The Sherbert Group has developed procedures to make sure your project achieves the maximum equity contributions. Every tax credit project begins with a plan and a set of projections. These projections outline the expected benefits to the investor in the project, including the dollar value of the tax credits allocated to the investor and when these credits will be delivered. Based on these factors, a capital contribution schedule is created. But many times, things don’t go exactly as planned and in these cases, an adjuster to the expected capital contributions must be calculated. It’s important to examine the potential effects of adjuster calculations on contributed capital early in the process, before the Operating Agreement is signed. But whether you have a signed Operating Agreement or are structuring the Operating Agreement for your project, the question is, how can these adjuster calculations be maximized?
Properly calculating tax credit adjusters can make a huge difference to a project. Recently, we worked with a developer on the first year credit calculation for a bond acquisition/refinance project. We were able to identify almost $200,000 in additional required equity contributions by reviewing their adjuster calculation to ensure that all of the months that each BIN was eligible for were included in their calculation. In addition, we were able to identify adjustments to the calculation of eligible basis as of December 31st of the first year of credits, which added an additional almost $20,000 of equity contributions. This resulted in additional equity contributions of over $200,000 to the project!
In order to understand the adjuster calculation for any project, the terms of the Operating Agreement must be examined. This will outline the agreement between the parties for how adjusters will be calculated, both upward and downward, along with any caps or floors on the calculations, the price per credit adjusted, discount rates, and in which contributions on the schedule of capital contributions the adjustments will be reflected. Adjusters typically fall into two categories, Basis Adjustments and Timing Adjustments.
Basis Adjustments result from a difference between the estimated or projected tax credit basis and the actual tax credit basis. These basis differences may be either positive or negative, depending upon whether the actual incurred eligible costs on the project are higher or lower than the eligible costs estimated when projections were done and capital contribution schedules were established. The credit pricing rate applied on upward and downward adjustments may be different, so the adjuster calculation must use the rate specified in the Operating Agreement for each type of basis adjustment. In addition, the Operating Agreement may place a cap on the dollar value of any upward capital adjusters, so adjuster calculations must take this into account, where applicable.
Timing Adjustments result from the early or late delivery of tax credits, based upon the delivery schedule provided for in the Operating Agreement and outlined in the capital contribution schedule. The Operating Agreement specifies the minimum expected tax credits to be delivered to the investor by tax year. To the extent that the actual tax credits delivered do not meet the minimum expected credits, an adjuster must be calculated. The Operating Agreement specifies the discount rate to be applied to the shortfall on credits delivered. The Operating Agreement may also indicate that the specified minimum tax credits to be delivered may be adjusted to account for any upward capital adjustment before comparison to the actual credits delivered for the purpose of calculating the shortfall.
After the determination of any Basis Adjustments or Timing Adjustments, the Operating Agreement must be consulted to determine in which capital contribution under the capital contribution schedule the adjustments will be reflected. The agreement may specify that the adjustments be reflected in one or more of the remaining capital installments.
The Sherbert Group has worked with numerous clients on the best way to maximize the adjuster calculation under their signed Operating Agreement, and has worked with numerous others to structure their Operating Agreements with respect to Adjuster Calculations to provide maximum benefits. Please contact us if we can be of assistance with your Adjuster Calculation or Operating Agreement Structuring at aspaugh@sherbertgroup.com.