Introduction to Adaptive Reuse

1
Introduction to Adaptive Reuse Historic Tax
Credits

• Al Shehadi
• National Trust Community Investment Corp.
• February 12, 2009

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Harmony Mills

• Original Use Harmony Mills Mill No.3,
  190,000 sf
• 1870s knitting mill

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Harmony Mills
Adaptive Reuse 96 apartments, 152 parking
spaces, storage, health club leasing
office
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Harmony Mills

• Development Cost 18.2 million
• Tax Credit Equity 2.6 million

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Harmony Mills

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Professional Arts Building
Original Use 110,000 sf medical and
professional office building
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Professional Arts Building
Adaptive Reuse 96 apartments, 1,676 sf ground
floor retail space rental storage
units
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Professional Arts Building
Development Cost 26.1 million Tax Credit
Equity 4.52 million Separate State HTC
Investment 2.01 million

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Peoples Building
Original Use Peoples Bank Trust Co.
1918 Bank Office Building
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Peoples Building
Adaptive Reuse Community College branch
Small business office
space
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Peoples Building

Development Cost 3.7 million Tax Credit
Equity 1.33 million
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Arbaugh Building
Original Use Arbaughs Department Store,
100,000 sf 1905 department store
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Arbaugh Building
Adaptive Reuse 48 apartments, 17,000 sf
office space 51 parking spaces
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Arbaugh Building
Development Cost 8.2 million Tax Credit
Equity 1.7 million
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First Security Building

• Original Use 1955 International Style office
  building

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First Security Building

• Rehabilitation 156,000 sf office and retail
  space

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First Security Building

• Development Cost 20.8 million
• Tax Credit Equity 2.3 million

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Dia Beacon
Original Use 290,000 sf 1929 Nabisco
Box Printing Factory
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Dia Beacon
Adaptive Reuse Dia Beacon largest
contemporary art museum in the world
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Dia Beacon
Development Cost 34.3 million Tax Credit
Equity 6 million
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Dia Beacon
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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

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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

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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

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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 Interiors 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

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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

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Basic Eligibility NPS (and SHPO)
Rehabilitation Must be Historic

• Must comply with the Secretary of the Interiors
  Standards
• Must respect historic fabric of the building
• Part II and Part III approvals

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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)

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Qualified Rehabilitation Expenditures
Rehabilitation expenses properly chargeable to
the buildings 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

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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

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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

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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

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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

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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)

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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

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Syndicating the Credit
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Investor Marketplace

• lt750,000 - 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
• gt3m - competitive market place with multiple
  investors

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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

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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

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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

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Investor Due Diligence

• Financial Projections
• Development Team
• Real Estate
• National Park Service Approvals (Parts 1 2)
• Tax Compliance
• Legal Closing

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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

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• Al Shehadi
• Acquisitions Manager
• National Trust Community Investment Corp.
• 27 Byram Shore Road
• Greenwich, CT 06830
• [phone]
• Al_shehadi_at_ntcicfunds.com