ADAPTIVE REUSE AND HISTORIC PRESERVATION IN …Office buildings Hotels Warehouses Two tiers of tax...

ADAPTIVE REUSE AND HISTORIC PRESERVATION

IN UPSTATE NEW YORK

1:30 PM

CLIFTON HALL

TOM YOTS

PROFITABLE PRESERVATION: ECONOMIC INCENTIVES FOR HISTORIC

REHABILITATION PROJECTS

Jason Yots

Preservation Studios

Yots Law Firm P.C.

HISTORIC REHABILITATION:YOU CAN HAVE YOUR CAKE AND EAT IT TOO

• Civic responsibility (do some good)

• Environmentally friendly (go green)

• Profitable (oh yeah, make some money while you’re at it)

Profitable Preservation

“The economic benefits of historic

preservation are enormous. The

knowledge of the economic benefits of

preservation is miniscule.”

Greg Paxton, Georgia Trust for Historic Preservation

Numerous economic incentives are available for historic rehabilitation projects:

Federal historic rehabilitation tax credit

State historic rehabilitation tax credit

Façade easement donation

Other compatible incentives

Federal Historic Rehabilitation Tax Credit

History:

Program enacted in 1976; modified to its current form in 1986

Currently codified at IRC §47

Program Administration

Department of Interior

National Park Service

Internal Revenue Service

State Historic Preservation Offices (SHPOs)

Federal Historic Rehabilitation Tax Credit (cont.)

Federal Tax Incentives for Rehabilitating Historic Buildings - 1977-2006

(Source: National Park Service)

0

500

1000

1500

2000

2500

3000

3500

4000

4500

FY77

-78

FY79

FY80

FY81

FY82

FY83

FY84

FY85

FY86

FY87

FY88

FY89

FY90

FY91

FY92

FY93

FY94

FY95

FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

Investment (in millions) Approved Part 2s


What is a tax credit? Dollar-for-dollar credit against income taxes

Credit vs. deduction

Who can use the HRTC? Generally, any taxpayer that is liable for regular income taxes

(eg, individuals, certain corporations, estates, trusts), subject to certain restrictions

Pass-through entities (eg, LLCs, limited partnerships) not taxed at entity level; suitable for syndication of HRTCs


Limitations on the use of HRTCs:

Passive activity rules

Generally, individuals with AGI exceeding $250,000 cannot use HRTCs

At-risk rules

Generally, the basis for calculating HRTCs is reduced by “non-qualified non-recourse financing”

Alternative minimum tax (AMT)

Old rule: HRTCs could not offset AMT

New rule: under the Housing and Economic Recovery Act of 2008, HRTCs can now offset AMT

Tax-exempt use rules:

Old rule: To the extent that more than 35% of real property is leased to a tax-exempt entity under a disqualified lease, then that portion of the building constitutes tax-exempt use property and the owner may be limited in the amount of HRTCs it can claim

New rule: under the Housing and Economic Recovery Act of 2008, tax-exempt leasing threshold increased to 50%


To be eligible for HRTCs,

property must be depreciable,

such as:

Apartments

Office buildings

Hotels

Warehouses

Two tiers of tax credits are

available for rehabilitation

projects:

Qualified rehabilitation expenditures on a certified historic structure: 20% tax credit

Non-historic structure: 10%

tax credit


3-Part Process To Become Eligible for 20% HRTC: Part 1: For buildings not listed in the National Register of Historic

Places (NRHP), owner needs to file with SHPO a completed Part 1 of the Historic Preservation Certification Application –Evaluation of Significance (Part 1)

Part 2: Before commencing rehabilitation work, owner needs to file with SHPO a completed Part 2 of the Historic Preservation Certification Application – Description of Rehabilitation

Part 3: After completing rehabilitation work, owner needs to file with SHPO a completed Part 3 of the Historic Preservation Certification Application – Request for Certification of Completed Work


Certified Historic Structure (CHS) Any building which:

Is listed in the NRHP or

Is located in an historic district listed in NRHP and which is certified by the Department of Interior as being of historical significance to the district

Obtaining CHS Status Buildings listed on NRHP: no additional action required

Buildings located in NRHP-listed historic district: complete Part 1

Buildings not listed on NRHP and not located in NRHP-listed historic district: complete Part 1 and become listed on NRHP


Qualified Rehabilitation Expenditure (QRE)

Under IRC 47(c), a QRE is any amount properly chargeable to a

capital account which is in connection with a qualified rehabilitated building and which is:

(1) non-residential property,

(2) residential real property,

(3) real property with a class life greater than 12.5 years or

(4) an addition/improvement to property described in (1), (2) or (3).


QREs (generally) are things

like:

Walls, partitions, floors

Permanent coverings (eg, tile)

Windows and doors

Certain HVAC components

Plumbing and fixtures

Wiring and lighting fixtures

Chimneys

Stairs, escalators, elevators

Other components related to O&M

of building

Certain soft costs such as

construction-period interest and

taxes, A&E fees, reasonable

developer fees, CM costs and any

fee chargeable to a capital

account


QREs (generally) are not

things such as:

Land and acquisition costs

Site work

Enlargements and demo (but

additions may be OK)

Furniture, fixtures and equipment

Carpeting (if tacked in place and

not glued)

Sidewalks, parking lots and

paving

Tax-exempt use property


Qualified Rehabilitated Building (QRB)

A building must satisfy a 4-part test to be a QRB:

(1) It must be substantially rehabilitated,

(2) It must have been placed in service before the beginning of the

rehabilitation,

(3) For non-CHS (ie, for 10% credit projects), at least (a) 50% of the

existing external walls are retained as external walls, (b) 75% of

the existing walls are retained as either internal or external walls

and (c) 75% of the existing internal structural framework is retained in place and

(4) It must be depreciable.


Substantial Rehabilitation A building has been substantially rehabilitated when QREs:

(1) Exceed the greater of:(a) $5000 or(b) the adjusted basis of the building (as of beginning

of 24-month measuring period) and(2) Are incurred within a 24-month measuring periodselected by the taxpayer.

For certain phased rehabilitation projects, the taxpayer can elect a 60-month measuring period.

Measuring period must end no later than the last day of the tax year in which the project is placed in service.An asset is generally considered to be placed in service

when all conditions have been met for the asset to be used for its intended purpose (eg, certificate of occupancy).


Non-historic structures

Any non-historic, non-residential building first placed in service

before 1936 (and not moved after 1935)

Eligible for 10% tax credit

Must satisfy certain external and internal wall and structural

framework retention requirements (see #3 on QRB slide, above)

No formal review process (ie, no Parts 1, 2 or 3); credit is

claimed by taxpayer on IRS Form 3468

Owners of buildings located in NRHP-listed historic districts may

claim 10% tax credit only after filing a Part 1 and receiving a

determination from SHPO/NPS that the building does notcontribute to the district and is not a CHS


Recapture of HRTC

IRC 50(a)

5-year recapture period during

which (1) property ownership

cannot change and (2) the property must remain

investment credit property.

Casualty also can trigger

recapture

Calculation of recapture

amount:

Year 1: 100%

Year 2: 80%

Year 3: 60%

Year 4: 40%

Year 5: 20%


Syndication of HRTCs Property must be owned or leased by a pass-through entity (eg,

LLC, limited partnership)

Depending on transaction structure, syndicator or direct investor admitted as member or partner of the pass-through entity

Tax benefits, including HRTCs, flow through to investor to the extent of its interest in the pass-through entity (typically as much as 99.99%)

Owner/developer retains day-to-day control of property and ownership entities

Guaranties and adjusters

Priority return to investor: IRS profit-motive requirements

Pre-negotiated procedures for withdrawal of investor after 5-year regulatory period expires

State Historic Rehabilitation Tax Credit

New York’s HRTC Program –

Commercial

Tax Law 606(oo)

30% of federal HRTC (ie,

about 6% of QREs)

$100,000 cap per project

State HRTC cannot be “bifurcated” from federal

HRTC and is not otherwise

transferable

Proposed legislative changes:

10% of QREs

Cap increased to $5,000,000

Transferability restrictions

loosened

State Historic Rehabilitation Tax Credit (cont.)

New York’s HRTC Program –

Residential

Tax Law 606(pp)

20% of QREs

$25,000 cap per project

Located in census tract that

meets Targeted Area

Residence levels under IRC

143(j) (70% of population is at

or below 80% of SMI)

Proposed legislative changes:

30% of QREs

Cap increased to $50,000

TRA increased to at or

below 90% of SMI

Refundable to taxpayers

earning less than $100K

FAQs about HRTCs

Can individual taxpayers

claim HRTCs?

Are personal residences

eligible for HRTCs?

Are expansions eligible for

HRTCs?

Can I start the HRTC

eligibility process afterplacement in service?

Is developer fee a QRE?

Façade Easement Donations

IRC 170(h) – Qualified Conservation Easement

Contribution of a qualified real property interest (eg, easement)

To a qualified organization (eg, 501c3 organization)

Exclusively for conservation purposes (eg, preserving CHS)

In perpetuity

Donor generally can claim a charitable deduction in the amount of the FMV of the easement, up to 30% of donor’s AGI (excess may be

carried forward for 5 years)

CHS must be accessible to the public

Easement agreements typically include restrictions on demolition

and major alterations without donee approval

Some Other Incentives

Low income housing tax credits – IRC 42

New markets tax credits – IRC 45D

Brownfield redevelopment tax credits – Article 27 of NY

ECL

Renewal Communities

Empire Zones

Industrial Development Agencies

Environmental protection fund

NYSERDA

HOME and CDBG funds

Charitable foundations (subject to certain restrictions on

the use of grants)

Some (Simple) NumbersAssumptions:

Building acquisition: $250,000

Non-QREs: $500,000

QREs: $2,250,000

Price per HRTC = $.90 – federal HRTCs

= $.65 – state HRTCs

_____________________________________________

$2,250,000 QREs

x 20% federal HRTC %

$450,000 total federal HRTCs

x 99.99% investor’s interest

$ 449,955

x $.90 price per dollar of HRTC

$ 404,959 equity from federal HRTCs

_____________________________________________

$2,250,000 QREs

x 10% NYS HRTC %*

$225,000 total NYS HRTCs

x 99.99% investor’s interest

$ 224,978

x $.65 price per dollar of HRTCs

$ 146,236 equity from NYS HRTCs

$404,959 federal HRTC equity

+ $146,236 NYS HRTC equity

$551,195 TOTAL HRTC EQUITY

_____________________________________________

$3,000,000 total development cost

($551,195) total HRTC equity

($198,805) developer equity/deferred developer fee

$2,250,000 mortgage amount (based on 75% LTV)

* Assumes passage of NYS Assembly bill A-7935

A (Simple) Transaction Structure

Nominal .01% Credits, 99.99% Credits,

Equity Investment Profits & Profits & $$ Equity

Losses Losses

Developer Fee Rent

Mortgage(s) Loan(s)

Operating Partnership

General Partner Limited Partner

(Tax Credit Investor)

Developer Tenant Group Lender(s)

A (Not So Simple) Transaction Structure

90% Credits*, Nominal 99.99% Credits,

Profits, Losses Equity .01% Credits, Nominal Profits, Losses

Profits, Losses Equity

Equity $$

10% Losses, Profits,

10% Residual, Credit Pass Through

Master Lease Rent

Equity $$

Mortgage(s) Loan(s) Sublease(s) Rent

*Other than HRTCs

Limited Partner

(Tax Credit Investor)

General Partner

(Project Sponsor)

Real Estate

Partnership

(Master Lessor)

Operating Partnership

(Master Lessee and

10% Limited Partner)

Lender(s) Tenant(s)

Jason Yots is a partner in Preservation Studios, a

historic preservation consulting firm. He also is the

founder of Yots Law Firm P.C., a law firm concentrating

in the areas of historic preservation, community and

economic development and affordable housing. Jason

lives in Buffalo with his wife, Becky, and his sons, Jake

and George.

Questions – 716-440-0521 or [email protected]

mailto:[email protected]

ADAPTIVE REUSE AND HISTORIC PRESERVATION IN UPSTATE NEW YORK.pdfProfitable Preservation - NYSAFAH 092308

ADAPTIVE REUSE AND HISTORIC PRESERVATION IN …Office buildings Hotels Warehouses Two tiers of tax...

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