The original Alabama Historic Tax Credit (“HTC”) program was successful in stimulating the redevelopment of aging properties across Alabama, and was particularly recognized for its role in the revitalization of downtown Birmingham. However, the original Alabama HTC program, enacted in 2012, with an authorized total of $60 million in tax credits, expired in 2016.
On the last day of the 2017 Regular Session, the Alabama legislature passed H.B. 345 (and signed into law as Act 2017-380 -- the “New Act”), which establishes a new state HTC program by authorizing $20 million in refundable income tax credits per year for five years, beginning January 1, 2018. Like the original program, the New Act offers a tax credit of up to 25 percent of qualified rehabilitation expenditures for certain historic commercial or residential structures and retains many other aspects of the original program (such as the per project caps of $5 million for commercial and $50,000 for residential projects).
The tax credits available under the New Act must be claimed in the year in which the rehabilitation is placed in service. Unlike the original program, the tax credits cannot be carried forward if not used, but are now refundable if the amount of the credit certified by the Alabama Historical Commission (the “Commission”) exceeds the owner’s state income tax liability. Unlike the original program, credits under the New Act cannot be used by banks against the Financial Institutions Excise Tax. However, the refundable structure may create the need and opportunity for bridge lending to project owners by banks, especially in light of the minimum pricing requirements if the credits are transferred.
While the one-time transferability feature remains, the New Act requires credits to be sold for at least $.85 per dollar of credit and prohibits the allocation of credits by a pass-through entity to its owners. Thus for a project owned by a pass-through entity, which is very common and needed in most instances for federal tax purposes, the credit and likely refund will have to be claimed on the entity’s Alabama income tax return. In many instances, this will require the owner entity to obtain a bridge loan to finance rehabilitation costs until the refund is received from the Alabama Department of Revenue. In addition, most historic properties must now be at least 60 years (as opposed to 50 years) of age to qualify for the credit (unless located within the boundaries of a national monument or park).
The New Act also changes the manner in which projects can receive an allocation of credit by establishing a nine-member evaluating committee, four of whom are legislators, to review qualifying projects and rank the application based on criteria to be established by the Commission. Another noteworthy change to the reservation process is that 40 percent of the available credits each year are initially set aside for projects in non-metropolitan counties (less than 175,000 in population), but after six months can be awarded to other qualifying projects. The New Act leaves the majority of the details regarding the new reservation mechanics to the Commission’s rulemaking process, and requires that these rules be promulgated by October 1, 2017.