But is this just a tool for big city developers to turn larger profits?

No. Many projects involve rehabilitation of abandoned or underutilized buildings, and are critical towards revitalizing smaller, rural, and economically depressed communities. Based on data from NPS, 51% of HTC projects in 2018 were located in low- and moderate-income census tracks, and 75% were located in economically distressed areas. Over 40% of HTC projects in the last 15 years have been located in communities with populations of less than 25,000. Historic rehab also creates more jobs than new construction, with costs averaging 60% labor and 40% materials, compared to new construction which averages 40% labor and 60% materials. In addition to hiring local labor, historic rehabilitation materials are more likely to be purchased locally. As a result, approximately 75% of the economic benefits of these projects remain in these communities.

Ok, but is less tax revenue what is needed right now?

The HTC actually returns more to the Treasury than it costs. The Treasury receives $1.20‐1.25 in tax revenue for every dollar invested via HTCs. According to a National Park Service study, as of 2017, $25.2 billion in federal tax credits have generated more than $29.8 billion in federal tax revenue from HTC projects.

So how did we get here and what can be done?

The HTC was in severe danger of being eliminated in the Tax Cuts and Jobs Act of 2017, but was saved, though greatly weakened. In 2018, a bipartisan group of Senators put forth the Historic Tax Credit Growth and Opportunity Act in an attempt to strengthen the program, though it failed to gain traction. This Spring, the House included a strengthening of the credit in their Infrastructure Bill. This would increase the HTC to 30% from 2020-2024, but reduce it back to 20% from 2024 to 2027. It would have included a temporary extension to rehab period deadlines to ensure projects impacted by the pandemic do not fail to qualify, as well a permanent 30% HTC for smaller projects of $2.5 million or less in HTC qualified expenses (“QRE”). It would also reduce the threshold of investment necessary to qualify for credits (the “Substantial Rehab Test”), make the credit easier to use by non-profits, and other tax treatment changes making these investments more attractive.

The impact this would have on projects is more easily shown with an example.

Case Study: A Developer purchased a historic office building for $5M and Developer plans to convert the building into market-rate apartments. The Developer took out an acquisition loan to pay for 70% of acquisition cost, meaning they now have a $3,500,000 loan to repay or roll into construction financing. Together, hard and soft costs will total $4,500,000, with $4,000,000 being QRE. Having already put in $1,500,000 of equity and without additional cash, Developer now has a total funding need of $8,000,000 (and private equity is usually more expensive than debt). With the 20% HTC, factoring in expected HTC investor pricing and transaction costs, combined with the cash the Developer has left to put into the deal, the Developer may only net approximately $900,000 from HTCs, leaving a $7,100,000 loan. However, the Developer does not pass the HTC Substantial Rehab Test, which stipulates that QRE must exceed the Developer’s adjusted basis in the building. They cannot qualify for HTCs. Letting alone what their loan-to-value and debt-service-coverage ratios might be, at a need of $4-4.5M in debt in addition to the $3.5M of existing debt, Developer now has a very high Loan-to-Cost ratio which might make it difficult to borrow. Developer is stuck. With a 30% tax credit, and lower Substantial Rehab Threshold, Developer would now have a feasible project. These types of scenarios occur far too often, and effectively limit economic development in our communities.

BW&A would like to suggest the following revisions to the HTC to be included in any Stimulus Bill:

• Permanent 30% HTC for certified rehabs of all sizes.
• Return of the 10% HTC for non-certified rehabs of buildings placed in service before 1936.
• Reworking of the Disqualified-Lease restrictions which make it difficult for non-profits to rehab historic buildings
• Reducing the Substantial Rehab Test to 50% of a building’s basis instead of 100%
• Eliminating the HTC Basis Adjustment, bringing more value to HTCs
• Reinstate the ability to claim the HTC in a single year

We encourage all readers to contact your Representatives and Senators regardless of party to support the strengthening of the HTC, which will be invaluable towards turning vacant storefronts back into bustling downtowns as we work our way back from the impacts of Covid-19.

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IPH was founded in 1984 by the Capital Area Council of Churches as a non-denominational provider of emergency shelter for single adults, providing a continuum of services for homeless and at-risk individuals and families that promote life skills development and self-sufficiency for the past 35 years. In hoping to expand their services, NMTCs were an integral financing piece for IPH to secure in order to make this expansion a reality.

The New Markets Tax Credit program was established in 2000 to spur economic development in low-income communities throughout the USA. The program provides a tax credit of 39% for real estate projects, small business development, and a variety of other pursuits in low-income communities. Every year a division of the Treasury Department, called the CDFI Fund, awards various groups called Community Development Entities an allocation of these tax credits. CDEs facilitate and largely control the process of accessing NMTC funds, as they are competitively awarded a NMTC allocation from the CDFI Fund to invest in projects in low-income communities that best fit their mission. NMTC eligibility of a given project is based on the demographics of the census tract in which it is located. In order to qualify, the census tract must either have i) a poverty rate of at least 20% or ii) 80% or less of the area’s median family income. Unlike using HTCs, this process of attracting allocation from a CDE is competitive, and projects that demonstrate the most community impact are more likely to be awarded NMTC allocation.

Because of IPH’s incredible work with the homeless and near-homeless, their project drew significant interest from CDEs. BW&A worked with IPH to assimilate State Grants, Private Fundraising, Debt, Federal and State HTCs, and other sources with $10 Million of New Market Tax Credit allocation. In combination with a $5 Million Bridge Loan that BW&A secured for IPH, BW&A monetized over $5 Million of tax credit equity for the renovation, representing 40% of the project’s $12.5 Million development budget. The substantial infusion of cash from NMTCs & HTCs allowed IPH to add additional elements to the construction project such that the renovated facility would better serve their patrons. The tax credit equity also allowed IPH to setup substantial operating reserves to ensure the organization is financially stable for years into the future.

“Working with the team at Brian Wishneff & Associates allowed us the opportunity to accomplish the largest project in IPH’s history. Their specialized knowledge, attention to detail and extreme work ethic guided IPH to be successful in obtaining tax credits for programs that are making life changing differences for individuals and families experiencing and facing homelessness. Historic and New Markets Tax Credit financing were critical in allowing us to complete the project and expand the benefits we provide for the vulnerable people we serve.”

Janine Robitaille, Executive Director of IPH

These historic school and convent buildings now house IPH’s Community Connections Center and Health and Wellness Center. The new Community Connections Center has allowed IPH to double the number of community members it serves, providing case management, meals, permanent supportive housing daily. The expanded Health and Wellness Center now offers expanded services, multiple exam rooms, community training space, and improved accessibility, over a total of 3,000 visits with health and wellness staff annually.

BW&A is currently representing its clients in attracting allocation from CDEs. To learn more about how BW&A can help, please reach out to david@wishneff.com.

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It is an extremely common misconception that non-profit organizations and non-taxable entities like municipalities, quasi-government entities like EDAs, (etc.), cannot benefit from incentives like tax credits as for-profit developments can. While non-profits cannot recognize the tax credits themselves, they can be monetized with third party investors who can. In our previous post we discussed how powerful a financing resource Federal Historic Tax Credits can be, and BW&A has specialized for over two decades in guiding not-for-profit project sponsors through the process to qualify for, earn, and monetize these tax credits, in order to maximize both economic net benefit and efficiency from the process.

The rehabilitation of the historic Carnegie Library in Union, South Carolina is a fantastic story of such success. Rieta Drinkwine, Executive Director of the Union County Library System, which recently renovated its historic Carnegie Library (the first library sponsored by businessman and philanthropist Andrew Carnegie in the state of South Carolina back in 1905), had this to say about the benefit of using tax credit financing:

 “The Union County Carnegie Library would not be the same without the use of historic tax credits, and some of the greatest aspects of our 2018 renovation and restoration project are the result of the tax credit funding. Using tax credits allowed our organization to increase accessibility, making the library the most accessible public facility in the county. Additionally, they enabled us to do a beautiful restoration of the original historic structure, which received a South Carolina Preservation Honor Award in 2019. Most significantly, tax credits facilitated the design of a vanguard partnership library facility that is now a community hub and the first facility of its kind in South Carolina. We are now able to have an ongoing, tremendous positive impact on our community with the renovated facility and expanded services and have experienced a 50% increase in facility usage.”

Rieta Drinkwine, Executive Director of the Union County Library

For this $3M project, a small project for tax credit standards, BW&A was able to help the Library recoup over 32% of its development budget from tax credit investor equity. This successful renovation has resulted in a completely modernized facility, providing new space in the Library dedicated towards honoring Union’s history, as well as new meeting spaces, study rooms, and partnership spaces for collaborating, allowing the library to further its role in representing a truly integral community hub. The lower level of the building now incorporates expanded children’s and teen’s spaces, featuring an early learning resource center in collaboration with Union County First Steps (a statewide public-private partnership to increase school readiness outcomes for children). The Library also provides office space for SC Works, and United Way of the Piedmont, a nonprofit, volunteer-driven organization dedicated to improving the quality of life for people in the surrounding counties.

For information about tax credits and how BW&A can help, please contact us today. 

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At Brian Wishneff & Associates (BW&A), our passion is to promote the revitalization of communities, and to help organizations and real estate developers across the country looking to do the same, through the rehabilitation of America’s historic buildings. There is an incredible wealth of American history lying within these historic structures. While many of these buildings remain blighted and vacant today, extremely significant economic opportunity, both private and public, is very easily unlocked through the use of one of the oldest and most successful financing incentives available for real estate development projects, and indispensable to organizations looking to renovate or rehabilitate a historic structure: the Federal Historic Tax Credit.

The Federal Historic Tax Credit (“FHTC”) is the nation’s largest federal incentive promoting urban and rural revitalization through private and public investment in reusing historic buildings. Since the HTC program’s inception in 1977, more than 44,000 rehabilitation projects have been undertaken representing over $96 billion of investment in rehabilitation, approximately 600,000 new and rehabilitated housing units have been produced, including more than 166,000 low- and moderate-income housing units, and over 2.5 Million jobs have been created, as of 2018.

The program provides a tax credit of 20% of qualified expenditures, which can be monetized into cash from a third-party investor, who contributes equity to the project. Depending on a number of factors, Federal Historic Tax Credits (“FHTCs”), can cover between 10-15% of the construction budget of a qualifying project. 36 states also have companion programs of some kind that “piggy-back” off of the Federal program. Projects can usually take advantage of both State and Federal programs, which together can often represent up to 35% of your development budget. The best part about these programs is that there is no restriction on how this money can be used.

BW&A is a full-service real estate consulting and syndication firm that specializes in the finance and operations of tax credit enhanced development projects. Since 1995, we have worked on over 200 Historic Tax Credit projects across 36 states and the District of Columbia, serving a myriad of clients ranging from for-profit developers, to non-profit organizations, municipalities, IDAs, universities, business owners, housing agencies, and many other entities in a variety of industry segments looking to take advantage of tax credits. We are also a developer of historic buildings ourselves. Focusing most of our work on high-impact incentive programs such as Historic, New Market, Low-Income and Renewable Energy Tax Credits, BW&A has been able to secure over $600 million of equity for our clients since our inception. Our next post will highlight how we specialize in helping even small not-for-profit projects to take advantage of tax credits.

For information about tax credits and how BW&A can help, please contact us today.

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Brian Wishneff & Associates (BW&A) is a full-service real estate and tax credit consulting firm specializing in the use of federal and state historic tax credits, New Markets tax credits, renewable energy investment tax credits, and Opportunity Zones.  BW&A has served a myriad of clients over the last 20 years ranging from non-profit organizations to municipalities, IDAs, universities, business owners, housing agencies, for-profit developers and many other entities in a variety of industry segments. With a focus on high-impact incentive programs, BW&A has been able to secure over $500 million of equity for clients since its inception.  For more information about BW&A please go to wishneff.com or contact Erik Wishneff erik@wishneff.com.

Release Date: January 24, 2019

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Texas Trost Society to Host Tax Credit Session on Downtown Historic Buildings

Property owners, investors and community members are invited to an informational session regarding tax credits and the restoration of buildings in Downtown El Paso.

The session is set for Wednesday, in the ground-level Foundation Room, of the El Paso Community Foundation (333 N. Oregon Street) right next to San Jacinto Plaza from 5:30-6:30pm.

Adam Markwood, of Brian Wishneff & Associates, will review the mechanics of qualifying for, monetizing, and maximizing the economic benefits of federal and state historic tax incentives.

Markwood will outline the application process, necessary legal and financial structuring, and current trends across the state.  Admission to the event is free admission and light refreshments will be provided.

According to officials, federal and state tax credits can pay for up to 45% of the costs of renovating historic buildings in downtown El Paso.

TTS officials say. “Once the County architectural survey and National Register nomination processes are completed (by early 2018), these tax credits will be available for restoring somwhere between 500 and 1,000 buildings throughout downtown, Segundo Barrio, and Chihuahuita.”

They add, “This is an unprecedented business opportunity and has been transformative in downtowns throughout Texas.”

For more information, please contact Malissa Arras of the Texas Trost Society at malissa@texastrost.org

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If you are pursuing monetization of your tax credits for projects in Alabama or across the country, do not hesitate to contact BW&A today to discuss opportunities.

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To learn more about BW&A’s investment in historic tax credits, please contact us today.

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