USA – RHODE ISLAND Trends and Developments Contributed by: Amy T. M. Oakley, Partridge Snow & Hahn LLP
refunds or non-transferable federal credits, a 1997 US Bankruptcy Court case affirmed that the debtor’s right to an earned income tax credit constituted a “thing in action” falling under the definition of “general intangi- bles”, which includes “any personal property, includ- ing things in action, other than goods, accounts, chat- tel paper, documents, instruments and money”. The court found that the lender had a valid security inter- est in the tax credit as the debtor had a transferable property interest in the tax credit, the debtor granted a security interest in the tax credit to the lender in the loan agreement which adequately described the col- lateral and value was given for such security. See In re Richardson , 216 B.R. 206 (Bankr. S.D. Ohio1997). Although far from well settled, the market consensus is that State Tax Credits qualify as “general intangi- bles”. See Christopher K. Odinet, “Testing the Reach of UCC Article 9: The Question of Tax Credit Collateral in Secured Transactions”, 64 S.C.L. Rev. 143 (2012) available at the Texas A&M Law Scholarship reposi- tory (noting that credits have “amorphous and unique qualities” that “do not fit neatly in to the traditional categories of collateral under the UCC’s article 9”). To secure the State Tax Credit Bridge Loan, the lender will take a security interest in the credits, including any conditional awards, incentive agreements and credit certificates, any refunds, any and all tax credit allo- cation, transfer or purchase agreements to monetise the credits, and the proceeds from the sale thereof. It will perfect its interest by filing a UCC-1 financing statement. A power of attorney will be necessary for the lender to speak with the state agency regarding the particular credit to be earned by the Project LLC such as the status of issuance of the credit certificate, or details on the transfer of such certificate. Note that some states, such as Rhode Island, have a special form of power of attorney for this purpose. The lender should further require evidence of the end-user buyer’s binding commitment to purchase the State Tax Credits. It is important for the lender to confirm the purchase price of the State Tax Cred- its to properly size the State Tax Credit Bridge Loan. For instance, for a USD1 million credit award with a sale price of USD0.92, the net sales proceeds will be USD920,000. The lender may elect to apply anywhere from a 75% to 95% loan-to-value test and bridge
USD828,000 of the USD920,000 net value, keeping in mind whether the credit amount is subject to fluctua- tion. Although somewhat unlikely, if a project comes in under-budget, and the eligible expenditures are less than the original projected amount, the credits may be reduced. In addition to identifying the end-user buyer and con- firming the contractual relationship for the sale of the credits to such buyer, the lender should take a collateral assignment of such purchase agreement. That agreement should require a direction of payment directing that the sales proceeds be wired directly to the lender to pay off the State Tax Credit Bridge Loan before any excess funds are received by the borrower. The Project LLC should be ready to sell the credits to the end-user buyer promptly upon issuance of the state tax credit certificates. More complex tax structures include allocating credits and donating credits. The form of security will need to be adjusted accordingly. For credit allocations, the lender should obtain an assignment of capital contri- butions. For credits that are donated then sold, with the proceeds being loaned back into the project, the lender should obtain a lien on those loan proceeds. For refundable credits, the lender should direct the state agency to pay the refund directly to the lend- er upon written request of the Project LLC and the lender. Typically, refunds are issued on a set schedule which may be once or twice per year. The lender will need to be aware of the timing for calculating the term of the State Tax Credit Bridge Loan. The lender should obtain guarantees and junior mort- gages, and any other collateral available, to protect against the risk that the project will not be completed, or will not be completed in accordance with the credit programme rules, and the State Tax Credits will never materialise to repay the State Tax Credit Bridge Loan. Many of these projects have federal credit compo- nents and investors in the deal that are heavily reliant upon project completion to receive the federal cred- its for which they have invested. The lender may be asked to enter into an agreement with the investor: (i) to confirm that the investor has the right to step into
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