USA – RHODE ISLAND Trends and Developments Contributed by: Amy T. M. Oakley, Partridge Snow & Hahn LLP
For transferable, certificated credits, the lender should have a grasp on the following: • any restrictions on transferability, such as a one- time transfer rule; • the process and timeline to transfer the credits; • what taxes may be offset by the particular credit; • the tax year(s) for which credit certificate(s) will be awarded along with any carry-back and carry- forward rules; and • whether the buyer bears any recapture risk. These key factors will affect the saleability and poten- tial pool of buyers and the pricing that such credits will command. Timing of the sale greatly impacts the buyer’s internal return on investment (IRR). Buyers will pay more for credits that can be immediately used on a tax return than for credits that cannot be used for a year or more in advance. Aside from the time value of money considerations, careful attention should be paid to the compliance provisions. While the parties may surmise that suc- cessful completion of the project is paramount to gen- eration of the tax credits, leading the lender to focus entirely on mitigating the construction risk, failure to comply with a programme requirement may cause a full revocation of such State Tax Credits. It is far less likely that the lender and the borrower will be involved in a dispute over rights to the State Tax Credits than the scenario in which the tax credits are never issued because the conditions to achieving the award are not met. Common pitfalls include: • failure to file the documentation or pay the fees to successfully reserve the conditional award; • failure to timely submit the required reporting; • failure to comply with any labour and wage require- ments under the programme; and • failure to complete the project by the established deadline. Using the RI HTC again as an example, a USD5 million tax credit award was revoked due to the developer’s failure to complete the project by the substantial-com- pletion deadline. See Fuller Mill Realty, LLC v Rhode Island Department of Revenue Division of Taxation , 313 A.3d 377 (R.I. 2024). A new condition under
recently enacted RI HTC legislation requires projects with hard costs over USD25 million to pay prevailing wages for all labour on the project and to submit all necessary paperwork regarding such wages in order to validly claim the credit. Monetisation Process for State Tax Credits With the credit award in hand and a decent under- standing of the credit programme, the lender must gain knowledge of the monetisation process in order to properly calculate the term of the State Tax Credit Bridge Loan. A general rule of thumb is that it may take up to six months following project completion for State Tax Credit certificates to be issued. Some of these state credit programmes require an audit or cost certification to support the eligible expenditures for submission along with all other required documenta- tion to the applicable state agency to review. Addition- ally, the credit programme may have other prerequi- sites to be satisfied, such as a lease-up component, approval by the state agency of the scope of work completed and/or recording of a restrictive covenant or regulatory agreement. Lenders should anticipate building in an extension option as the project may encounter construction delays and it may take longer than six months to submit the required information and allow the state to review and process the state tax credit certificates. State Tax Credit Bridge Loan Structure and Security The State Tax Credit Bridge Loan may take the form of a credit enhancement to the senior loan with a paydown component at monetisation or as a sepa- rate bridge loan secured by a second mortgage on the subject property. Ideally, the Project LLC will be the borrower. If that is not feasible, perhaps because the credits will be allocated to the managing mem- ber, there is a different lender at the Project LLC level and/or the federal tax credit investor will not allow it, then the managing member receiving an allocation of the credits may be the borrower and the Project LLC should guaranty the loan. Pursuant to Article 9 of the Uniform Commercial Code, personal property and fixtures may serve as collat- eral for a secured transaction. Despite very little case law on point and most cases dealing with tax credit
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