in excess of $5.00 per square foot.
Using energy tax incentives can be a powerful way to attract investors and lenders to a real estate project that includes energy-efficient features. The credits can be used to offset a significant portion of the cost of energy efficiency improvements, making it more financially feasible for investors and lenders. In addition, energy-efficient buildings can be more attractive to tenants and buyers, resulting in a positive impact on property values and economic development.
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Our Energy Tax Credits & Incentives team has saved companies thousands of dollars through utilizing energy tax credits and supporting clean energy production, advanced manufacturing and energy-efficient construction.
State Credits and Incentives
In addition to federal tax credits, many states offer their own credits and incentives to support real estate development. These may include property tax abatements, sales tax exemptions, income tax credits, infrastructure assistance, reduced land costs, utility and other incentives designed to encourage investment in specific areas or industries.
By taking advantage of these state credits and incentives, developers can reduce the overall cost of the project, making it more attractive to investors and lenders. In addition, state incentives can help to attract additional private investment in the community, which can have a positive impact on property values and economic development.
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Read more guidance from Cherry Bekaert’s Tax Credits & Incentives Advisory team on state tax credits and incentives.
How Cherry Bekaert Can Help
Historic tax credits, new market tax credits, low-income housing tax credits and state credits and incentives can all be powerful tools for boosting equity and improving the bottom line. Cherry Bekaert can help you understand how these programs can best support real estate development. We will guide your business forward so you can stay ahead of the curve and take advantage of new opportunities as they arise.
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