By Chris Pieper
Rules promulgated by the Missouri Department of Economic Development (DED) significantly alter Missouri’s Historic Preservation Tax Credit Program (HTC). The emergency rules, which took effect March 30, 2019, implement Senate Bill 590 enacted during the 2018 legislative session. The rules are expected to become final during the second half of 2019.
In addition to reducing the annual cap on HTC projects receiving more than $275,000 in credits and increasing the tax credit issuance fee, SB 590 granted DED significantly more discretion in approving applications and established a number of additional requirements for HTC applicants. Consistent with SB 590, DED’s rules convert the former open application process to a semi-annual competitive process. Although the new competitive process is similar to competitive processes used in other discretionary tax credit programs administered by DED, it marks a significant change to the HTC program.
The competitive process has two application cycles—June 3 and October 1 for FY2020 and April 1 and October 1 for FY2021. DED will continue to review applications in the order they are postmarked but will determine whether to approve an application based on a 100-point scale considering the factors specified in SB 590:
- The Overall Size and Quality of the Project (35 points) – committed financing, leveraged investment ration, and new jobs (including wages, multiplier effect);
- Level of Economic Distress (30 points) –whether the project is in an Opportunity Zone, the unemployment rate of the county, the poverty rate of the Census tract, and vacancy rates.
- Net Fiscal Benefit (25 points) – evaluated through a cost benefit analysis to determine the return on investment for state and local governments, with up to 15 points allocated for state fiscal benefit and 10 points allocated for local fiscal benefit; and
- Input from Local Elected Officials (10 points) – determined with a letter of support from the chief elected official or resolution from legislative body and the committed amount of local incentives.
To facilitate the competitive process, rules and guidelines require additional information to be submitted with the preliminary application, including an “HTC Self-Score Sheet,” a copy of all land use approvals and building permits, documentation of assessed value, a copy of any applicable tax abatement applications, classifications for new jobs, anticipated tenants, and a project narrative.
DED’s rules exclude from the competitive process (1) any project that received a proposal for business development incentives from DED; (2) any project to be occupied by the applicant or entity controlling the applicant; and (3) any project where the applicant has committed to relocating from another state. Applications for the foregoing categories can be submitted at any time, although they remain subject to the aggregate annual program cap.
The rules also include various provisions that were previously addressed in the DED HTC guidelines, including restrictions on non-profit participation and project phasing. Additionally, the rules provide that incomplete applications will not be reviewed, and that an application will be deemed inactive when the applicant has failed to communicate for at least nine months from the date of the last DED correspondence.
The rules clarify eligibility of various categories of Qualified Rehabilitation Expenditures (QREs). For example, hard costs incurred on or after the later of six months prior to preliminary approval or one month prior to DED’s receipt of the application are eligible for credits, while soft costs are eligible if incurred on or after the later of one year prior to preliminary approval or six months prior to DED’s receipt of the application.
Under the rules, a developer fee can be eligible as a QRE only if it is 12% or less of the total project cost, less non-QREs, related party fees, profit and the total amount of the developer fee. The rules require a developer fee to be evidenced on a form agreement prescribed by DED submitted at the later of the initial closing on construction financing or initial closing on federal historic tax credits (if applicable). Accrued developer fees must be paid within five years of completion.
General contractor profit is an eligible QRE only if it is 6% or less of the total eligible project costs, less related party fees, overhead and profit. General contractor overhead is limited to 4% or less of the total eligible project costs, less related party fees, overhead and profit.
The rules also modify the cost certification process by authorizing an applicant to request an independent review of the applicant’s cost certification by a third-party certified public accountant. The cost of the independent review is to be borne fully by the requesting applicant.
Under the rules, if a final application shows QREs in excess of the amount authorized, the applicant can request additional credits. However, DED will consider the request for additional credits to be a new application.
Chris Pieper’s practice focuses on Regulatory and Government Solutions, Public Finance and Incentives, Real Estate, and Litigation. Prior to returning to private practice Chris served in Missouri state government, including as Chief of Staff to the Governor, Director and General Counsel of the Missouri Department of Economic Development, Deputy General Counsel for the Missouri Department of Natural Resources, Legislative Director for the Missouri Department of Revenue, and Special Assistant Attorney General.