Introduction to Adaptive Reuse & Historic Tax Credits

1. Introduction to Adaptive Reuse & Historic Tax Credits Al Shehadi National Trust Community Investment Corp. February 12, 2009

2. Harmony Mills Original Use: Harmony Mills Mill No.3, 190,000 sf 1870’s knitting mill

3. Harmony Mills Adaptive Reuse: 96 apartments, 152 parking spaces, storage, health club & leasing office

4. Harmony Mills • Development Cost: $18.2 million • Tax Credit Equity: $2.6 million

5. Harmony Mills

6. Professional Arts Building Original Use: 110,000 sf medical and professional office building

7. Professional Arts Building Adaptive Reuse: 96 apartments, 1,676 sf ground floor retail space & rental storage units

8. Professional Arts Building Development Cost: $26.1 million Tax Credit Equity: $4.52 million Separate State HTC Investment: $2.01 million

9. People’s Building Original Use: People’s Bank & Trust Co. 1918 Bank Office Building

10. People’s Building Adaptive Reuse: Community College branch Small business office space

11. People’s Building Development Cost: $3.7 million Tax Credit Equity: $1.33 million

12. Arbaugh Building Original Use: Arbaugh’s Department Store, 100,000 sf 1905 department store

13. Arbaugh Building Adaptive Reuse: 48 apartments, 17,000 sf office space & 51 parking spaces

14. Arbaugh Building Development Cost: $8.2 million Tax Credit Equity: $1.7 million

15. First Security Building Original Use: 1955 International Style office building

16. First Security Building Rehabilitation: 156,000 sf office and retail space

17. First Security Building Development Cost: $20.8 million Tax Credit Equity: $2.3 million

18. Dia: Beacon Original Use: 290,000 sf 1929 Nabisco Box Printing Factory

19. Dia: Beacon Adaptive Reuse: Dia: Beacon – largest contemporary art museum in the world

20. Dia: Beacon Development Cost: $34.3 million Tax Credit Equity: $6 million

21. Dia: Beacon

22. 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

23. 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

24. 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

25. 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

26. 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

27. Basic Eligibility: NPS (and SHPO) Rehabilitation Must be “Historic” • Must comply with the Secretary of the Interior’s Standards • Must respect historic fabric of the building • “Part II” and “Part III” approvals

28. Basic Eligibility: IRS • $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

29. 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

30. Qualified Rehabilitation Expenditures • 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

31. 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

32. 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

33. 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”

34. 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)

35. 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

36. Syndicating the Credit

37. 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

38. 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

39. 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

40. 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

41. Investor Due Diligence • Financial Projections • Development Team • Real Estate • National Park Service Approvals (Parts 1 & 2) • Tax Compliance • Legal & Closing

42. 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

43. Al Shehadi Acquisitions Manager National Trust Community Investment Corp. 27 Byram Shore Road Greenwich, CT 06830 (203) 531-5999 Al_shehadi@ntcicfunds.com