Ohio’s Budget Bill, signed by Governor Ted Strickland on July 17, contained provisions authorizing Ohio’s first state-run New Markets Tax Credit, as well as substantially revising the state’s Historic Preservation Tax Credit. Here is a breakdown of each:
New Markets Tax Credit
Modeled after the federal New Markets Tax Credit, the state program allows up to a nearly $1 million cumulative, nonrefundable tax credit for an entity that holds an investment in a “qualified community development entity” over the next seven years. Like the federal Credit, the Program is intended to aid development in low-income areas where new projects are typically more difficult to finance.
Only insurance companies and financial institutions are eligible to receive the credit, and they may do so by holding a “qualified equity investment.” A “qualified equity investment” is an investment in a “qualified community development entity” (i.e. an entity with an allocation agreement under the Federal Credit that does business in Ohio) that: (1) is acquired solely for cash after July 17, 2009; (2) has at least 85% of its purchase price used to invest in low-income communities; and (3) is designated by the issuer as a qualified equity investment.
To receive the credit, the community development entity must invest in a “qualified active low income community business” (“QALICB”). The intention behind this provision is to ensure the credit is used for new projects that actively promote job creation in the state. The QALICB definition excludes from such businesses those that derive 15% of annual revenue from real estate, such as developers. The language may permit a developer to be a QALICB, however, if it is the end user of the property through a sale-leaseback transaction. The program permits investment in a special purpose entity (“SPE”), principally owned by the property user, if the SPE was formed solely to rent or sell the property back to the principal user. Therefore, a developer could form an SPE and lease the property to itself as the owner of a separate end user entity, so long as the user is not itself a real estate developer.
An eligible entity may receive the credit if it holds such an investment on the first day of January in 2010 through 2016. The Program credit is equal to the “applicable percentage” of the purchase price. In years 2010 and 2011, however, the applicable percentage is zero. In 2012, the credit is seven percent, and in 2013 through 2016 the credit is eight percent. At the end of seven years, the entity may receive a 39% credit on a statutorily capped maximum investment price of $2,564,000, for a total credit of up to $999,960. The total amount of credits allocated by the state under the Program each year may not exceed $10 million.
Ohio joins a number of states that offer a New Markets Tax Credit in conjunction with the federal Credit. The Program should be a useful tool, along with the Historic Preservation and Low Income Housing Tax Credits, for encouraging investment in underserviced areas.
Changes to Historic Preservation Tax Credit
The Ohio Historic Preservation Tax Credit provides a credit equal to 25 percent of “qualified rehabilitation expenditures” to owners of certain historic buildings. The expenditures generally include construction for the building’s structure and interior that meets the U.S. Secretary of the Interior’s historic rehabilitation standards. To qualify as an eligible historic property, a building must either be (1) listed in the National Register of Historic Places; (2) a local landmark designated by a certified local government; or (3) located in a registered historic district.
The first revision to the Historic Preservation Tax Credit Program from the Budget Bill authorizes Ohio’s Director of Development to seek up to $75 million in federal funds to create the Ohio Historic Preservation Tax Credit Fund. If federal money is acquired, the Fund will be used to issue and pay guarantees on loans for eligible historic rehabilitation projects. By reducing risk, these guarantees will provide a substantial incentive to lenders and investors interested in historic rehabilitation projects.
The second change allows pass-through entities (i.e. partnerships, limited liability companies and S corporations) to allocate Program tax credits among its owners in any proportion. Previously, the credit was allocated in accordance with the equity owners’ respective profit shares in the entity. This ability to specially allocate the credit will allow considerable flexibility in structuring projects and permit the credit to operate more easily in conjunction with other tax credit programs such as the New Markets Tax Credit and Low Income Housing Tax Credit.
The current application round for the Historic Preservation Tax Credit commenced July 1, 2009 and the Department of Development will be accepting applications until September 30. The next application period will run from January 4, 2010 through March 30, 2010. Owners considering improvement projects in the near future are well advised to consider applying for the Program in the current or next application round.