Musical Chairs

By Jason Yots

For those of us making our way through the historic tax credit world, the recent legislative mess relating to New York’s HTC program has resembled a frustrating game of musical chairs: we have slowly taxied around our chairs for months hoping that, when the music stopped, our projects would have a seat (and HTCs) to claim.

Well, the music recently stopped on what has become known as “Part Y”, a legislative pruning of the enhanced HTC legislation passed in New York last summer. To understand the impact of Part Y, we need a bit of back-story . . .

A few years ago, New York adopted a HTC program for commercial properties that included a stingy calculator and a $100,000 cap that rendered it largely useless for even small historic rehabs. Then, last summer, the New York legislature passed a significant amendment that matched the calculation of such credits to the federal program and which increased the per-project cap to $5 million. Those enhancements took affect as planned on January 1, 2010.

Soon after its passage, HTC industry members astutely identified two factors that would diminish the value of New York’s program. The first was a lack of “transferability” language in the law that would have permitted separate taxpayers to claim the federal and NYS HTCs (which would have led to greater marketability, among other benefits). The second was a lingering prohibition against banks and insurance companies – two industries that are active in HTC investment – claiming the NYS HTC.

The first factor was deemed by the Governor Paterson’s office to be too administratively daunting to tackle last year, so its consideration was tabled indefinitely. The second issue was addressed by legislative action passed by both houses this summer, which now awaits the governor’s signature (hopefully in September).

And that brings us back to Part Y. That law, which was passed this August but applies retroactively to January 1, 2010, imposes a deferral of NYS HTCs for taxpayers claiming more than $2,000,000 during 2010 through 2012. Under the law, deferred credits may not be claimed for 3 years, and then are phased in over a three year period beginning in 2013. A simple example using $2.8 million in NYS HTCs helps illustrate how the amendment will work:

HTCs that may be claimed in 2010: $2,000,000

HTCs that may be claimed in 2011: $0

HTCs that may be claimed in 2012: $0

HTCs that may be claimed in 2013: $400,000

HTCs that may be claimed in 2014: $200,000

HTCs that may be claimed in 2015: $200,000

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The application of the HTC deferral on a per-taxpayer (rather than a per-project) basis is significant because institutional investors involved in multiple HTC projects will quickly hit the $2,000,000 cap, necessitating the deferral of the balance of HTCs it intended to claim (and, in theory, diminishing the value of those credits to investors and developers alike). For HTC syndicators and investors, this is yet another wrinkle in the already complex HTC syndication process, which, at the very least, makes New York a less desirable forum for HTC investment than other states.

But there’s hope. Representatives for the Preservation League of the State of New York recently indicated that the HTC program sponsors will seek an exemption from Part Y for the HTC law as soon as the legislature reconvenes in September. At that time, the governor hopefully will also sign the bank and insurance company amendment that will open HTC investment opportunities to those sorts of institutions. In the meantime, industry members continue to circle their chairs, waiting for our state leadership to step up and face the music for this critical economic development tool.