“Twinning” Tax Credits

6 min read

WaterFire utilizes New Markets and Historic Tax Credits

WaterFire is a non-profit arts organization whose activities include simultaneously lighting nearly 100 bonfires suspended just above the rivers that run through downtown Providence—accompanied, according to founder and Executive Artistic Director Barnaby Evans, “by music and other art surprises” that bring “joy and energy” to the way people experience and explore the City. Businesses benefit from the crowds attracted by WaterFire celebrations and from civic pride generated by its unique artistic expressions.

All of this is innovative and instructive, as is the financing of WaterFire’s new Arts Center in a long-abandoned building constructed in the 1920s as a tire factory for the U.S. Rubber Company. Essential to the financing is additional equity generated by “twinning” Federal Historic Tax Credits (HTCs) and New Markets Tax Credits (NMTCs)—as shown in the chart below, twinning funded $770,000 in equity of the $11,200,000 construction cost of the project.

This twinning is far more than simply using two tax credits together.

“Twinning the NMTC and the HTC permits the historic equity to be enhanced by NMTC,” explains Jerry Breed of Washington, DC’s Bryan Cave law firm, who helped structure the Waterfire financing. “In a side-by-side, non-twinned Federal Historic and New Markets Tax Credit deal, no portion of the HTC qualifies for NMTC; thus, the HTC investor invests in the master tenant and the NMTC investor makes a loan to the property owner/lessor.”

Such additional equity can be crucial for non-profits, which often rely on grants and charitable donations to service debts incurred during construction projects.

“What surprised me most in all this,” says WaterFire’s Barnaby Evans, “was that tax credits, clearly designed—and able—to achieve positive social ends, can become so complicated.”

In NMTC-HTC twinning, the complications—in the form of restrictions—all come from the HTC. “Under the Internal Revenue Service’s Revenue Procedure 2014-12,” says Breed, “the sponsor/developer is prohibited from loaning money to the investor to acquire an interest in the project. And in addition, the NMTC transaction must be separate and independent from the HTC transaction.”

Waterfire’s twinning structure, he continues, “resolves these two hurdles. First, because the investor supplies all of the equity that is used to make the HTC investment and no leverage is used in that portion of the transaction structure, the sponsor has clearly not provided any loan to finance the investor’s acquisition of an interest in the master tenant. And second, the NMTC side of the transaction is separate and independent because it is priced at the NMTC market price and does not utilize any portion of the HTC enhanced equity. A leverage loan can be provided by the sponsor/developer to the NMTC side of the structure without raising questions that the sponsor is financing the acquisition of an interest in the master tenant.”

Other twinning structures, Breed emphasizes, also were available for WaterFire. For example, the HTC investor could contribute cash to the master tenant entity and the cash then could be immediately lent to the investment fund or to an affiliate of the sponsor/developer who would bundle the proceeds with other leverage loan sources for the NMTC side of the transaction.

“With any complex financial structure,” says Boston- based Mary Thompson, Senior Originator for Bank of America Merrill Lynch, which is providing New Markets Tax Credit allocation and is investing in both the New Markets Tax Credits and the Historic Tax Credits, “you need open communication and a clear understanding of the roles and responsibilities of each party. We also try to identify potential issues early in discussions, which helps manage transaction costs. In this case, because the structure is unique, the CDE needed to be comfortable with using a second sub CDE to facilitate the HTC/NMTC twinning along with the sponsor having an ownership interest in the sub CDE, as well as having the sub CDE own the Master Tenant.”

At $11.2 million construction cost, the WaterFire project is relatively small—and leaves unanswered the question, Would NMTC-HTC twinning work well for larger projects? “The twinning structure utilized in WaterFire triggers the requirement that a CDE invest the QEI proceeds within 12 months,” says Breed. “All of the historic equity comes into the CDE on day one and the CDE holds that equity until certain benchmarks are met, such as completion or lease-up. The project must be able to hit those benchmarks within 12 months. The larger the project, the more difficult it may be to meet this 12-month requirement.”

If the project is delayed, the CDE can “loan the remaining funds to the QALCIB with a requirement that the funds can’t be released from an account until the benchmarks are met,” says Breed. “But if the project melts down, the QEI proceeds need to be reinvested in another project within the 12-month period.”

New Markets Tax Credit twinning with HTC have been common since the first rounds of NMTC allocations in 2001-2002, but faded after the 2012 U.S. Court of Appeals Third Circuit Historic Boardwalk Hall decision ruled that equity investors must have a meaningful financial interest in the success or failure of a project—and the subsequent issuance of Revenue Procedure 2014-12 by the IRS in 2014, which made twinning more complicated.

But Breed says that, as evidenced by WaterFire, twinning transactions will now “become more common, thanks, in large part, to IRS issuance on July 21, 2016 of 50(d) guidance—which, says Breed, “most people believe” will decrease the equity prices for FHTC by 15 to 20%. Thus, he says. “twinning can go a long ways towards filling the equity gap in post-50(d) guidance transactions.”

Bank of America Merrill Lynch’s Thompson agrees, adding, “We plan to continue to invest in twinned deals. The additional equity from twinning HTC/NMTCs will provide much-needed funding for many projects that couldn’t be completed without it.”

In the meantime, WaterFire, which since its founding in 1993 has been producing events from rented sites scattered throughout Providence, will soon have a structure large enough to gather all of its creative teams and support equipment into one place, augmented by new facilities, including classrooms and performance space—making it possible, according to Evans, “to imagine even larger interactions and realize more of our dream projects.” These dreams include to expand WaterFire’s role as a national leader in the fast-changing field of Creative Placemaking—using artists and the arts to add vitality to communities.

Evans clearly sees that arts are essential to economic success and that there are no limits to what imagination can achieve—which can also describe the financial plans that make projects, such as WaterFire, possible.

Sources of Funding
The total development cost $14.1 million.

NMTC $3.27 million

Federal HTC $1.71 million

State HTC $2.25 million

Deferred developer fee $622,000


WaterFire leveraged $6.27 million, including:

$3.16 million state cultural facilities grant

$600,000 EPA Brownfields cleanup grant

$450,000 recoverable grant

$265,000 local foundation grant

$1.79 million in capital campaign pledges.