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Introduction to Adaptive Reuse & Historic Tax Credits
Al Shehadi National Trust Community Investment Corp.
February 12, 2009
Harmony Mills
Original Use: Harmony Mills Mill No.3, 190,000 sf 1870’s knitting mill
Adaptive Reuse: 96 apartments, 152 parking spaces, storage, health club & leasing office
Harmony Mills
Development Cost: $18.2 millionTax Credit Equity: $2.6 million
Harmony Mills
Harmony Mills
Original Use: 110,000 sf medical and professional office building
Professional Arts Building
Adaptive Reuse: 96 apartments, 1,676 sf ground floor retail space & rental storage units
Professional Arts Building
Development Cost: $26.1 million
Tax Credit Equity: $4.52 million
Separate State HTC Investment: $2.01 million
Professional Arts Building
Original Use: People’s Bank & Trust Co. 1918 Bank Office Building
People’s Building
Adaptive Reuse: Community College branch Small business office space
People’s Building
Development Cost: $3.7 million
Tax Credit Equity: $1.33 million
People’s Building
Original Use: Arbaugh’s Department Store, 100,000 sf 1905 department store
Arbaugh Building
Adaptive Reuse: 48 apartments, 17,000 sf office space & 51 parking spaces
Arbaugh Building
Development Cost: $8.2 millionTax Credit Equity: $1.7 million
Arbaugh Building
Original Use: 1955 International Style office building
First Security Building
Rehabilitation: 156,000 sf office and retail space
First Security Building
Development Cost: $20.8 millionTax Credit Equity: $2.3 million
First Security Building
Original Use: 290,000 sf 1929 Nabisco
Box Printing Factory
Dia: Beacon
Adaptive Reuse: Dia: Beacon – largest contemporary art museum in the world
Dia: Beacon
Development Cost: $34.3 millionTax Credit Equity: $6 million
Dia: Beacon
Dia: Beacon
Federal Historic Tax Credit
• Established in 1976
• 34,800 properties rehabilitated 1977-2007
• $45 billion total investment
• 40% of projects involve housing
• Over 350,000 housing units have been created or rehabbed
• More than 80,000 low- and moderate income housing units
Federal Historic Tax Credit
Fiscal Year 2007• 1,045 approved
rehabilitation projects• $4.34 billion in private
investment• 40,755 jobs created• 18,006 housing units
created or renovated• 6,553 low- and moderate-
income housing units created
State Historic Tax Credits
• Roughly half of states have state historic credits
• Credits range from 5% to 30%; many are capped
• State credits can be in addition to federal credit
• Buildings on state historic registers are eligible in addition to buildings on the National Register
• Best state credits are uncapped, “as of right” and easily transferable
• High correlation between states with a “good” state historic credit and states with high volume of federal historic tax credit projects
Federal Historic Rehabilitation Tax Credit
National Park Service (“NPS”)• Maintains National Register• Determines eligibility of building for federal credit• Certifies rehabilitation as consistent with the Secretary of the Interior’s Standards
State Historic Preservation Office (“SHPO”)• Delegated partner of NPS for administering federal credit• Maintains State Register• Determines eligibility of building for state credit
Internal Revenue Service (“IRS”)• Determines who gets economic benefits of tax credit
Basic Eligibility: NPS (and SHPO)
Building Must Be “Historic”
• Individually listed on National Register
• Contributing building in a NR District
• Contributing building in a certified state or local district
• “Part 1” Approval
• Must comply with the Secretary of the Interior’s Standards
• Must respect historic fabric of the building
• “Part II” and “Part III” approvals
Rehabilitation Must be “Historic”
Basic Eligibility: NPS (and SHPO)
• $5,000, or
• Adjusted basis of the building (e.g. excluding land)
Rehabilitation Must be “Substantial”
“Qualified Rehabilitation Expenditures (“QREs”) must exceed the greater of
Basic Eligibility: IRS
Qualified Rehabilitation Expenditures
• Rehabilitation costs within the existing building envelope, including interior demolition & environmental remediation
• Construction period expenses (utilities, taxes, interest)
• Construction related soft costs and professional costs related to the building rehab
Rehabilitation expenses properly chargeable to the building’s capital account
• Acquisition costs (purchase, financing, legal & recording)
• Land costs (site improvements, landscaping)
• Enlargements and exterior demolition (with limited exceptions)
• Furniture, fixtures, equipment, appliances
Does not include
Qualified Rehabilitation Expenditures
Calculation of Federal Credit
• Credit is equal to 20% of QREs
• Credit taken in the year the building is placed in service (e.g. C of O)
• Credit accrues to owner(s) of building at placement in service
• Credit can be carried forward 20 years and back 1 year
Compliance & Recapture
Compliance period:
• 5-years from date last QRE is placed-in-service
Recapture:
• 100% in first 12 months
• Declines 20% every 12 months thereafter
Compliance & Recapture
Recapture triggered by:
• Disposition of the property (including sale, foreclosure and condos)
• Disposition of at least 1/3 of partnership interest
• Noncompliance
• Property becomes “tax exempt use property”
Outside Investors: When & Why
• Tax Credit is a key part of adaptive reuse of historic buildings
• “Free” tax benefits in exchange for rehabilitating a building in a historically appropriate way
• Credit only worth something if you can use it (passive loss limits, AMT, NOL carry forwards)
Syndicating the Credit
• Syndication is a way to monetize tax credits
• Exchange of ownership & tax benefits of ownership for an equity investment
• Outside investor must enter ownership before placement in service
Syndicating the Credit
Investor Marketplace
• <$750,000 - little investor interest; best option may be to keep the credits yourself
• $750k to $3m - modest investor interest; may have several investors to choose from
• >$3m - competitive market place with multiple investors
Finding an Investor
• Small deals: ask locally – local accountants, lawyers, business colleagues, banks, historic preservation groups
• Medium-sized deals: regional accounting firms, law firms with tax and real estate practice, mortgage brokers, regional banks, state preservation groups, SHPO, internet
• Large deals: national accounting firms, law firms with tax and real estate practice, larger regional and national banks, internet
Check out Potential Investors
• What areas and types of projects do they invest in?
• Have they done a project like yours?
• What are standard pricing and terms?
• What is the process and how long does it take?
• Who will be your contact person and what is their experience?
• What information do you need to submit to get a term sheet
The Term Sheet: Standard Terms
• Price: per $1 of tax credits
• Timing and benchmarks for equity installments
• Priority return: needed to meet IRS profit motive requirements
• Option price: pre-arranged “divorce” terms
• Guarantees & Adjusters: guarantees of completion, operating performance and tax credits
Investor Due Diligence
• Financial Projections
• Development Team
• Real Estate
• National Park Service Approvals (Parts 1 & 2)
• Tax Compliance
• Legal & Closing
Summary
Financial benefits include:
• Adaptive re-use is a widely-used option for historic buildings
• Buildings on the National Register are eligible for both State and Federal Historic Tax Credits
• Tax credits are a powerful financing tool for rehabilitating historic buildings and can generate significant equity funding for rehabilitation projects
• Credit is earned on the money invested in the overall building, not just on the historic features
Al ShehadiAcquisitions ManagerNational Trust Community
Investment Corp.27 Byram Shore RoadGreenwich, CT 06830(203) [email protected]