At the Cherrytree Group, we understand tax credits are a bit of a “dense” topic. And we also understand that many real estate developers and investors don’t always know where to begin to find out if they might be a candidate to take advantage of the various Federal and state tax credit programs. That’s why we’re here to help — even if it’s just to answer some questions and offer some suggestions.
So whether you’re a seasoned real estate pro or a newcomer to this field, we want you to be able to dive into our world of tax credits with some basic knowledge about the ins and outs. In addition to better understanding the process that results in the creation of tax credits , we believe you may start feeling like we do: that tax credits can be something to become exited about!
The value that tax credits can provide, with the right guidance from experts, is usually significant. Reducing taxes is one thing; limiting construction costs and generating capital to put into projects is another; and often both of these can be paired together.
So, let’s start at the beginning for the real estate or investing professional who may know little about tax credits:
Our Federal government — and many state governments — wish to reward forward-thinking development which benefits the public good. These usually fall into five categories: creation of renewable energy, preservation of structures of historic importance, renovation or new construction of structures to be used for affordable housing, remediation of lands where the soil may be tainted or contaminated, and “Opportunity Zone” revitalization of economically depressed areas. Various legislation over the years has created the “carrot” of tax credits to be rewarded to those developers who undertake these types of projects.
Simply, a tax credit is the amount of money which a taxpayer (individual or entity) may be permitted to subtract, dollar for dollar, from the income taxes which that taxpayer owes. They are dissimilar to tax “deductions” or “exemptions” because these credits directly reduce the total amount of taxes due — far more valuable to the taxpayer. Tax credits don’t fluctuate depending on taxable income, so the amount of money you make doesn’t change how much money you save. In short:
Our job at Cherrytree is to use our resources and network of industry connections to help you identify tax credit opportunities, then tailor these tax credits to meet your specific needs and ultimately either add equity to your development or lessen your tax burden.
If you are a developer, perhaps you do not need the tax credit benefit for your upcoming 1040 return. In those cases, developers who earn tax credits often are allowed to “sell” them to tax-paying individuals or entities at a discount. (It’s not actually a sale; more like a partnership of interests, but stay with us for a moment.) The “buyer” of these tax credits would be considered an “investor.” This is where astute investors find they can lucratively participate in the tax credit market — even if they’ve never built a building in their life.
We at Cherrytree provide the guidance to help a developer earn these tax credits. And we can match the developer with the investor who will benefit from those credits — which we call “syndication.” Likewise, individual investors continually approach us to ask if we can match them up with vetted developers for a mutually beneficial transaction.
A developer may work with one or many investors and the collective investment in your business or project builds equity. This equity is called a “tax credit syndication fund.” If you chose to be an investor yourself you would receive a credit against your federal income tax based on the size of your investment. It’s a win-win for both parties. We can aid you in deciding the most profitable path through buying and selling tax credits for your business endeavors.
The process of buying and selling tax credits is Cherrytree’s speciality and we pride ourselves on quickly securing competitive pricing for our clients. But there’s another area where we can obtain funding for developers: with Cherrytree-managed funds earmarked for tax credit-eligible development such as the currently popular Opportunity Zone Funds. Hundreds of development projects are underway across America, funded by this novel mechanism, created by the 2017 Tax Cuts and Jobs Act.
There is no one job title held by our clients. We work with developers, environmental engineers, investors, investment consultants, property owners, and lessees of tax credit eligible sites — all of whom have different needs based on their business goals. Let’s run down, in a little more detail, the five main tax credit development categories:
Introduced by Congressional legislation in 2017, these Federally-designated “zones” are located in neighborhoods that would benefit the economy and public good if developers are willing to build or re-build within them. Businesses can relocate to these zones to defer capital gains and thereby direct additional money to their property and also enlarge the number potential employees available for hire. Developers benefit as they can generate third-party investment capita — the money you need to build your project — by establishing or working with a fund for projects built in these zones. Investors can even then use this fund to defer tax on the initial investment and well as eliminate taxes on the sale of the development project. Investors can re-invest unrealized profit from the sale of their properties or investments into “Opportunity Funds” that are dedicated to investing into these “Opportunity Zones.”
Brownfields Tax Credits
States such as Massachusetts have robust programs to reward developers who undertake a project which remediates tainted or contaminated land — whether the end use is for construction or not. Let’s look at the Massachusetts Brownfields Tax Credit (BTC) as an example. Since Massachusetts requires owners or lessees of contaminated properties to remediate the land regardless of who caused the contamination, the BTC exists to lessen the financial burden for owners who did not cause the contamination but are obligated to clean up the land. Developers can negate 50% of the eligible costs of a qualified remediation when implementing a permanent solution to a property or investment.
Historic Tax Credits
Society places a value on our history, and tax credits are offered by the Federal government — and many states — to those renovating a historically significant older building. When considering the state and Federal tax credits, the credit amount can be up to 40% of tax credit eligible construction costs. Usually the property will need to be included on the National Register of Historic Places, be eligible for a National Registry Listing, or be located within a designated Historic District. Sometimes the historic credit can be combined with a Brownfields credit, a renewable energy credit or a low-income housing tax credit. Older U.S. post office buildings, abandoned factories, mill buildings, and city or town halls are often a target for re-development that is eligible for multiple tax credits.
Creation of Renewable Energy
As the technology of renewable energy advances and the cost factor to generate such energy reduces, more and more public and private projects are being completed with substantial upside. Add to this are the advantages of Federal tax credits offered to those who place renewable energy equipment into service. By building — or investing — in renewable energy such as solar panels, wind energy, geothermal, biomass and hydroelectric you as developer or investor will earn subsidies for your effort. This support of energy conservation, pollution control, or various forms of desirable economic development will not only benefit the greater good but also your year-end tax position.
Low Income Housing Tax Credits
These tax credits are provided as an incentive for the development and investment in affordable housing. At Cherrytree we are able to connect investors with developers as well as community governments and non-profit entities to create affordable housing to create partnerships which benefit all parties. There is an equivalent of nearly $8 billion in annual budget authority to issue tax credits for the acquisition, rehabilitation, or new construction of rental housing targeted to lower-income households available that could be used toward savings on your taxes when you build for low-income households.
That’s a quick run-down to allow you to have a little more knowledge about the options available to you and how they will assist a future development project or reduce your taxes. We at the Cherrytree Group hope you will see, as we do, the endless possibilities that exist in the tax credit world. We look forward to advising you through this process, and please reach out to us if you have any further questions. Our job is to make diminishing your taxes through tax credits as effortless as possible.
The Cherrytree Group