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) 531-5999Al_shehadi@ntcicfunds.com