Maryland Historical Trust

MARYLAND HERITAGE STRUCTURE REHABILITATION TAX CREDIT PROGRAM
HB 679 as Enacted
An Analysis of Changes Made to the Program in the 2004 Session

The following analysis attempts to identify the major changes made to the Heritage Structure Rehabilitation Tax Credit program by the 2004 General Assembly. This is the first analysis and may be subject to subsequent revision.

In what follows, it may be assumed that if an existing provision is not mentioned, it has remained the same in the amended legislation. This analysis is not comprehensive, but is intended to serve as a guide to the public and applicants to the program. For example, certain changed provisions relating to Reporting Requirements are omitted because these affect internal state government operations and do not significantly affect the public.

The Maryland Historical Trust continues to develop and promulgate detailed application and review procedures, and emergency regulations to govern the implementation of these new provisions.

Program-wide Changes – Applicable to All Projects:

The program, which was slated to "sunset" on June 1, 2004, has been extended in amended form with a new "sunset" or termination date of July 1, 2008.
The Comptroller’s authority to examine and audit tax returns and rehabilitation projects is clarified and strengthened. (These provisions are generally consistent with and identical to provisions that had been included in the Administration’s bill.)
Language is included that clarifies that an applicant must claim the credit for the tax year in which the project was completed. For corporate taxpayers, this provision applies to the calendar year. In order to claim the credit, an applicant must also have received an approved Part III (Certification of Completed Rehabilitation). If the Part III Approval is received by the applicant after they have filed for the relevant tax year, they may file an amended return for that tax year.
For all projects, the new rules are fully in effect for applications received or approved on or after July 1, 2004. (Note: For commercial projects, there are certain transitional rules that affect Part II project applications approved before June 30, 2004 – see below).
The effective date of this legislation is June 1, 2004.

Rehabilitation of Owner-Occupied Residential Historic Structures:

Owner-occupied residential projects previously were not subject to a per-project cap. They now are subject to a $50,000 per project cap. (In other words, projects expending up to $250,000 would be eligible for a full 20% tax credit/refund; projects expending above that amount would only be eligible for a maximum tax credit of $50,000.)
The limitation on qualified rehabilitation expenditures that has been in effect since 2002 no longer applies to owner-occupied residential projects. The existing requirement that limits the tax credit to 20% of the estimated rehabilitation expenditure as stated on the Part II application, or 20% of the completed rehabilitation expenditure at Part III, whichever is less, no longer applies to owner-occupied residential projects. This provision applies to Part II applications submitted or approved after July 1, 2004. This limitation continues to apply to commercial projects.

Rehabilitation of Commercial Historic Structures – Projects Approved After July 1, 2004:

1. The program which had operated as a traditional tax credit has changed to a hybrid that operates more like a grants program requiring an annual appropriation. (In other words, the new program requires that an appropriation be provided in the current fiscal year budget for each of fiscal years 2006, 2007 and 2008. As previously operated, the credits were realized as reductions against future tax revenues and spread out over a 2 to 3 year period.) In broad brush, the program will operate as follows:

The Trust will accept applications for commercial projects during a narrowed window of opportunity – January 1 to March 31 each year, beginning in 2005. Projects previously "in the queue" and not awarded a portion of the $10 million in available tax credits during the Special Transitional Period will be returned to the applicant. If a project remains eligible to apply for tax credits under the new rules for Fiscal Year 2006 (see below), an application may be resubmitted during the January – March submission period.

Projects must be evaluated against the competitive criteria detailed under the Special Transitional Period and Rules above.
Not more than 50% of the total credit amounts can be awarded for projects in any single county or Baltimore City. If, under this rule, any amounts remain un-awarded at the end of the relevant fiscal year, that amount will be added to the competitive pool for the next fiscal year, except for the last year of the program.
Up to 10% of available credits each fiscal year are reserved for projects sponsored by non-profits. If in the competitive selection process non-profits apply for less than 10% of the total available credits, the remaining balance may be allocated to other commercial projects in the competition for that fiscal year.
The Trust cannot accept Part II applications for review if:

any substantial part of the proposed rehabilitation work has begun; or
the applicant has previously submitted 3 or more applications for commercial projects for that fiscal year with aggregate rehab expenses exceeding $500,000.

In the budget the Governor submits in January to the General Assembly, he may submit an appropriation request for the program. The language in this legislation provides that the Governor "shall" provide an appropriation of "at least" $20 million for FY 2006 (FY begins July 1, 2005), and "at least" $30 million each for FY’s 2007 and 2008. (This language would permit the Governor to request more than the minimum authorized level.)
The General Assembly may approve the Governor’s appropriation request, or reduce it. After an appropriation is approved by the General Assembly, it cannot be cut by the Governor and Board of Public Works.
When the final amount of the appropriation is known, the Trust shall allocate the tentative credits awarded under the January through March competitive rating and ranking to projects up to the amount provided in the appropriation. The credits would be available to projects on the following July 1^st.
The Comptroller removes the total appropriated funds from the state’s General Fund and sequesters it in a special Reserve Fund – earmarked for only those projects approved. The funds remain in the Reserve Fund until they are ready to be claimed by sponsors of completed projects – approximately 2 to 3 fiscal years. If any amount appropriated is not allocated to specific projects, such amount remains in the fund and may be carried over to the pool for allocation in the next fiscal year. The Reserve Fund is a special continuing, non-lapsing fund which is invested in the state Treasury; however, any interest or earnings on the Fund revert to the General Fund of the State.
When the Trust notifies the Comptroller that an approved project has been successfully completed, the Comptroller transfers an amount equal to the credits awarded to that project to the General Fund where it is available for claims/refunds to the project sponsor. The amount transferred back to the General Fund will be the maximum amount listed on the Part II estimate, even if the credit claimed at Part III completion is less than the amount estimated.
Projects that are awarded tax credits (on July 1) must be completed by the end of the following fiscal year or, in other words, within 24 months. Any such amounts which "expire" (i.e., the project was not completed within 24 months), revert to the state’s General Fund and are no longer available to that project. The Trust may grant a waiver to extend this 24 month requirement "for reasonable cause." (The Trust intends to promulgate regulations tightly defining "reasonable cause." Current intent is to limit such situations to conditions beyond the control of the applicant.)