Historic Rehabilitation Tax Credit Insurance

Background

The Internal Revenue Service provides historic rehabilitation income tax credits in the
amount of 10% of qualified rehabilitation expenditures for buildings places into service
before 1936 and 20% of qualified rehabilitation expenditures for certified historic
structures.1 However, qualification for this credit is not absolute. Instead, the credit may
be significantly reduced or lost in its entirety if a casualty to the building results in
significant property damage.2 A significant loss resulting in the recapture of previously
claimed tax credits could frustrate the expectations of any assignees of the credit as well
as result in a financing shortfall because the assignee would not then be required to make
its capital contribution.3 As a result many developers are turning to a relatively new
insurance product Historic Rehabilitation Tax Credit Insuranceto protect against
financial loss resulting from the reduction or recapture of the expected tax credit during
rehabilitation or after the building is placed into service.4

Dual Policies

Historic Rehabilitation Tax Credit (HRTC) Insurance is issued on two separate policy
forms covering: (1) the projects rehabilitation period, and (2) the recapture period (5
years) following the completion of the rehabilitation.5

Rehabilitation Coverage6

During the rehabilitation of the building, HRTC coverage can be purchased as an

enhancement to the owners Builders Risk policy for a term commensurate to the
underlying policy.7 The HRTC enhancement is triggered if: (1) during rehabilitation, (2)
a covered casualty results in significant property damage, and (3) as a result of the
damage, the amount of the tax credit is totally lost or reduced from the amount
anticipated at the start of the project.

Once triggered, the coverage will pay the lesser of (1) the amount of the scheduled tax
credit, or (2) the amount actually lost due to the determination of reduced qualifying
expenditures, up to the policy limit. In addition, most policies permit an optional
enhancement that extends HRTC coverage to include consequential losses.

Recapture Coverage8

Once the building is placed into service upon the completion of rehabilitation, HRTC
coverage can be purchased as an enhancement to the property insurance policy for a term
of five years.9 Once purchased, HRTC recapture coverage is trigged if: (1) after
completion, (2) a covered casualty results in significant property damage, and (3) as a
result of the damage, the IRS disqualifies all or part of the tax credit taken at occupancy.

1
Once triggered, the coverage will pay the lesser of (1) the scheduled tax credit, or (2) the
amount recaptured by the IRS, up to the policy limit. In addition, most policies permit an
optional enhancement that extends HRTC coverage to include consequential losses.

1
See 26 U.S.C. 47
2
See International Amalgamated Group, Recapture of Rehabilitation Investment Tax Credits from a
Casualty, available at www.internationalamalgamated.com/
product_investment_tax_credit.html See also 26 U.S.C 50 (detailing recapture rates decreasing by 20%
each year following completion of rehabilitation)
3
See International Amalgamated Group Supra note 2.
4
See Lexington Insurance (Chartis), Historic Rehabilitation Tax Credit Insurance, available at
http://www.internationalamalgamated.com/
_media/pdf/HRTC_Ins_Tear_Sheet.pdf
5
See id.
6
See id.
7
$10,000 minimum premium with aggregate limit of $40,000,000. Id.
8
See Lexington Insurance (Chartis) Supra note 4.
9
$25,000 minimum premium with aggregate limit of $40,000,000. Id.