The United States government has created tax incentives for the development and redevelopment of certain types of real property. These include tax credit programs to encourage the preservation of low income housing, historic buildings or economic development.
As an example, under the Low Income Housing Tax Credit Program, the U.S. Treasury allocates tax credits to the states, and state agencies award the tax credits to developers of qualified projects for the construction or rehabilitation of affordable housing. Developers sell the tax credits to purchasers (investors) to raise funds for the projects. The sale of the tax credits reduces the amount of funds that the developer would otherwise have to contribute or borrow. This enables a property receiving tax credits to charge lower rents.
Provided the property maintains compliance with the affordable housing program requirements, tax credit purchasers can use the tax credits to reduce their own Federal taxes over a period of 10 years. The amount of the tax credit is based upon the amount invested in the project. The amount of the tax credits is separate from the cost of the land and improvements.
Some tax credit investors may be concerned that a loss covered by the title policy – affecting the title to the Land - might also cause a reduction of the tax credits allocated to the project. Because the amount of the tax credits is separate from the cost of the land and improvements, it is possible that the total loss, when the value of the tax credits is also considered, might exceed the Amount of Insurance for the land and improvements alone.
Both ALTA Endorsement 40-06 and ALTA Endorsement 40.1-06 add an additional amount of insurance for the tax credit investor for the reduction of the value of the tax credits, to the extent that the loss of the tax credits is caused by a matter covered by the policy. Both endorsements insure against loss or damage sustained by the tax credit investor by a reduction in a tax credit that is caused solely by a defect, lien, encumbrance or other matter insured against by the policy, subject to applicable conditions and limitations. Neither endorsement insures the tax credit itself or the costs to defend or establish eligibility. The endorsements are designed for use only on an Owner’s Policy. The tax credit investor must be specifically identified in both endorsements.
Both the ALTA Endorsement 40-06 and the ALTA Endorsement 40.1-06 contemplate that the total amount of title insurance will be equal to the cost of the land and improvements plus the amount of the tax credits attributable to the project.
The endorsements differ primarily in that ALTA Endorsement 40.1-06 specifically allocates an Additional Amount of Insurance for tax credits, while the ALTA Endorsement 40-06 does not.
ALTA Endorsement 40-06 (Tax Credit - Owner’s Policy)
ALTA Endorsement 40-06 contemplates that the Amount of Insurance stated in Schedule A includes the aggregate of: (a) the value of the Land, and (b) an additional amount for the value of the tax credits. ALTA Endorsement 40-06 does not specifically designate the portion of the Amount of Insurance allocated to the tax credits. Under ALTA Endorsement 40-06, loss or damage under the endorsement is limited to the Amount of Insurance shown in Schedule A.
Under Section 6.a of ALTA Endorsement 40-06, the Insured assigns to the Tax Credit Investor the right to receive payment under the policy, but only to the extent of the reduction in the amount of a tax credit. Under Section 6.b of ALTA Endorsement 40-06, such payment to the Tax Credit Investor shall reduce the Amount of Insurance payable under the policy.
ALTA Endorsement 40.1-06 (Tax Credit - Defined Amount - Owner’s Policy)
ALTA Endorsement 40.1-06 provides for the specification of an Additional Amount of Insurance that is applicable only to the loss or damage payable to the Tax Credit Investor. This amount must be inserted in Section 2.c. This amount is in addition to the Amount of Insurance stated in Schedule A. Under ALTA Endorsement 40.1-06, loss or damage under the endorsement is limited to the Additional Amount of Insurance shown in the endorsement.
ALTA Endorsement 40.1-06 does not contain an assignment of the Insured’s rights to receive payment under the policy or a provision reducing the Amount of Insurance on account of a payment under the endorsement.
1. With respect to both ALTA Endorsement 40-06 and ALTA Endorsement 40.1-06:
A. The premium to be charged should be calculated based upon the aggregate of: (a) the value of the Land and contemplated improvements; plus (b) the amount of the tax credits (whether or not specified in the endorsement); and
B. Insert the name of the Tax Credit Investor in Section 2.a.
2. With respect to ALTA Endorsement 40-06 only, the Insured (not the Tax Credit Investor) must sign the endorsement.
3. With respect to ALTA Endorsement 40.1-06 only, in Section 2.c, insert the Additional Amount of Insurance that is applicable only to loss or damage payable to the Tax Credit Investor under this endorsement.