Commercial Investment Real Estate March/April 2013 - Page 17

Banks financing commercial real estate transactions traditionally require a 20 per- cent equity contribution by the borrower. By requiring less than the average equity require- ment of 20 percent, historic tax credits make such transactions possible. As a result, the historic tax credit program has been one of the nation’s most successful and cost-ef ective community revitalization programs to date. Boston Example As developers, owners, and managers look to f ll gaps in project funding, state and fed- eral tax credits can make or break the feasi- bility of resurrecting desired buildings with significant community value. As shown above, these credits on the state and federal level, together with accelerated deprecia- tion, can combine to of set as much as 45 percent (on a gross basis) of a construction project’s budget. Note that with transaction costs, which include the tax credit investor’s purchase discount, the net capital generated may be in the 33 percent range. T e Fort Point Channel area in South Bos- ton is a good example of an area benef ting from the historic tax credit. T is urban area is comprised of several buildings that were owned by the Boston Wharf Co., and previ- ously had been used as warehouse space and for other port and trade-related uses much more prevalent in the early 20th century. Now, these historically signif cant buildings are being adapted for use as residential apart- ments, storefronts, restaurants, and of ce space. Similarly, many other metropolitan areas of er historically valuable buildings in prime locations in need of varying levels of attention. Submission Details To start the process, the property owner applies to the state historical commission for both federal and state tax credits. In some states, an approved request on the state level is distributed via a competitive allocation process, wherein an owner can request an allocation of the total amount at various points throughout the year. In this scenario, owners may f nd themselves going back to the state several times as more funding is needed and approved. T e process of applying for and securing historic tax credits typically requires a devel- opment team including a lawyer, a consultant, and a syndicator. Seeking out information about this process before the project com- mences allows for the potential tax credit equity to be built into a proposed budget or development pro forma, which can lead to even greater control over f nancing costs. Tax incentives such as the historic tax credit manage some of the inherent challenges in preserving a historic building, as well as providing solutions to potential f nancing conundrums. Warren Kirshenbaum is founder and president of The Cherrytree Group, a Massachusetts- based consultant, tax credit broker, and syn- dicator. Contact him at warren@ cherrytree- group.com. Master of Real Estate Development Executive Program a joint degree offered by the College of Architecture, Design and Construction and the College of Business MAKE PLACES, not projects. Curriculum focuses on sustainable and responsible real estate development practices. New class launches each May with rolling admissions. For more information visit: mred.auburn.edu Auburn University is an equal opportunity educational institution/employer. CCIM.com March | April | 2013 15