Incentives for Historic Preservation in Detroit Michigan Tax Incentives Part I: Michigan Historic Tax Credits

1. Incentives for Historic Preservation in Detroit Michigan Tax Incentives Part I: Michigan Historic Tax Credits and OPRA Presented by: Gordon Goldie gordon.goldie@plantemoran.com 248-375-7430 Detroit Athletic Club June 5, 2008

2. Overview of Agenda • Michigan Incentives Available • Historic Tax Credit • Obsolete Property Tax Freeze (OPRA) • Brownfield Incentives • SBT Credits • Tax Increment Financing (TIF) • Neighborhood Enterprise Zone (NEZ)

3. Incentives: Key Questions • What are the benefits? • What are the eligibility requirements? • What else do you have to do? • What are the drawbacks/limitations?

4. Michigan Historic Tax Credits

5. Michigan Historic Tax Credits • What are the benefits? • State tax credit • Credit = 25% of QRE • Must be reduced by available Federal credit • Can be used to offset MBT or MI Income Tax • Claimed in year completed rehab certificate is issued • May be assigned (but not re-assigned): • To owners of pass-through entities • Can assign pro-rata or 100% to a single owner • Typically “sold” for $.50 to $.85 per $1 of credit

6. Michigan Historic Tax Credits • What are the eligibility requirements? • Eligible property • Includes buildings, structures, sites, objects, features and open spaces • Individually listed on National or State Register of Historic Places, or • Located in National, State or local historic district • Can be non-income-producing (i.e., owner occupied residence) • Tax-exempt use property • Can be owned by tax exempt entity if leased to unrelated taxpayer • Can be leased to tax-exempt entity on long-term lease

7. Michigan Historic Tax Credits • What are the eligibility requirements (continued) ? • Eligibility of rehabilitation • QRE = same definition as Federal credit • QRE must exceed • 10% of SEV, or • 5% of appraised value, if no SEV • Certificate of completed rehabilitation must be issued not more than 5 years after the rehabilitation certified by State • QRE must be paid within 5 years of certification of rehab plan for historic resource not eligible for Federal credits

8. Michigan Historic Tax Credits • What else do you have to do? • Secretary of Interior’s Standard Guidelines apply for Rehabilitation Plan • State Historic Preservation Office (SHPO) reviews federal Historic Preservation Certification Application • SHPO issues Verification of Eligibility after Federal Part III approval • Fee = $0 to $2,500 • Credit claimed on Michigan Form 3581 • Credit is assigned by submitting to Michigan Department of Treasury Michigan Tax Credit Assignment Form 3614 and securing approval

9. Michigan Historic Tax Credits • What else do you have to do (continued)? Contact Information: • Robb McKay • Federal historic tax credits • 517-335-2727 • Bryan Lijewski • State historic tax credits • 517-373-1631

10. Michigan Historic Tax Credits • What are the drawbacks/limitations? • Credit reduces Federal deduction for state taxes • Construction costs to comply with rehab standards • Reduced depreciation • Must reduce basis of building by amount of Federal credit (if any) • Can’t claim bonus depreciation on leasehold improvements • Recapture • 5 year compliance period • Prorata vesting • Potential taxability of proceeds from “sale” of credits

11. Federal Tax Impact of State Tax Credits

12. Federal Tax Impact of State Tax Credits • State credit pricing depends upon federal tax treatment • Federal tax treatment depends upon assignment structure • Structuring alternatives • Credit transferred via sale of certificate • Credit transferred via partnership allocation • Pricing • Certificate = up to $.90 • Partnership allocation = $.50 to $.75

13. Federal Tax Impact of State Tax Credits(continued) • Assignor’s treatment - Generally • Credit transferred via sale of certificate • Ordinary income upon receipt • CCA 200211042 - Missouri • Credit transferred via partnership allocation • Capital gain upon disposal of LLC interest (reversal of difference between inside and outside basis) • Mandatory basis reduction could accelerate income and convert income to ordinary

14. Federal Tax Impact of State Tax Credits (continued) • Assignee’s treatment - Generally • Credit transferred via sale of certificate • Ordinary deduction when credit is used to pay state tax • PLR 200348002 • CCA 200445046 - Massachusetts • Credit transferred via partnership allocation • Capital loss upon put/call exercise

15. Federal Tax Impact of State Tax Credits(continued) • Can ordinary income/deduction treatment apply to credits transferred via partnership allocations? • Maybe – If substance (vs. form) of transaction is equivalent to the sale of a certificate credit • AM2007-02 • CCA 200704028 and CCA 200704030 • Risk that State could disallow assignment

16. Obsolete Property Tax Freeze

17. Obsolete Property Tax Freeze (OPRA) • What are the benefits? • Allows local government units to abate real property taxes on the value of renovations to blighted or obsolete structures in eligible communities.

18. Obsolete Property Tax Freeze (OPRA) • How does it work? • Up to 12 year exemption from Ad Valorem property taxes on increased value of buildings and improvements • Exemption does not apply to: • School operating millage and State Education Tax • Personal property • Freezes value of building shell • Land remains subject to regular taxes • State Treasurer may exempt up to ½ of school taxes for up to 6 years (limit = 25 per year) • Exemption may be transferred with approval

19. Obsolete Property Tax Freeze(OPRA) • What are the eligibility requirements? • Property must be Blighted or Functionally Obsolete • Property must be either: • Commercial property • Residential rental property • Must meet “but for” test (wouldn’t occur but for exemption) • Rehab must exceed 10% of FMV before rehab

20. Obsolete Property Tax Freeze(OPRA) • What else do you have to do? • Qualified local governmental unit must establish an Obsolete Property Rehabilitation District • Owner of obsolete property files application for exemption with local unit’s clerk (Form 3674) • Local unit approves application • State Tax Commission approves application and issues exemption certificate