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

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

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

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

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

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

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

Original Use: Peoples Bank & Trust Co Bank Office Building Peoples Building

Adaptive Reuse: Community College branch Small business office space Peoples Building

Development Cost: $3.7 million Tax Credit Equity: $1.33 million Peoples Building

Original Use: Arbaughs Department Store, 100,000 sf 1905 department store Arbaugh Building

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

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

Original Use: 1955 International Style office building First Security Building

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

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

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

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

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

Federal Historic Tax Credit Established in ,800 properties rehabilitated $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

Federal Historic Tax Credit Fiscal Year ,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

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

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 Interiors 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

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

Must comply with the Secretary of the Interiors Standards Must respect historic fabric of the building Part II and Part III approvals Rehabilitation Must be Historic Basic Eligibility: NPS (and SHPO)

$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 Basic Eligibility: IRS

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 buildings capital account

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 Qualified Rehabilitation Expenditures

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

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

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

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)

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

Syndicating the Credit

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

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

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

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

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

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

Al Shehadi Acquisitions Manager National Trust Community Investment Corp. 27 Byram Shore Road Greenwich, CT (203)