For below market loans, can tax credits be spread out over several years instead of taken all at once in year 1?
The community investment tax credit for qualified loans and qualified low-rate loans may be fully utilized in the year in which the credit originated or utilized over a period of years not to exceed 15 years after the tax year in which the credit originated.
Low-rate loan is defined at 2% below prime and very low-rate loan is defined at 4% below prime. What is the credit for a bank that makes a loan that is between 2% and 4% below prime?
A “qualified loan” is eligible for a 5% credit and is defined as any loan that is at least 2% below the prime rate as published by the Wall Street Journal at the time the loan is approved. That does not qualify as a “qualified low-rate loan”. A “qualified low-rate loan” is eligible for a 10% credit and is defined as any loan that is at least 4% below the prime rate as published by the Wall Street Journal at the time the loan is approved. Any qualified loan between 2% and 4% below prime is eligible for the 5% credit.
What is the minimum loan term for permanent financing? When can the loan be renewed and will the financial institution receive credit a second time if the loan is renewed?
There is no minimum loan term required for a qualified loan or qualified low-rate loan to be eligible for the community investment tax credit. Loan renewals will not qualify for a second round of credits unless a new application is submitted and approved by THDA and the Department of Revenue. As a general rule, renewal applications will only be approved if it is determined that additional “eligible activities” are being supported by the renewed funding.
Is it necessary for a financial institution to document its cost of funds in order to take advantage of the credit? For example, if the bank is able to obtain below-market funds, will they receive credit a second time if the loan in renewed.
It is not necessary for a financial institution to document its cost of funds in order to take advantage of the community investment tax credit.
Can the bank keep the credit if the loan goes bad?
Yes. Once a financial institution has been granted a credit under this program the credit belongs to the financial institution regardless of the actions of the eligible housing entity. However, eligible housing entities that fail to perform according to the terms of the credit application will not be allowed to participate in additional community investment tax credit projects.
How are the tax credits calculated? Are they dollar for dollar credits?
Tax credits for qualified loans or qualified long-term investments are equal to 5% of the loan or investment amount. For example, a $200,000 qualified loan made to an eligible housing entity for an eligible activity would generate a credit of $10,000. Tax credits for qualified low-rate loans, grants or contributions are equal to 10% of the loan, grant or contribution amount. For example, a $200,000 qualified low-rate loan, grant or contribution made to an eligible housing entity for an eligible activity would generate a credit of $20,000. Community investment tax credit may be applied directly to a financial institution’s Tennessee franchise and excise tax liability on a dollar for dollar basis.
Are there any restrictions on the type of loans made to the non-profits? Do the loans have to be fixed rate loans?
In order to qualify for the community investment tax credit a financial institution must have an approved application from THDA and the Department of Revenue establishing that the loan was made to an eligible housing entity for an eligible activity. Qualifying loans must be made at a fixed rate at least 2% below prime in order to qualify for the credit.
Would a non-profit be considered eligible if the non-profit takes over the general partnership interest from a for profit developer and/or would the non-profit be eligible if it only takes over half o
The non-profit would have to take over all of the general partnership interests to be considered eligible.
How long would the non-profit have to be in business before being considered eligible?
There is no limit on the length of time that a non-profit must be in business before being considered eligible. The non-profit will, however, be required to submit a copy of it’s 501(C)(3) designation letter from the IRS and a copy of it’s Certificate of Existence from the Tennessee Secretary of State dated no more than 90 days prior to the date of application submission.
How long will the non-profit have to stay in business after the tax credits have been awarded?
There is no limit on the length of time that a non-profit must remain in business, however, if the non-profit does not complete the funded housing related activity or if the non-profit fails to comply with any of the other terms of the community investment tax credit program, the non-profit will be deemed ineligible to participate in the community investment tax credit program for a period not to exceed 36 months.
Can investments made in LIHTC properties be eligible for tax credits through the CITC Program?
Investments in the form of purchasing low income housing tax credits from an eligible housing entity are not eligible for the tax credit. An investment made in eligible low-income housing entities, such as a nonprofit developer for the purpose of constructing an LIHTC project, or a loan made to an eligible housing entity to finance an LIHTC project would be eligible, if the transaction was completed on or after 6-22-05.
Does the investment or loan have to be with a non-profit?
The investment or loan must be with an eligible housing entity such as a 501 (C)(3) non-profit, Development District, Public Housing Authority, or THDA.
If the bank finances the purchase of a property for a non-profit to be used by the non-profit for low income rental housing, would the bank be eligible to receive tax credits?
Yes. This would be an example of an eligible entity, 501(C)(3) non-profit, being engaged in an eligible activity, the creation of affordable housing for low income Tennesseans.
Can the tax credits be used with other subsidies or tax credit programs?
Yes. The awarding of tax credits under the community investment tax credit program is based on whether the loans, investments, grants, and contributions are extended to eligible housing entities for engaging in eligible low income housing activities, and would not be affected by the use of other tax credits or subsidies.
Could the waiving of origination or any other fees be considered a contribution that a bank could receive tax credit for?
Yes. If such fees are waived on a qualified loan or qualified low rate loan and the loan is made to an eligible entity for engaging in an eligible low income housing activity, this would be considered a contribution and the bank would be eligible for a one time 10 % credit. This means that the financial institution could be eligible to receive two separate credits. One credit based on the amount of the loan and another credit based on the amount of the contribution.