Historic tax credits with LIHTC: twinning, basis and the math

Old mills, schools and hotels converted to apartments are among the hardest LIHTC deals to finance, because historic rehab is expensive and the result has restricted rents. The federal historic tax credit (HTC) under 26 U.S.C. 47 helps pay for it, and twinning it with LIHTC is a long-standing structure.

The two credits side by side

	LIHTC	Federal historic tax credit
Rate	Applicable percentage (9% or 4% floors) on qualified basis, each year for 10 years	20% of qualified rehabilitation expenditures (QREs), total
Timing	10-year credit period, 15-year compliance period	Ratably over 5 years beginning in the placed-in-service year (47(a), as amended in 2017)
Approval	State housing credit agency allocation or bond financing	National Park Service certification via the SHPO (Parts 1, 2 and 3)
Recapture	Decrease in qualified basis during 15 years	Disposition or loss of use within 5 years after placed in service, under section 50(a)
Basis effect	None on depreciable basis	Reduces depreciable basis by the credit amount (section 50(c))

Why the basis reduction matters

Section 50(c) reduces a building’s basis by the amount of the rehabilitation credit. LIHTC eligible basis starts from the building’s adjusted basis (42(d)(1)), so the same reduction flows into the LIHTC calculation. Every $1 of HTC removes $1 of LIHTC eligible basis.

QREs are a subset of the rehab budget. Acquisition cost, enlargements that add square footage, and certain site work aren’t QREs. A twinned budget tracks three overlapping buckets: total cost, LIHTC eligible basis, and QREs.

Worked example

Assumptions only: a 1920s school becomes 60 apartments, all low-income. The site is in a QCT. It is a 9% deal. LIHTC eligible basis before the HTC adjustment is $20,000,000, and QREs are $17,000,000. Both credits price at $0.82 for illustration (real HTC pricing is quoted separately and is often different).

Line	LIHTC only	Twinned
QREs		$17,000,000
Historic credit (20% of QREs)		$3,400,000
LIHTC eligible basis before HTC	$20,000,000	$20,000,000
Less 50(c) basis reduction		($3,400,000)
LIHTC eligible basis	$20,000,000	$16,600,000
Boosted basis (130%)	$26,000,000	$21,580,000
Annual LIHTC at 9%	$2,340,000	$1,942,200
Ten-year LIHTC	$23,400,000	$19,422,000
Equity from LIHTC at $0.82	$19,188,000	$15,926,040
Equity from HTC at $0.82		$2,788,000
Total credit equity	$19,188,000	$18,714,040

In this example twinning raises less equity, because the 9% credit on the lost basis, boosted 130%, is worth more than the HTC itself. That is the arithmetic every twinned deal must run. Twinning pays when:

• the deal is a 4% deal, where each dollar of basis is worth less LIHTC (on a 4% boosted deal, $3,400,000 of basis is worth $1,768,000 of 10-year LIHTC against $3,400,000 of HTC);
• the agency would cap the 9% award below what the full basis supports, so the lost basis wasn’t going to produce credits anyway;
• some QREs are in ineligible basis, such as commercial space, so the HTC applies without costing LIHTC; or
• a state historic credit adds equity without a federal basis reduction (check the state law, since some states also reduce basis).

Rerun the comparison in the credit estimator with your own basis and rate.

Structures

1. Single-tier. One partnership owns the building and claims both credits; one investor or two investor members take them. Simple, but the basis reduction falls entirely on the owner.
2. Master tenant (lease pass-through). The owner leases the building to a master tenant and elects under the regulations under section 50(d) to pass the HTC to the lessee. The HTC investor invests in the master tenant. The lessee includes income over the recovery period instead of the owner reducing basis, which keeps LIHTC eligible basis whole. This is the main reason twinned deals use master leases; it needs careful tax counsel, because the IRS has tested HTC structures in court and in its own safe harbor guidance.

Rev. Proc. 2014-12 sets the IRS safe harbor for allocating HTCs to partners in partnerships that rehab historic buildings; investors expect deals to fit it (IRS).

Timing: two credit clocks

• HTC is claimed over 5 years from placed in service; LIHTC over 10 years.
• Phased placed-in-service dates matter. The HTC is generally taken when the rehabilitated building is placed in service, and the LIHTC first year can be deferred one year by election (42(f)(1)).
• HTC investors usually pay in faster than LIHTC investors, which helps construction financing. An equity bridge can cover the rest.

Common traps in twinned deals

• Counting QREs that aren’t. Acquisition cost, new additions that enlarge the building, and site work outside the building’s footprint generally aren’t QREs. Have the HTC consultant and the LIHTC cost certifier work from one cost segregation.
• Forgetting the 50(c) reduction in the LIHTC model. The LIHTC application often goes in before the HTC structure is final. If the deal later adopts a single-tier structure, eligible basis drops and the agency’s credit amount may no longer be supportable.
• Mismatched recapture periods. HTC recapture runs 5 years from placed in service under section 50(a); LIHTC runs 15. A transfer that is fine for LIHTC under the reasonable-expectation rule can still be an HTC disposition in years 1 to 5.
• Phased placed-in-service dates. If units come online in phases, the HTC investor’s credit timing and the LIHTC first-year proration (by month, under 42(f)(2)) diverge. Map both before signing the pay-in schedule.
• Agency review of total subsidy. The agency’s 42(m)(2) feasibility analysis counts HTC equity as a source. Adding HTC can lead the agency to cut the LIHTC award.

The approvals

Step	Agency	When
Part 1: historic significance	SHPO, NPS	Before design is fixed
Part 2: description of rehab	SHPO, NPS	Before construction; design must meet the Secretary’s Standards
LIHTC application	State HFA	Per the QAP calendar
Part 3: certification of completed work	SHPO, NPS	After completion; needed to claim the HTC
Form 8609	State HFA	After placed in service and cost certification

NPS standards can collide with LIHTC requirements: accessibility, energy efficiency scoring in the QAP, unit sizes. Resolve them in Part 2, not in construction.

The Janover Capital desk can size construction and bridge debt around two investor pay-in schedules.