Now that we have been living with Revenue Procedure 2014-12 (the historic tax credit safe harbor) for about a year, it seems appropriate to take stock of how people are addressing its tests and rules --
- The tax community still views traditional, single partnership (or LLC) Section 42 transactions as not needing the benefit of the safe harbor. The thinking is that if the investor is a partner for housing credit purposes, then it should also be respected for historic credit purposes.
- In two tier historic LIHTC deals (often called the "lease pass-through" or the "master tenant" structure), and in single tier or two tier historic commercial deals, investors are paying close attention to the safe harbor. We are still not seeing all that many two tier LIHTC-HTC transactions.
- Investors are not always requiring complete compliance with the safe harbor, but even when they are not getting 100% compliance, they generally want a tax opinion that says that the project arguably, or very nearly, complies with all of the 20 or so factors in the safe harbor.
- Investors are generally getting an expert opinion on the reasonableness of fees and "other arrangements" involving the sponsor or developer in order to be comfortable that these fees and arrangements comply with the safe harbor.
- The latest hot topics? Does an investor still have to show "profit motive" if the transaction complies with the safe harbor? If the property is refinanced, can the proceeds be distributed to the GP, up to the amount of its capital account, even if this is disproportionate to its percentage interest? Can the GP guarantee the investor against changes in law, even if it can't guarantee against "structure risk"? And, how closely should tax counsel scrutinize the reasonableness opinion?