Profitable Pre$ervation

Transcription

1 Profitable Pre$ervation Accessing Historic Tax Credits Jason Yots, Preservation Studios

2 Historic Tax Credits By The Numbers 57,783 - Jobs created by HTCs 17,991 - Housing units created with HTCs (47% of HTCs) 35% - Portion of that housing that is low-mod income $ Average HTC project cost (millions) $ Total HTC investment (billions) $1,045,255 - Average HTC project award (federal) Source: National Park Service s 2012 Annual Report on the HTC Program

3 Historic Tax Credit Feasibility 3 Threshold Questions Is your building eligible? Does your rehabilitation work qualify? Do you need tax credits, cash or both?

4 Historic Tax Credit Eligibility 3 Possible Paths Individual listing in the National Register of Historic Places Contribution to an historic district listed in the NRHP Contribution to a tax certified local historic district

5 Historic Rehabilitation Qualification The (Other) 10 Commandments Dept. of Interior s Standards for Treatment of Historic Properties... Rehabilitation (10) Preservation Briefs (47) Interpreting the Standards Bulletins (55)

6 Using Historic Tax Credits 2 Options to Realize Value Fund the rehabilitation project and then claim the HTCs (for the year the project is placed-inservice) Syndicate the HTCs to an investor and receive discounted equity (in milestone installments during the project) HTC FAQs

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8 HISTORIC PRESERVATION AND REFUNDABLE CREDITS NYSAFAH Upstate Conference October 16, 2013 Prepared by: James S. DeBellis, CPA Salmin, Celona, Wehrle & Flaherty, LLP

9 Two types of Federal Historic Rehabilitation Credits 10% Credit Building first placed in service prior to Not listed on National Register of Historic Places or not located in a Historic District. Use must be Commercial.

10 20% Credit Must be a Certified Historic Structure. Listed on National Register of Historic Places or located in a Registered Historic District. Use can be either Commercial or Residential.

11 Substantial Rehabilitation Qualified Rehabilitation Expenses (QREs) must exceed greater of $5,000 or the adjusted basis of the building at the beginning of the 24 month measuring period. Eligible QREs include amounts incurred prior to the first day of the 24 measuring period, during the 24 month measuring period and after the 24 month measuring period through December 31 of the year in which the 24 month period ends.

12 Alternate 60 Month Measuring Period for Phased Rehabilitation Requirement that before the rehabilitation begins, written plans exist showing the Rehab is expected to be completed in phases and is reasonably expected to take more than 24 months. Must formally elect to use the 60 month period.

13 Use of Multiple 24 Month measuring periods Used to claim Historic credits in multiple years when the 60 month period is not elected. Example Acquire four story building in Dec 2012 for $100K. Top three floors will be residential and first floor will be commercial. Incur $1Mil of QREs to rehab residential space and place in service on ($200K of QRES incurred between Jan and June 2013). Incur $400K of QRE s for commercial space in 2015 and place in service

14 First measuring period Dec 2012 November Adjusted basis at beginning of first measuring period is $100K. Eligible QREs during the measurement period are $1mil. Credits allowed in 2014 based on $1mil of QREs.

15 Second Measuring period July 2013 June Adjusted basis at beginning of second measuring period is $300K (Acq - $100K plus $200K prior to beginning of second 24 month measuring period). Total cost incurred during second measuring period are $1.2mil ($800K of residential plus $400K of commerical. Since $1.2 mil of costs during second measuring period exceeds adjusted basis of $300K, substantial rehabilitation rule is met. Credits allowed in 2015 based on $400K of QREs.

16 What qualifies as Qualified Rehabilitation Expenditures - QREs QREs are costs chargeable to a capital account in connection with the rehabilitation of a qualifying building. Only rehabilitation costs subject to 27.5 and 39 year straight line depreciation. Hard costs such as windows, doors, walls, ceilings, floors, HVAC, plumbing, elevators, etc. Soft cost directly related to the building such as architect & engineering fees, reasonable developer fees, real estate taxes, interest and utilities incurred during the construction period, amortized construction loan costs incurred during the construction period, etc.

17 What doesn t qualify as a QRE Land and related costs Building Acquisition and related costs Site improvements and Landscaping Enlargements Personal property appliances, equipment, etc. Tax exempt use property

18 When is Credit allowed In the year the building is placed in service. Placed In Service means that all or portions of the building is placed in a condition of readiness and is available for a specifically assigned function. There is a five year recapture period.

19 Types of Entity structures used Single entity Usually through the use of a Limited Partnership (LP) or an LLC. Investor has 99.99% ownership interest. Project developer has.01% ownership interest. For tax depreciation purposes, must reduce basis of the building by the full amount of the credit.

20 Master Lease Structure Landlord Entity (LP or LLC) owns the building and performs the rehabilitation. Typically owned 90% by developer and 10% by Master Tenant. Master Tenant Entity (another LP or LLC) is responsible for the operations of the building. Typically owned 99.99% by investor and.01% by developer.

21 Master tenant leases the entire project from the Landlord Entity for a fixed annual rent. IRS allows the Landlord Entity to make a tax election to pass the Historic Tax Credit through to the Master Tenant. No building basis reduction required for depreciation. Master Tenant Entity must include in gross income each year, a ratable amount of the Historic credit over the tax depreciation life of the building (either 27.5 or 39 years).

22 Tax Exempt Use Issues Eligible QREs do not include expenditures allocable to Tax Exempt Use property. Who is a Tax Exempt Entity - US Government and any state or local agency - 501(c)(3) organization - Any foreign person or entity - Any Indian tribal government

23 Residential Property Tax exempt use property equals the portion of any tangible property leased to a tax exempt entity. If 20% of residential space is leased to a tax exempt entity, then 20% of otherwise allowable QREs will not be eligible for the credit.

24 Nonresidential Property Property leased to a tax exempt entity in a disqualified lease is treated as Tax Exempt Use property. Exception Only Tax Exempt Use property if the portion of property leased to tax exempt entities under disqualified leases is more than 50 percent of the property (35 percent prior to 2008).

25 Disqualified Lease is any lease of the property to a tax exempt entity in which The project utilized tax exempt financing and the tax exempt entity participated in the financing. The lease contains a fixed purchase price or an option to buy. The lease term is in excess of 20 years. There was a sale/leaseback with the Tax Exempt entity and the tax exempt entity used the property prior to the sale.

26 Partnerships & LLC s with Tax exempt entities as owners. Tax Exempt use property to the extent any allocation of partnership items to an exempt owner is not a qualified allocation. Qualified Allocation all partnership items are allocated to the tax exempt in the same proportion throughout its time of ownership. If one or more partnership items are or can be allocated disproportionately, tax exempt use property will be equal to highest allocable share of any item.

27 Also applies to Tax Exempt Controlled entities. Tax exempt controlled entity is any corporation in which 50% or more of the stock is held by one or more tax exempt entities. Tax exempt controlled entity can make a Code 168(H) election to be taxed as a for profit entity to prevent tax exempt use status.

28 New York State Historic Tax Credit Credit is equal to 100% of the Federal credit subject to a maximum of $5 million per structure for tax years beginning before January 1, For tax years beginning January 1, 2020, the credit will equal 30% of the Federal credit subject to a maximum of $100,000. Building must be located in a qualified census track as determined by NYS. For tax years beginning January 1, 2015, the credit will be refundable.

29 Historic Preservation Illustrated John Oster, Edgemere October 16, 2013

30 Edgemere is a housing developer Primary business: to equip our clients with the instrumental services necessary to enable them to develop residential projects

31 Edgemere since 2001 Units 1,464 Total cost $237,477,956 Concessionary loans/grants $74,663,165 Federal/state housing credits $108,482,610 Historic credits $9,865,746 Private ivestment $96,156,417 Section 8 vouchers 355 Tax-exempt bonds (C&P) $70,160,000

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33 Muldoon Gardens Total cost 9,110,743 Permanent sources NYSHTF 1,534,184 FHLB 279,000 Interim income 21,779 Investor equity 6,819,070 Deferred development fee 456,710 Total permanent sources 9,110,743

34 Equity Proceeds from federal historic credit $0.95 1,430,400 Proceeds from upward adjuster $ ,186 Proceeds from state historic credit $ ,297 Proceeds from upward adjuster $ ,440 Proceeds from federal low income credit $0.93 4,309,606 Proceeds from upward adjuster $ ,140 Total investor equity 6,819,069

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37 Obstacles to conversions Objections to Register listing (and therefore tax credits) Participation of unprepared nonprofit sponsors the Road to Hell is paved with good intentions Onerous preservation requirements Architectural unsuitability e.g. unworkable fenestration, unusable building depth, lack of accessibility, excessive common space Inadequate capitalization too much debt, too small reserves Inadequate discovery Multiple environmental issues Outrageous high costs Marginal locations Green vs Preservation issues e.g. insulation, penetrations, windows

38 Reasons to do them anyway For the challenge Making money more cost should equal more markup Interesting architecture and units Solid structures they don t build em like this anymore Higher equity, which should mean less debt Warm fuzzies: community benefits, people love them

39 Many thanks to NYSAFAH and my fellow Exemplary Panelists! Edgemere Development

40 Upstate New York Affordable Housing Conference Historic Preservation & Refundable Credits October 16, 2013 Nicholas V. Petragnani, Jr., SVP 315 North Clinton Street Syracuse, NY

41 About CPC Not-for-profit corporation established in 1974 to provide financing to enable the development and ownership of low / moderate income housing in New York State Loans are for subsidized and non-subsidized properties/projects Our financing is provided by a consortium of 70 prominent banks, insurance companies and pension funds Since inception, CPC has contributed over $8 billion to the preservation or creation of nearly 145,000 units of affordable housing, initiated numerous downtown revitalizations, and improved the quality and energy efficiency of the multifamily stock. In Syracuse, Rochester & Buffalo, CPC has invested over $690 million in more than 16,000 Primary Focus: Construction & Permanent Financing Historic Renovation Supportive Housing Green Financing Initiatives Freddie Mac Financing Upstate Investors Include: New York State CRF United Methodist Church Freddie Mac Collateral Trust Notes 41

42 Historic Preservation & Adaptive Reuse Across New York State, new and strategic housing investments that focus on historic revitalization have spurred advanced downtown infrastructures. Downtown districts in cities rich with history, such as Syracuse, Buffalo, and Rochester are on the rise and experiencing a rebirth, reminiscent of their prime at the turn of the twentieth century. Suburbia & Disinvestment The rise of suburbia after World War II caused the decline of these Upstate downtowns. Cars became the preferred mode of transportation & suburban life became a nationwide trend. Shopping malls developed to serve the growing suburban population. Recognizing Historic Buildings and their Potential Early 2000: local governments recognized the growing need to revitalize their Main Streets to keep local economies viable. Municipalities saw the value of utilizing innovative funding sources and private-public partnerships to help restore downtown. One of the most important factors in the revitalization effort has been the investment in and creation of attractive housing stock in these downtowns to create density and support convenience in upstate cities. 42

43 Historic Preservation - A Lender s Perspective 43

44 Historic Preservation & Adaptive Reuse A Lender s Perspective THE CHALLENGE High rehabilitation/construction costs Pioneering projects in emerging neighborhoods Hard to support rental rates Financing gaps PUBLIC/PRIVATE PARTNERSHIPS PILOT agreements/tax abatements, i.e. 485a Incentives - $$$ Acquisition Infrastructure improvements 44

45 Historic Preservation & Adaptive Reuse A Lender s Perspective DEVELOPMENT TEAM Experienced Architect Experienced Contractor/Construction Manager Legal Counsel Tax Credit Consultant/Accountant DEAL COMPONENTS Part I, Part II and Part III Commitment from a Syndicator/Investor with terms and equity pay-in schedule Operating agreement or two-tier lease agreement with Investor 45

46 CPC s Work with Historic Preservation & Adaptive Reuse 46

47 Map of Downtown Syracuse 47

48 Pike Block Project Pike Block Project: CPC construction financing commitment totaling $13.7 million, with a SONYMA-Insured Pension Fund Permanent Mortgage take out of $9.6 million Acquisition, construction & conversion of four-buildings, essential to rebirth of South Salina Street in the heart of Downtown Syracuse Project received federal & state historic tax credits; additional incentives & grants from NY State, City of Syracuse, Onondaga County, the Downtown Committee & National Grid were provided Former department & other retail stores on site, built in late 1800s, will become new, mixed-use development with 78 market rate housing units with 4 three-bedroom units, 41 two-bedroom units, and 33 one-bedroom units with green components 48

49 Dey s Centennial Plaza, Syracuse 401 South Salina Street CPC Construction Financing: $6,200,000 Participants: M&T Bank, Pathfinder, Alliance Bank (construction and perm loan) 45 market-rate units Gut rehab of historic Dey Brothers department store comprised of four contiguous six- to eight- story masonry mixed-use buildings constructed in 1893 Developers purchased site from the City of Syracuse & converted long vacant office space into mixed one- and two-bedroom residential units 155,000sf of commercial/retail space of which 145,000sf is currently occupied 49

50 The Academy Building, Rochester 13 South Fitzhugh Street CPC construction financing: $3.7M & CPC SONYMA-insured Pension Fund permanent financing: $3.25M The City of Rochester & New York State s Empire State Development Corporation have committed an $800,000 Restore NY grant and a $700,000 construction bridge loan Project will also receive Federal and State Historic Tax Credit equity 50

51 The Lafayette, Buffalo 391 Washington Street CPC NYS Pension Fund Permanent Financing: $11.052M, insured by SONYMA M&T Bank: $17.9M in construction financing for the residential units National Grid Grant: $250,000 Historic Tax Credit Equity (syndicated by Foss & Company): $10.752M Transformation of historic building built in 1901 into 115 state-of-the-art apartments, while serving as a 34-room boutique hotel and provider of retail / banquet space 51

52 THANK YOU! QUESTIONS? Nicholas V. Petragnani, Jr., SVP 315 North Clinton Street Syracuse, NY