Historic and New Markets Tax Credits At Risk Under Current House Tax Reform Proposal

by BakerHostetler

On Nov. 2, the House Ways and Means Committee released draft statutory text (the "Bill") of the proposed Tax Cuts and Jobs Act (the "Act"), the long-awaited Republican tax reform bill. On Friday, Nov. 3, Kevin Brady, Chairman of the House Ways and Means Committee, released a markup of the Bill incorporating minor changes (the "Chairman’s Mark"). On Monday, Nov. 6, Chairman Brady proposed some additional amendments to the Bill, none of which affects the provisions discussed herein. If passed in its current state, the Chairman’s Mark would deal a devastating blow to the community development industry through elimination of various programs that have been successful in incentivizing economic development, specifically including the rehabilitation tax credit ("HTC") program and the new markets tax credit ("NMTC") program. The following is a summary of the portions of the Chairman’s Mark that relate to the HTC and NMTC programs, along with some initial thoughts on their implications.

Overview of HTC Program

Under Section 47 of the Internal Revenue Code of 1986, as amended (the "Code"), a taxpayer is eligible for an HTC of up to 20 percent of the “qualified rehabilitation expenditures” ("QRE"s) incurred in connection with the rehabilitation of a qualifying building. In order to be eligible for the credit with respect to QREs, the qualifying building must be “substantially rehabilitated,” meaning QREs during a 24-month period (or 60-month period in the case of certain “phased rehabilitations”) selected by the taxpayer generally must exceed the taxpayer’s adjusted basis in the qualifying building at the beginning of this rehabilitation period. Most HTC-generating rehabilitations are “syndicated,” meaning a tax credit investor agrees to partner with a developer to provide funding for the rehabilitation primarily in exchange for an allocation of HTCs. Syndicated HTC transactions are structured using either single-tier or lease pass-through structures. Under a single-tier structure, the project sponsor admits a tax credit investor as a partner in a tax partnership that owns and rehabilitates the qualifying building. Under a lease pass-through structure, the property owner elects to pass the HTCs through to a master tenant partnership pursuant to a master lease as permitted under current Section 50(d)(5) of the Code. The project sponsor then admits a tax credit investor as a partner in the master tenant. The HTC enables many developers to complete rehabilitation projects that otherwise would not have gone forward.

Proposed HTC Repeal

Section 3403 of the Chairman’s Mark (the "Amendment") repeals the HTC for all QREs paid or incurred after Dec. 31, 2017. While initially appearing to eliminate the HTC within weeks, the Amendment does provide some relief in the form of a “transition rule” for taxpayers that can meet certain requirements. Specifically, section (c)(2) of the Amendment (the "Transition Rule") provides that in the case of QREs in respect of any building (1) owned or leased by the taxpayer at all times after Dec. 31, 2017, and (2) with respect to which the 24-month rehabilitation period begins not later than 179 days after the enactment of the Act, the Amendment shall only apply to such QREs paid or incurred after the end of the taxable year in which the 24-month rehabilitation period ends. Assuming the Chairman’s Mark is enacted on or before year-end in its current form, qualifying projects should be entitled to HTCs on QREs incurred (1) during a 24-month rehabilitation period that would begin not later than mid-2018 and end 24 months thereafter in 2020, (2) before the start of such rehabilitation period and (3) prior to the end of taxable year 2020.

Impact of Proposed Amendment
  • Transactions for which a building has achieved final “placed in service” (i.e., ready for its intended use) on or before Dec. 31, 2017, generally should not be affected by the Amendment.
  • Transactions that have “closed” (i.e., tax credit investor has been admitted as a partner in either the property owner or the master tenant) before Dec. 31, 2017, but with respect to which work will continue after Dec. 31, 2017, should be able to rely on the Transition Rule and, thus, generally should not be affected by the Amendment, as long as the 24-month rehabilitation period begins within the time frame permitted under the Act.

    • Note that the foregoing is not without exception. For example, a portion of QREs could be lost in certain situations that involve an extended construction period. Also, the impact on “phased rehabilitations,” which under current law may benefit from a 60-month rehabilitation period, are uncertain.
  • It is possible that transactions that have not “closed” before year-end could rely on the Transition Rule. Careful consideration and planning would be necessary in these situations.

    • For example, it appears that by structuring tax ownership of the qualifying building in a tax partnership by year-end, a developer may preserve its ability to bring a tax credit investor into the tax credit structure and generate HTCs at a later date.
    • Careful scrutiny of a taxpayer’s rehabilitation timeline (and perhaps some restructuring of such timeline) also would be required to ensure the rehabilitation period could begin before the Transition Rule’s 180-day window expires.
Overview of NMTC Program

Under Section 45D of the Code, a taxpayer holding a “qualified equity investment” is eligible for an NMTC equal to 5 percent of such investment for each of the first three years of such investment, and 6 percent of such investment for each of the next four years of such investment (i.e., a total credit equal to 39 percent of such investment). Historically, low-income communities have suffered from a lack of investment. The NMTC program has successfully attracted private investment to such communities. Benefits of the program to qualifying low-income communities include creation or retention of hundreds of thousands of jobs, construction of over 100 million square feet of new space and the catalyzing of additional private investment.

The PATH Act, which was enacted in December 2015, extended the NMTC program for five years, from 2015 to 2019, at $3.5 billion in annual credit authority, for a total of $17.5 billion. The CDFI Fund, which administers the NMTC program, combined the 2015 and 2016 authorizations, and awarded $7 billion of NMTC allocation on Nov. 17, 2016. The industry expects awards with respect to the 2017 authorization to be made in early 2018.

Proposed NMTC Repeal

Section 3406 of the Chairman’s Mark eliminates NMTC allocation authority after 2017, meaning the allocation authority for years 2018 and 2019 would be rescinded despite the PATH Act. We believe that the 2017 round is preserved regardless of whether awards are made after calendar year 2017, although the industry is currently seeking further clarification on this important point.


Focus on the Fight – Those who feel strongly about preservation of development credits should focus their immediate efforts on reaching out to members of Congress and their staffs to remind them of the importance of such credits to community development. Baker Hostetler’s tax credit finance and economic development incentives team is available to assist in those efforts by providing contact information and talking points.

Understand the Process – We are still in the very early stages of the legislative process towards tax reform. If tax reform legislation passes, it is almost certain to be significantly different from the Chairman’s Mark.

Stay Informed – Monitoring tax reform at each step along the way is the best method to position for effective tax planning for current projects. Our team continues to monitor the situation and we are available to answer any questions about the legislative process and possible effects on current or planned HTC or NMTC projects.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© BakerHostetler | Attorney Advertising

Written by:


BakerHostetler on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.