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| Real Estate and Business Transactions, Tax Credit Investments and General Tax: Recent Developments |
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Client Alert: Maryland's Sustainable Communities Tax Credit Program
May 2010 |
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5/3/2010
Authors: GEJ
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Maryland's Sustainable Communities Tax Credit Program
Replaces the Maryland Heritage Structure Rehabilitation Tax Credit Program
Maryland renewed its historic tax credit program by creating a new, broader Sustainable Communities Tax Credit Program (Credit Program). The Credit Program runs for four fiscal years (2011-2014) and replaces the Maryland Heritage Structure Rehabilitation Tax Credit Program that expires on June 30, 2010.
The new Credit Program generally keeps the former historic tax credit program intact. There are also significant additions, including the availability of credits for non-historic structures and an increase in credits for historic structures attaining a LEED gold rating.
Below is an overview of the new Credit Program. New provisions that did not appear in the previous historic tax credit program are marked as (New). Selected definitions appear at the end of this alert.
Overview of the Sustainable Communities Tax Credit Program
Program Funding
There is $10 million appropriated to the Credit Program for the upcoming 2011 fiscal year. For each of the following three fiscal years, the Governor is to include in the budget bill an appropriation for the credit.
Credit Amount
The amount of the tax credit for a certified historic structure (that is not LEED gold rated) is 20% of the qualified rehabilitation expenditures.
Additional Credits for Green Buildings (New)
For historic structures, the tax credit is 25% of the qualified rehabilitation expenditures if the structure is a High Performance Building. A High Performance Building is one that attains a LEED gold rating or achieves a comparable rating under a nationally-recognized system. The Credit Program is among the first in the nation to link historic preservation with green construction.
Credits for Non-Historic Structures (New)
Up to 10% of the total Credit Program credits for any fiscal year may be issued for Qualified Rehabilitation Structures. These structures earn a credit equal to 10% of qualified rehabilitation expenditures. A Qualified Rehabilitation Structure is a building (other than a single-family, owner-occupied residence) that:
- Is located in a Main Street Maryland Community (see Definitions section below) or, beginning in fiscal year 2012, is located in a Maryland Main Street Community or a Sustainable Community (see Definitions section below);
- Will be substantially rehabilitated (see Definitions section below); and
- Has 50% or more of its existing external walls retained as external walls, has 75% or more of its existing external walls retained in place as internal or external walls, and has 75% or more of the internal structural framework retained in place.
Application Process
Like the previous historic tax credit program, applications for commercial rehabilitations will be subject to a competitive award process. The process will favor the award of credits to projects that: (i) have been located in jurisdictions that have been historically underrepresented in the award of tax credits; (ii) are consistent with and promote current growth and development policies and programs in the State; (iii) are located in areas targeted by the State for additional revitalization and economic development opportunities due to the focusing of State resources and incentives (New); (iv) beginning in fiscal year 2012, are located in Sustainable Communities (New); (v) are located in certain areas where the political subdivision has implemented regulatory streamlining or other development incentives that foster redevelopment and revitalization in priority funding areas (New); (vi) include affordable and workforce housing options (New); and (vii) for structures qualifying for the non-historic credit, are more than 50 years old (New).
Expiration of Initial Credit Certificate
The initial credit certificate for a commercial rehabilitation expires if:
- Within 18 months after the certificate is issued, the taxpayer has not notified the Maryland Historical Trust in writing that the rehabilitation has begun (New); or
- The rehabilitation is not completed within 30 months after the initial credit certificate was issued. The Director of the Maryland Historical Trust may postpone the 30-month expiration for reasonable cause.
Program Fee
The fee may not exceed 1% of the amount of the initial credit certificate for a commercial rehabilitation. If the fee charged for a commercial rehabilitation is not received by the Maryland Historical Trust within 120 days after the trust sends notice that the fee is due, then the initial credit certificate expires (New).
Recapture of Credits Upon Disposal of Structure (New)
If the structure is disposed of during the taxable year it is completed or any of the subsequent four taxable years, then the credit awarded for the structure is recaptured. To “dispose of” means to transfer legal title or a leasehold interest, and it includes (i) the sale in a sale and leaseback transaction; (ii) the transfer on the foreclosure of a security interest; and (iii) a transfer by gift. The recapture amount is 100% for a disposal in the taxable year that the rehabilitation is completed, and the 80%, 60%, 40%, and 20%, respectively, in the subsequent four taxable years. This recapture schedule is different from the federal historic tax credit recapture schedule. The first year of the recapture period under the federal credit rules is the one year period that begins on the building's placed in service date. The remaining four recapture years for the federal credit each begin on the anniversary date of the placed in service date. The entity that claims the Maryland credit is responsible for repaying the recaptured amount.
Recapture of Credits Upon Performance of Disqualifying Work
If any disqualifying work is performed on the structure during the taxable year it is completed or any of the subsequent four taxable years, then the credit awarded for the structure is recaptured. “Disqualifying work” means work that, if performed as part of the certified rehabilitation, would have made the rehabilitation ineligible for certification. The recapture is imposed as described in the disposal section immediately above.
Credit Limitation
For any commercial rehabilitation, the credit may not exceed the lesser of $3,000,000 or the maximum amount specified in the initial credit certificate.
Geographic Limitation
Not more than 75% of the total credit amounts issued for any fiscal year may be issued for projects in a single county or Baltimore City.
Credit Refundable
If the tax credit for the taxable year exceeds the total tax payable by the individual or entity for that taxable year, then the individual or entity may claim a refund in the amount of the excess.
Special Allocation
The new Credit Program, like the old program, does not have a special allocation provision that would allow the owners of an entity receiving the tax credits to divide the credits among themselves pursuant to the entity’s partnership agreement, operating agreement, or other similar agreement. Instead, the credit must be allocated among the owners in accordance with their respective profits interests, in the same manner that the federal historic tax credit is allocated.
Definitions
The following selected definitions are summarized versions of the definitions appearing in the Maryland Code.
"Main Street Maryland Community” means a commercial area designated as a Main Street Maryland Community under the Main Street Maryland Program on or before January 1, 2010 (or a commercial area in Baltimore City designated as a Main Street by the Mayor by January 1, 2010).
“Priority Funding Area” means:
- A municipal corporation, including Baltimore City, except that areas annexed after January 1, 1997 must satisfy additional requirements;
- A designated neighborhood, as defined in § 6-301 of the Housing and Community Development Article;
- An enterprise zone as designated under Title 5 of the Economic Development Article or the United States government;
- A certified heritage area as defined in §§ 13-1101 and 13-1111 of the Financial Institutions Article that is located within a locally designated growth area;
- Those areas of the State located between Interstate Highway 495 and the District of Columbia;
- Those areas of the State located between Interstate Highway 695 and Baltimore City; and
- An area designated by the governing body of a county or municipal corporation under § 5-7B-03 of the State Finance and Procurement Article.
“Substantial Rehabilitation” means a rehabilitation for which the qualified rehabilitation expenditures, during a 24-month period, exceed:
- For single-family, owner-occupied residential property, $5,000;
- For a structure located in a Main Street Maryland Community, the greater of 50% of the adjusted basis of the structure or $25,000; or
- For all other property, the greater of the adjusted basis of the structure or $25,000.
“Sustainable Community” means part of a Priority Funding Area that:
- Is designated by the newly-formed Smart Growth Subcabinet as such by showing a need for reinvestment in the area and by meeting one of the six requirements in § 6 205 of the Housing and Community Development Article;
- Has been designated as a BRAC Revitalization and Incentive Zone under the Economic Development Article; or
- Has been designated as a Transit-Oriented Development under § 7-101 of the Transportation Article.
“Transit Oriented Development” means a mix of private or public parking facilities, commercial and residential structures, and uses, improvements, and facilities customarily appurtenant to such facilities and uses that:
- Is part of a deliberate development plan or strategy involving (i) property that is adjacent to the passenger boarding and alighting location of a planned or existing transit station, or (ii) property, any part of which is located within one-half mile of the passenger boarding and alighting location of a planned or existing transit station;
- Is planned to maximize the use of transit, walking, and bicycling by residents and employees; and
- Is designated as a Transit-Oriented Development by the Secretary of Transportation after considering a recommendation of the Smart Growth Cabinet and by the entity with land use and planning responsibility for the relevant area.
The above-described changes are highlights of the new Sustainable Communities Tax Credit Program. For further guidance or specific questions about the new Credit Program, or to discuss how the changes can benefit your organization, please contact any one of the following Gallagher Real Estate and Business Transactions tax attorneys:
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