Breathing fresh life into the husk of an old building requires a grand, revitalizing vision—a belief that what's old can be reinvented into something new again.

But developers say that trying to find the capital for a historic rehab can make you want to tear your hair out. Banks are only now stepping back into the rehab space, while the broader bridge-debt market still has a ways to go. And finding equity for a smaller deal, whether historic or not, is always a challenge.

Yet, one of the most powerful financing tools for historic rehabs in today's environment— Historic Tax Credits (HTCs)—is an often overlooked, underutilized resource.

Many smaller developers get spooked by the level of compliance that HTCs require.

That's a shame, because there's really nothing to be afraid of. And for the private entrepreneur, HTCs can level the playing field with larger, more well-heeled competitors.

“HTCs are a great way for smaller developers to get into larger urban development," says Richard Hosey, senior vice president and senior originator for Tax Credit Equity Investments at Bank of America Merrill Lynch, one of the nation's largest HTC investors. “Startups and smaller developers are able to access a significant amount of equity, where otherwise they wouldn't be able to draw large pools of private equity out on the market."

Developers that combine state and federal HTCs can score as much as 45 percent of their eligible rehab costs in credits. So, a $5 million historic rehab can net $2.25 million in HTCs through the programs. This infusion not only offsets the higher cost of rehabbing a historic building but also becomes a competitive advantage.

Any chance to delever pays dividends down the road. So developers using HTCs often break even at a lower occupancy rate, or offer lower rents, compared with a higherleveraged new construction deal. “The whole reason for using the HTC is to reduce the amount of debt; therefore, you can in theory reduce the amount of rent,” says Lee Harris, president of Overland Park, Kan.–based Cohen-Esrey Real Estate Services, which has developed or invested in 20 HTC deals. “Or if you don't need to do that, then all you're doing is building more of a bottom line by using the credit and having less debt."

For developers unfamiliar with HTCs, the process can seem daunting and timeintensive, with experts estimating that a typical HTC deal can take anywhere from 15 to 20 months. As such, Apartment Finance Today has developed this five-step primer to guide you through the phases of an HTC project.

STEP 1 - Understand What's Available

There are two types of federal HTCs: the 20 percent credit and the very rarely used 10 percent credit. Any building on the National Register of Historic Places, or one that contributes to a historic district, is eligible for the 20 percent credit. Meanwhile, any building constructed before 1936, but that lacks historic significance, is still eligible for the 10 percent federal credit.

There are also 33 states that offer their own historic tax credits, with four others now mulling legislation to create a program. (See “Historic Tax Credits: A State-by-State Guide," on page 16, for more details.) Some state programs go up to 25 percent of eligible costs, though most max out at 20 percent.

“The credits really make a historic building a viable redevelopment opportunity,” says Glenn Solomon, president of Dallas-based developer Simbol Commercial. “The federal 20 percent credit offsets the complexity of developing a historic building, and if you can get state credits, you could have a real advantage."

Whether it's urban lofts in an abandoned warehouse, or turning a small-town 19thcentury hotel into seniors housing, the credits are scalable for small and large deals alike.

STEP 2 - Get Registered

The next task is to get your building on the National Register of Historic Places. To do so, you'll want to hire a historic consultant or historic architect, who will research the property and describe its significance to your State Historic Preservation Office (SHPO), which will then recommend it to the National Park Service (NPS), which administers the Register.

(For more on how to find such an expert, see “Assembling Your Team,” on page 15.) The registration process could take a few months, but it's definitely worth it. On a $5 million rehab, a property not on the Register can only net $500,000, while one that's registered can get $1 million in federal credits.

One common misconception is that there's a high barrier of entry for getting a building on the Register. But it's not as though George Washington had to have slept there to qualify.

The three rules of thumb for qualification are that the building is more than 75 years old, retains its architectural integrity (would the original owner recognize it today?), and is significant nationally, statewide, or locally. And that significance can be subtle.

For instance, the Gold Dust Hotel in Fredonia, Kan., recently redeveloped by Cohen- Esrey, was listed due to its “local significance,” since it was built just as the small city was beginning to grow to 1,500 residents.

And the hotel's architectural significance lies in the fact that it was the first three-story hotel in town and is an example of 19th Century Italianate design. So if it's old and mostly intact, your historic consultant will no doubt find a few reasons it should be listed.

In fact, there are more than 1 million properties on the Register, and each year, about 30,000 more are added, either individually or as part of an overall historic district. “That's one part of the process that tends to go well," Solomon says. “The state and federal agencies seem to be very open to getting something registered."

STEP 3 - Determine Your QREs

Once the building is on the Register, you'll need to figure out your qualified rehabilitation expenditures (QREs), which you'll submit to the SHPO for approval. QREs cover most hard costs, including roofs, walls, floors, ceilings, fixtures, windows, doors, stairs, elevators, chimneys, and HVAC systems. Anything considered personal property—like furniture, appliances, and movable partitions—does not count. And most predevelopment work, such as land and building acquisition costs, landscaping, and parking lot and site work, are not considered QREs.

Or, you can think of it like this: “If you picked up the building and shook it, anything that didn't fall off can be considered eligible," jokes Hosey.

But the good news is, some soft costs can also qualify. The cost of hiring a historic consultant and architect does count toward your QREs, as do engineering fees and construction management costs. “Many people don't realize that construction-related soft costs are eligible for claiming credits on,” says Owen Gray, a tax credit specialist and partner at San Francisco– based accounting firm Novogradac & Co. “Your architect costs count, and your construction period interest counts, for example."

The size of your QRE tally will determine the size of your HTC allocation—in other words, 20 percent of that QRE figure will be what you get in federal HTCs. So it's important to work with a historic architect and historic consultant when estimating QREs, especially since there are some unintuitive quirks to the program. For instance, carpet that's glued down is considered a QRE, while carpet that's tacked to a mat isn't eligible.

STEP 4 - Abide by the Standards

During the rehab, developers need to adhere to the standards set out by the secretary of the Interior—and those standards can also seem unintuitive.

“A developer needs to understand that the NPS doesn't care about economics or energy efficiency—they care about historical signifi- cance,” Harris says. “Things that make perfect sense to you in terms of how you lay out a building, or certain things you want to remove that are out of place, may conflict with what the NPS considers [historically significant]."

For instance, Cohen-Esrey recently completed a renovation of an 1887 hotel where it wanted to put Sheetrock over the original brick walls and run some furring strips across for electrical. The NPS said no, the walls must be left alone. So the developer had to run a conduit down the brick wall to each of the surface-mounted electrical outlets.

In another recent HTC development of a 19th-century hotel, in Independence, Kan., by Cohen-Esrey, the original layout of the building included closets in a common area that stuck out like sore thumbs and served no purpose in the new layout. But the NPS said it didn't care if the closets weren't utilized— they're historically significant and have to stay.

The key is to make sure the first people on your team are the historic consultant and architect.

They can tell you from day one—even before putting the deal under contract—exactly what the SHPO and the NPS expect regarding the property's preservation requirements.

STEP 5 - Cross the Finish Line

Once you've completed your rehab, the SHPO will recommend to the NPS whether it should be certified. That process can be highly subjective. “We've seen situations where the SHPO has recommended certification and the Park Service had a different view,” Gray says.

HTCs require a five-year investment and compliance period. But after those five years, the owner is free to dispose of the asset. For many developers, this means operating the units as rentals for five years, then selling them as condos once the compliance period ends.

Simbol Commercial has done that. The developer rehabbed the former Fidelity National Bank and Trust Building, which stood vacant for more than a decade, in downtown Kansas City, Mo. The 35-story, mixed-use skyscraper includes 161 residential units and scored $18 million in HTC equity on a total project cost of $64 million. The development, which is now called 909 Walnut, came on line in 2005, and Simbol began selling units last year.

While the entire HTC process can be timeconsuming, the payoff justifies the effort. And thankfully, HTCs aren't the exclusive domain of mega urban rehabs—they're scalable and manageable, even for small developers.

“People aren't aware that there's a monetization opportunity here,” Harris says. “HTCs are a largely untapped point of discussion."


Find your equity investor and historic consultant early in the HTC process.

ONE MISTAKE HTC rookies make is to wait too long before hiring a historic consultant. Another mistake is waiting until it's too late—some even hold off until just before getting a certificate of occupancy— to find an equity investor.

To avoid last-minute scrambles and problems, seasoned HTC developers suggest doing the following to find your team.


Developers should identify equity sources as early as possible. You can strike an agreement with an investor well ahead of time, agreeing on a price range that will get adjusted based on the fluctuations in HTC pricing.

When the developer submits his rehab plans for approval by the SHPO and the NPS, that's a good time to line up an investor. “In our fund, we've turned a number of people away who had great projects but didn't realize they should've brought us in months earlier,” Cohen-Esrey's Harris says.

The two largest HTC investors are Sherwin-Williams and Chevron. For Sherwin-Williams, though, there's a caveat to its investment appetite—the company has a program where it will only buy the credits for projects that use its paint and carpet products.

And Chevron, the largest buyer of HTCs, prefers larger deals—at least $2 million in HTCs.

But there are several funds across the country that focus on smaller deals. Companies such as Foss and Co., Carlisle Tax Credit Advisors, Cohen-Esrey, and the National Trust Community Investment Corp. offer such historic tax credit funds for smaller deals.

State HTCs were generally trading in the mid– to upper–80 cents range per tax credit dollar, while federal credits were fetching a higher price, in the 90- to 94-cents range, in early June. The difference in price reflects the difference in available investors— every U.S. business can use a federal tax credit, but with state tax credits, you have to find an investor that has a liability in that state, a much smaller universe.


Also critical to your team is a historic preservation consultant.

The cost of hiring these advisers is more than offset by the credits themselves. “In terms of development costs, it's always worth it for any project of any size,” BoA Merrill Lynch's Hosey says. “You're always going to get more back in that 20 percent credit than you would pay for adding those specialists on."

Given the levels of regulatory compliance inherent in the HTC process, you'll have to hire this individual early on, especially if your project hasn't been registered as historic. As part of the application process, you have to show the SHPO and the NPS what the project looks like at the start of rehab, and describe in detail the plan of the rehab, and they'll determine if that fits into their scope. Yet, some developers start tearing things down a little too quickly, sometimes destroying a historically significant feature before application.

“You need to get a historic consultant and architect in there before you do any demolition,” tax credit specialist Gray says. “If you start doing demo, you're pretty much jeopardizing your ability to claim the credits."

Another rookie mistake is to overestimate or underestimate the amount of your eligible basis, but a historic consultant can also let you know from day one exactly what the SHPO and the NPS view as a qualified rehabilitation expenditure. Many SHPOs maintain lists of local consultants, and developers can always ask historic architects if they know of any good consultants.

“It's very important that a developer look closely at the number of projects completed by a historic consultant,” Harris says.

“They should call a couple of references, and they should ask to see a complete package prepared by a consultant encompassing parts one, two, and three."