The COVID-19 outbreak could bring a number of significant financing considerations in syndicated Historic Tax Credit (HTC) transactions into focus as the economic impacts of the virus are felt by businesses. It can be expected that project delays may arise in some cases due to mandated work stoppages, government delays in issuing permits and approvals, or for other reasons, and that there could be other situations as well in which key deal terms and other items negotiated among the transaction parties could take on added importance. The following is a non-exhaustive list of issues that participants in syndicated HTC financings should consider.

• Timing Adjusters – Investors in syndicated HTC financings (Investors) typically require a downward adjustment in the pricing per credit if a project is not “placed in service” on or before an outside date.
• Transition Rule – As a result of Tax Cuts and Jobs Act (TCJA), the HTC is now claimed ratably over a five-year period beginning in the year that a project is “placed in service,” unless the project qualifies under the so-called “transition rule.” Investors in such projects typically require a significant downward adjustment in the pricing per credit if a project ultimately fails to qualify under the transition rule.
• Overall Limitation on Adjusters – Under Revenue Procedure 2014-12 (the Safe Harbor), the IRS established a list of requirements under which it will not challenge allocations of the HTC. One such requirement is that at least 75% of an Investor’s total capital contributions must be fixed in amount prior to the date the project is “placed in service.”
• Installments – Typically, Investors contribute capital in respect of HTCs in installments based on the achievement by the project sponsor of certain milestones and the satisfaction of certain conditions (e.g., construction completion, achieving “stabilization,” no termination of financing commitments and no continuing event of default).
• Repurchase obligations – Some Investors require sponsors to commit to repurchase the Investor’s partnership interest upon the occurrence of certain “critical events” (e.g., failure to qualify for a threshold amount of QREs or failure to achieve substantial completion by an outside date).
• Compliance Period – Investors typically require an “exit” mechanism in the form of a “put” option generally exercisable beginning upon expiration of the compliance period. A delay in “placed in service” will result in a corresponding delay in Investor exit which in turn could result in additional preferred return obligations.
• Notices – Sponsors are generally obligated to provide Investors with a litany of reports, including regular reporting and notices upon the occurrence of certain events that could reasonably be expected to have a material adverse impact on the project.
• Recapture – Investors in syndicated HTC financings typically require transactional safeguards to mitigate recapture risk: Lenders in “single-tier” deals are often required to execute a forbearance agreement (precluding them from foreclosing on the property during the recapture period), and transaction participants in “lease pass-through” deals are often required to enter into stringent subordination, non-disturbance and attornment agreements that prevent a termination of the master lease even in the event of a payment default thereunder.
• Third Stimulus Bill – Congress is currently negotiating a third stimulus bill aimed at addressing various COVID-19 impacts. There are several items included in the Senate version of the bill that will have an impact on syndicated HTC financings.
  • Qualified improvement property (QIP) – A significant amount of QREs incurred in connection with the rehabilitation of nonresidential real property can be QIP. The Senate version of the bill would correct the error in the TCJA by assigning a class life of 15 years to QIP, which will accelerate depreciation deductions, make QIP eligible for bonus depreciation and, in lease pass-through deals increase the annual 50(d) income inclusion (potentially creating an additional tax equivalency payment burden).
  • Business Interest Limitation – The TCJA imposed a limitation on the deductibility of business interest generally equal to 30% of EBITDA. The Senate version of the bill would increase the business interest limitation to 50% of EBITDA.