USA – RHODE ISLAND Trends and Developments Contributed by: Amy T. M. Oakley, Partridge Snow & Hahn LLP
State Tax Credit Collateral In today’s environment of high land values and high- er-cost loans, commercial real estate development projects are relying heavily on state subsidies to fill gaps in the capital stack. Developers are searching for grants, real estate tax stabilisation agreements and tax credit incentives to pencil out the deal. This chapter of the guide explores bridge financing for real estate deals secured by transferable state tax credits (hereinafter, a “State Tax Credit Bridge Loan”). Once thought of as “out of the box” collateral, lend- ing against state tax credits has become increasingly commonplace amongst community, regional and national banks that are willing to offer these types of bridge facilities to win certain development deals. In Rhode Island, state credits tied to property develop- ment include historic preservation credits, low-income housing credits and Rebuild RI credits. In Massachu- setts, in addition to historic preservation credits and low-income housing credits, the state offers market- rate housing development credits in gateway cities and brownfields credits. Connecticut offers urban and industrial redevelopment tax credits. Each state has its own unique state tax credit programmes to encour- age development (hereinafter “State Tax Credits”). State Tax Credit Award The first step is to confirm that the entity that will receive the award of tax credits – typically the property owner or ground lessee (hereinafter, the “Project LLC”) – has secured an award of tax credits. This is often referred to as a “conditional award”, contingent upon successful completion of the project in compliance with the particular credit programme requirements. The conditional award should be evidenced by an award letter from the state agency administering the award or the state’s department of revenue. In some instances, the Project LLC is required to enter into a contract with the agency administering the award. It is important to obtain all of the credit documentation available, including the initial application, the condi- tional award letter(s), any contract memorialising the credit terms, and any other correspondence between the applicant, the state agency administering the programme and the state agency that will ultimately issue the credit certificates. The documentation will contain material information such as (i) whether the
credit amount is fixed or tied to a percentage of eli- gible project costs subject to a programme cap; and (ii) what year the credits will be awarded. It will also identify the applicant/awardee, which may need to be updated via assignment to the Project LLC. Be wary of requests to bridge State Tax Credits that have been sought under a competitive programme with no award secured to date. Most State Tax Credits are highly competitive with limited funding and a great number of applicants. Furthermore, certain credit pro- grammes require the applicant to certify that the credit fills a gap in the financing, which will be renounced if the project commences work without the credit award. In general, credit programmes will not allow for an award to be made to a project that has been completed. Without an award, there is no collateral to secure the State Tax Credit Bridge Loan. A cautionary tale follows an applicant that applied in 2013 for credits under the Rhode Island Historic Pres- ervation Tax Credit (RI HTC) Program, administered by the Rhode Island Department of Revenue, Division of Taxation (the “Division”), which maintains a queue for applicants waiting to receive a credit award. The tax- payer’s claim for credit eligibility was denied because the building was placed into service, evidenced by receipt of a certificate of occupancy for the entire building and lease-up of the first floor of the building, prior to the credits becoming available to the taxpayer in 2014. See State of Rhode Island Division of Taxation Administrative Hearing Final Decision and Order, Case No 14-T-0068 (2015) . Programme Logistics and Compliance To properly underwrite a State Tax Credit Bridge Loan, a full review of the credit programme’s enabling legis- lation and regulations is necessary. Every state credit programme is unique and credit programmes can vary wildly even in the same state. To value the State Tax Credits as collateral, and understand how to perfect a security interest in such credits, it is essential to ascer- tain whether it is a certificated credit that can be freely sold to third parties, an allocated credit that must be passed through to a member, and/or a refundable credit providing for a dollar-for-dollar refund.
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