Historic Tax Credit Coalition Asks Regulators to Make the Historic Tax Credit Eligible for CRA

February 26, 2015 Written by: The Historic Tax Credit Coalition

The Historic Tax Credit Coalition (HTCC), in concert with the National Trust for Historic Preservation, has asked federal bank regulators to expand and clarify when Historic Tax Credit (HTC) investments by lending institutions qualify under the Community Reinvestment Act (CRA). A letter, endorsed by more than 165 supporting organizations, was sent in November in response to a request for comments on the Community Reinvestment Questions and Answers (CRA Q&A) document.

Given the continuing softness of the HTC market due to concerns about Revenue Procedure 2014-12 and expected new regulations on accounting treatment for 50(d) income in a master tenant structure, the timing could not be better. A response from the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve is expected this spring.

Background

The Community Reinvestment Act was enacted in 1977 in response to the practice of “redlining” urban areas in favor of mortgage lending in newer, more stable and higher-income suburban locations. CRA and the 1975 Home Mortgage Disclosure Act directed federally regulated financial institutions to report on the location of their loans and to make affirmative plans to serve the capital needs of low- and moderate-income (LMI) areas. Various regulations have been issued over the years to implement these statutes, including the use of federal regulator examinations to measure compliance.

It would be difficult to overestimate the potential impact of the requested changes on the market for HTCs. A typical conversation with a financial institution about HTC investing starts with a discussion of how the credit works and invariably stumbles at the point where the lender asks whether the investment will be eligible for CRA credit. Under current regulations, the answer is “maybe,” depending on the planned use of the rehabilitated historic building. Given the focus banks have on meeting their CRA requirements, “maybe” just isn’t good enough. The ability to say unequivocally “yes” is what drives the relatively higher market demand for new markets tax credits (NMTCs) and low-income housing tax credits (LIHTCs). The NMTC and LIHTC markets are always reliably over-subscribed. The HTC market has never fully recovered to its pre-Historic Boardwalk Hall days.

The Request

The HTCC’s letter focuses in on several definitions in the CRA regulations and the CRA Q&A that, if expanded, would qualify certain HTC investments as CRA-eligible. Central to the current regulations are the size, purpose and primary-use tests. The size test expresses the regulators’ emphasis on smaller loans or equity investments that support small businesses. The purpose test defines what activities constitute economic development. The primaryuse test measures whether the majority of building uses provide direct community benefits, such as affordable housing or office space for nonprofit tenants that provide social, economic development or educational services. While the term “primary use” has two definitions, lending institutions tend to default to the more quantifiable dollar test, which states that a project qualifies if more than 50 percent of the development cost is for space that supports economic development purposes.

The primary-use test is what leads to today’s “maybe” answer for HTC investments. If the property use is 51 percent affordable housing or a community-serving nonprofit use, the HTC investment may count toward satisfying the financial institution’s CRA requirements. But it the historic building was 80 percent market rate and 20 percent affordable housing, the HTC investment would not be CRA-qualified.

The general direction the regulators signaled in their draft revised CRA Q&A was to provide more recognition to loans and investments that promote LMI area stabilization or revitalization and those that generate jobs. The HTCC’s letter provides convincing evidence from several studies that indicates that the HTC is quite good at generating both of these outcomes. Based on the regulators’ stated interest in jobs and revitalization, the HTCC made its strongest recommendation through a proposed new example of what activities qualify as having a community development purpose:

“Projects eligible for the federal Historic Tax Credit located in LMI areas that are also designated federal, state, local or tribal economic development districts that have support, in the form of a letter or minutes of a public meeting of the governmental agency with jurisdiction over such a district.”

To support this example, the HTCC letter indicates that 84 percent of all HTC transactions since 2001 have been located in LMI census tracts. More anecdotal evidence is cited that indicates a high percentage are also located in various kinds of publically designated economic development districts. The HTCC suggests that qualifying HTC projects should also need to show support from the public agency that creates the plans for these districts. This requirement would help assure that the historic building’s reuse plan is consistent with the local community’s needs and aspirations.

The HTCC’s second key argument is that most HTC projects do meet the CRA size test and are sponsored by small businesses that would qualify for Small Business Administration support. The letter cites National Park Service (NPS) data that show that 44 percent of all certified historic rehabilitations over the past 13 years have had total development costs of $500,000 or less. Fourteen percent have had costs of $500,000 to $1 million. These numbers are consistent with the cost of renovating small Main Street-scale commercial structures. Main Street buildings also do a better job of accommodating the affordable lease needs of smaller, independently owned businesses than do suburban malls.

Comments from the Industry

Patrick Robertson, executive director of the Historic Tax Credit Coalition, expressed appreciation for the broad support that the HTCC’s request has received. “We have been gratified by the support we have gotten from both historic preservation and community development advocates,” he said. “Given the recent challenges to the HTC marketplace, this requested change in guidance would be a real shot in the arm for our industry.”

In a letter of support from the National Park Service, Stephanie Toothman, associate director, cultural resources, Partnerships and Science, wrote, “As you are considering providing new questions and answers as part of the guidance to institutions that implement the CRA, we would encourage you to include HTC projects as examples of activities that promote community development under the Community Reinvestment Act.”

Keith Kishiyama, senior vice president at East West Bank said, “Adding HTC transactions to the list of eligible CRA activities would definitely heighten East West Bank’s appetite for the historic tax credit investments. We can see the community development impact these projects have for the surrounding communities.”

Elizabeth Kemp, legislative analyst for National Community Reinvestment Coalition, stated, “We have looked at this request for greater recognition of the historic tax credit under proposed new CRA guidance. We think that this proposal would be consistent with the original purpose of the Community Reinvestment Act and the regulators’ new emphasis on community revitalization outcomes.”