Transcript Harmony Mills

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
Harmony Mills
Adaptive Reuse: 96 apartments, 152 parking spaces,
storage, health club & leasing office
Harmony Mills
Development Cost: $18.2 million
Tax Credit Equity:
$2.6 million
Harmony Mills
Professional Arts Building
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
People’s 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
Arbaugh 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:
Tax Credit Equity:
$8.2 million
$1.7 million
First Security Building
Original Use:
1955 International Style office building
First Security Building
Rehabilitation:
156,000 sf office and retail space
First Security Building
Development Cost:
Tax Credit Equity:
$20.8 million
$2.3 million
Dia: Beacon
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:
Tax Credit Equity:
$34.3 million
$6 million
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 moderateincome 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
Basic Eligibility: NPS (and SHPO)
Rehabilitation Must be “Historic”
• Must comply with the
Secretary of the
Interior’s Standards
• Must respect historic
fabric of the building
• “Part II” and “Part III”
approvals
Basic Eligibility: IRS
Rehabilitation Must be “Substantial”
“Qualified Rehabilitation Expenditures (“QREs”) must exceed
the greater of
• $5,000, or
• Adjusted basis of
the building
(e.g. excluding
land)
Qualified Rehabilitation
Expenditures
Rehabilitation expenses properly chargeable to the
building’s capital account
• 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
Qualified Rehabilitation
Expenditures
Does
not
include
•
•
•
•
Acquisition costs (purchase, financing, legal & recording)
Land costs (site improvements, landscaping)
Enlargements and exterior demolition (with limited exceptions)
Furniture, fixtures, equipment, appliances
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 Shehadi
Acquisitions Manager
National Trust Community
Investment Corp.
27 Byram Shore Road
Greenwich, CT 06830
(203) 531-5999
[email protected]