State Tax Credits

The success of the low-income housing tax credit, historic rehabilitation tax credit, new markets tax credit and renewable energy tax credits as incentives to the construction and rehabilitation of affordable housing developments, historic structures, renewable energy facilities and the development of other community economic development projects has led an increasing number of states to enact analogous state tax credit statutes. The structure and requirements of these programs vary widely. Some are designed to closely track the federal tax credit programs and others resemble their federal counterpart programs in name and goal only.

Holland & Knight's Tax Credit Practice Group has extensive experience in structuring transactions that are intended to utilize both federal and state tax credits. We have created and continually update a comprehensive library of the various state low-income housing, historic rehabilitation, new markets and film production tax credits.

The unique issues that arise in state tax credit transactions are as varied as the state programs themselves. Some state tax credits may be allocated to investors who are not investing in the counterpart federal tax credits; other state tax credits must follow the federal tax credits; and still others stand alone and may be sold or assigned to an investor who is not even an interest holder in the ownership entity of the project. Significant federal income tax planning opportunities (and pitfalls) can be presented depending on the manner in which a particular state tax credit transaction is structured. Some state credits are delivered to the owner and its investors over the same period as the corresponding federal tax credit, and other state tax credits deliver a benefit much more quickly. The market for the various state tax credits is also much less developed than the market for the federal tax credits, and finding a willing state tax credit investor can sometimes be a difficult task.

We leverage our attorneys' extensive experience and relationships developed in federal tax credit transactions to assist not only in dealing with myriad tax and structuring issues that the state tax credits present, but also in creating successful relationships between developers and sponsors of affordable housing and historic rehabilitation projects and willing state tax credit investors.

In particular, we have helped form state tax credit investment funds for the California, Missouri and Georgia low-income housing tax credits. We also have performed the acquisition work for those funds as they invest their investor's equity in state tax credit transactions. Our attorneys have developed innovative structuring techniques to deal with the various tax issues that arise in some transactions that involve a federal tax credit investor and a different state tax credit investor.

Holland & Knight attorneys have also been extensively involved in the development of the statutory and regulatory framework for several state low-income credits, historic tax credits and film production credits in states such as Massachusetts, Rhode Island, Ohio and Missouri. We continue to work with state agencies, developers, investors and lenders in clarifying issues involving the use of the state tax credits and structuring transactions that combine those state credits with other federal and state programs.

Over the past several years, certain cases have highlighted the federal income tax issues involved in transactions that include state tax credits, and indicate a strong view at the IRS that common state tax credit structures present significant disguised sale issues and may call into question the status of partners receiving an allocation of state tax credits as partners. In any transaction involving state tax credits, the facts and structure are critical, and the risk of re-characterization of the transaction should not be minimized.

Holland & Knight's presence in more than 10 different states – many of which have state low-income housing and/or historic rehabilitation tax credit, new markets tax credits and film production credit programs – eliminates the necessity of hiring separate state credit counsel in those states.