Commercial Investment Real Estate March/April 2013 - Page 16

FINANCING FOCUS Taking Credit Historic preservation tax incentives offer capital solutions. i In the current economic climate, creative thinking is critical when it comes to securing the fi nanc- ing needed to purchase or reha- bilitate real estate. With under- writing standards still extremely tight, banks remain less likely to lend, and when they do, loan-to- value ratios are low and collat- eral requirements are high. This continues to be a major chal- lenge for some businesses. In addition, in some highly developed metropolitan areas, it can be diffi cult to fi nd proper- ties that are fi nancially feasible. However, urban centers that were developed historically as port cities, trading outposts, or early industrialized sites are often rife with turn-of-the-cen- tury structures that are well- suited for conversion into apart- ments, offi ces, and restaurant spaces. 14 March | April | 2013 But adapting a building to modern usage while preserving and restor- ing its historic character can be daunting — and expensive. Without the support of historic reha- bilitation tax credits, the risk involved would not be worth it for investors and owners. Tax Credit Calculations Properties listed on the National Register of Historic Places, located within historic districts, or those that can be listed on the National Register are eligible for the historic tax credit at both the state and federal lev- els. T e property’s rehabilitation must meet certain standards that are designated by the National Park Service to maintain the build- ing’s historic character. Property owners can use these tax credits to of set federal and state tax liabilities, or they can “sell” the tax credits and use the capital to of set rehabilitation costs. (Although federal historic tax credits are issued to the property owner and are non-transferable, a tax credit investor can be admitted to the property own- ership in exchange for a capital contribution in a transaction that has “economic substance” as def ned by the Internal Revenue Service.) Add to this the intrinsic value of a historic property — including desirable location and positive sentiment associated with revitalizing a piece of a neighborhood’s history — and historic preservation becomes worth a second look. In fact, developers can use historic tax credits as a f nancing tool. For example, a historic building costs $200,000 to buy and another $800,000 in qualif ed rehabilitation expenses. T e historic tax credit amounts to 20 percent of the QREs on both the state and federal levels, which would be $320,000 in this example. A developer may monetize the federal tax credits and receive a term sheet for the purchase of the state tax credit, thereby raising actual capital (in tranches as construction progresses) for the federal tax credit. T is could add $137,600 in construc- tion capital and $275,200 in net monetiza- tion proceeds. In a situation where the bank is only of er- ing a loan of 60 percent of the cost of the purchase price and QREs, or $600,000, there would be a $400,000 equity requirement to fund the transaction. As mentioned above, the historic tax credit would cover $275,200 (af er factoring in transaction costs) of the equity required, leaving slightly less than a $125,000 equity requirement, which is 12.5 percent of the purchase price and QREs. Commercial Investment Real Estate by Warren Kirshenbaum