Since the cost of running a bank continues to rise as a result of regulation, reducing the federal tax debt with a rebate is an easy way to reduce expenses. Tax credits are an option under an asset allocation model for bank capital (i.e. credit growth, branch creation, increased asset management). This is not the case because a profitable bank has to make quarterly tax estimates to the government and HTCs reduce these quarterly estimates. Since HTC transactions are structured so that most of an investor`s capital is not developed until after the credits are put into service, these investments are positive in six to nine months. Following the 2014 edition of a new set of IRS tax guidelines for HTCs, HTCs` pre-trade pre-sale was banned and the tax credit investor had to become an investor in the transaction. The advance was limited to 25% of the purchase price of the tax credits and the investor had to be «at stake» for the duration of construction. If it`s complicated, it`s because that`s the way it is. Even experienced lenders are often reluctant to sign a subordination, dysfunction and incident agreement (SNDA) with the lease control structure and claim that they are subordinate to no one.
However, this is a must for HTC transactions, as the SNDA prevents the collapse of the master-leasing structure during forced execution and, in return, protects the investor`s rights in HTCs tax credit. These tax credits can then be used by the investor during the five-year compliance period (20% per year) after receiving the approval of Part 3 (the final signature of the NPS) after construction. During this period, any takeover financing must also agree to sign an SNDA with the tax credit investor. The Federal Government`s Historical Tax Credits (HTCs) are an asset class in which banks, insurance and other large corporations have been investing since 1986. This asset class may grant CRA credits to banks and is an authorized investment pursuant to the Volcker Rule and the Dodd-Frank Act. These credits are generated by skilled real estate developments, but many developers cannot use HTCs personally. This creates a market where investors can work with these developers and acquire tax credits. HTC investments present two main risks: the completion of the construction business and the change of ownership during the compliance period.
Tax credits are not earned until after the completion of the work and the commissioning of a real estate estate. To reduce construction risk, the investor invests only 25% of his capital before the loan assets are put into service.