IRS Issues Anticipated Safe Harbor Guidance on Historic Tax Credit-Related Transactions

By Gary A. Zwick and Lacie L. O'Daire.

On December 30, 2013, the Internal Revenue Service issued its long-anticipated "Safe Harbor" guidance for transactions in which federal Historic Tax Credits are employed to raise capital for real estate redevelopment projects. The guidance was issued in the form of Revenue Procedure 2014-12. To access the full text of Revenue Procedure 2014-12, please follow the link at the bottom of this Client Alert. 

The guidance was issued in response to requests for clarification of the IRS position taken in the case of Historic Boardwalk Hall, LLC v. Commissioner, decided in 2012 by a federal court of appeals. The Historic Boardwalk case had a chilling effect on pending and new projects which would utilize federal historic tax credits to aid in capital formation for redevelopment of historic structures. It has been anticipated that the guidance would bring stability and certainty to this segment of the real estate industry, which was thrown something of a curve ball in the 2012 decision. 

Generally speaking, the IRS re-emphasized a key outgrowth of Boardwalk Hall - HTC deal structures must ensure that "investors" (owners who are not developers or do not manage the project) share in both the upside and downside risk associated with the project. In IRS-speak, investors should have "a reasonably anticipated value commensurate with the Investor's overall percentage interest." 

The guidance provides a road-map for HTC-structured transactions to utilize in the future. Among other things, the Safe Harbor guidelines: (i) provide clear minimum equity interest requirements for the developer/sponsor and the investor; (ii) define minimum investor contribution percentages and related timeframes as to when such contributions should be advanced; (iii) create categories of permissible and impermissible guarantees; and (iv) set forth a strict prohibition against developer/sponsor calls (as to the purchase of the investor's interest). 

The Safe Harbor applies to allocations of HTCs on or after December 30, 2013. If transactions which closed prior to this date meet the Safe Harbor guidelines, then the IRS will not challenge the later allocations of HTCs to the extent of the subject matter contained in the guidelines. 

This Client Alert is intended to give only a brief overview of the Safe Harbor guidelines. There are other requirements not summarized above that will require detailed analysis for each transaction. It is too early to predict how investors, in particular, will seek to change the structure, pricing and other terms of Historic Tax Credit-related transactions given the guidance provided by the IRS, but deal changes seem likely. Please consult us to provide further advice.