Commissioned by the Miami Downtown Development Authority Authored by Goldman Properties Company

Transcription

1 LEVERAGING HISTORIC PRESERVATION INCENTIVES IN THE DEVELOPMENT OF HISTORICALLY SIGNIFICANT REAL ESTATE IN MIAMI Commissioned by the Authored by Goldman Properties Company AUGUST

2 The (DDA) is a leading public agency in the efforts to care for and help guide the improvement of Miami s Downtown neighborhood s market and livability characteristics. The development through many of its incentive programs and campaigns. The DDA s efforts have not only ensured Downtown building and business owners through historic preservation processes. The DDA has leveraged its historic preservation efforts to create a more informed and actively involved business community and has found ways to target easy-to-achieve aesthetic goals that provide immediate boosts to the historic character of the Downtown. Goldman Properties Company of older historic properties and neighborhoods, their basic market characteristics, and how they can be partnering with local governments, leveraging development incentives, and serving as a private sector leader in these efforts. Most recently Goldman Properties has capitalized on the creation of market success through the reuse of older properties in the Wynwood neighborhood of Miami. Although many of these properties are not preserved for their historic value, they are representative of the successful market impact that the neighborhood identity. Goldman Properties and the Miami DDA worked together to create this toolkit so that many Downtown building and property owners could learn how to make Downtown Miami a neighborhood with a unique historic character and a strong market foundation. 1

3 Table of Contents 1 EXECUTIVE SUMMARY 04 / Estate Development in Downtown Miami 05 / The Toolkit s Structure 06 / Conclusions 2 INCENTIVES 10 / Federal Historic Rehabilitation Tax Credits 11 / Introduction to Federal Historic Rehab 13 / 17 / 18 / National Trust for Historic 19/ New Markets Tax Credits 21 / Low Income Housing Tax Credits 23 / Other Tax Based Historic Preservation Incentives 25 / Deductions 26 / Incentives 27 / Refunds 28 / 30 / Historic Preservation Grant Programs 32 / National Trust for Historic Preservation Grants 33 / City of Miami Community Development Block Grants (CDBG) 34 / Environmental Protection Agency 35 / State of Florida Historic Preservation Grants 36 / Miami Downtown Development Authority s Façade Improvement Grant Program 37 / Transfer of Development Rights 3 CASE STUDIES 42 / Introduction to Historic Preservation Development Case Studies 45 / The Royalton 53 / 101 SE 1st Street Building 63 / The Shoreland Arcade 4 INDEXES 75 / Historic Preservation Development Incentives Project Applicability Index 77 / Historic Preservation Development Incentives Comparison Matrix 2

4 EXECUTIVE SUMMARY 3

5 Real Estate Development in Downtown Miami Downtown Miami is a rejuvenating district within the rapidly growing and evolving City of Miami. It is an irreplaceable character and identity. A lot of Downtown s recent growth and success has come area. These older buildings are a vital component of Downtown s character and identity. Although Downtown district s real estate development boom, they present an important opportunity for growing Downtown s character and identity and also contributing to its economic growth. in strengthening the value of Downtown s real estate market by garnering premium rents. The historic character of older buildings brings an authentic appeal to Downtown s architectural repertoire, a character that helps The character that historic buildings bring to Downtown balance out the modernity that its new glass towers have instilled, informing pedestrians and residents that the area is a stable neighborhood with a history serving as its foundation. This sense of stability and history provide a basis for allowing these buildings to as a result of the unique spaces, architecture, buildings provide their users. However, the cost of preserving these versus rehabbing them to a vanilla shell or razing and redeveloping their land with newer, modern structures, is an important variable to take into consideration when deciding what to do with this historic building stock. within an owner s portfolio, and to understand partnerships are available to support a building owner in the process of preserving a structure as an income-generating asset. Also important is owner is willing to take in regards to redeveloping To assist property owners in deciding how property this toolkit provides an inventory of historic preservation development incentives. To highlight the actual real estate development process, and how these incentives play into a building s development, this toolkit also provides a series of case studies focusing on actual Downtown Miami properties. We hope that this information will serve property owners well in deciding how to make the best use of their historic properties. 4

6 The Toolkit s The toolkit is structured to provide users with an understanding of the basics of the many incentives available to developers of Downtown Miami historic properties. Information about these these projects, and an overview of the incentive s rules and restrictions. 5 Incentives Catalogue The detailed incentives catalogue highlights the real estate development project. An overview page outlines an incentive summary, basic characteristics, a Pros and Cons or Usefulness incentive and a score of 3 is indicative of an incentive that, all things considered, has considerable rules and restrictions relative to its applicability and or funding that it brings to a project. The overview page also includes in other cities around the country. Following the incentive. Case Studies different types of incentives can play a role in hypothetical real estate developments. Each real estate development project is a unique transaction, and thus each developer must assess his or her development plans on a project-by-project basis to determine whether an incentive can bring added value to his or However, these three case studies provide a Indexes The Historic Preservation Development Incentives Project Applicability Index provides a quick guide to search for which incentives involving different building typologies based on size, ownership, project costs, building use, historic status, and the purpose for which incentive funds are needed. The Historic Preservation Development Incentives Comparison Matrix is a summary guide for navigating this toolkit s compendium of information. It provides an overview of all of the incentives discussed within the toolkit.

7 This toolkit serves to provide a guide with which to navigate the world of historic preservation historic property development project, as that is the job of each building s uniquely talented owner and developer. The strength of this guide is its ability to present property owners and real estate developers with a one-stop shop for demystifying the historic property real estate development hypothetically be generated by redeveloping and reusing some of Downtown Miami s most valuable historic property assets. The most important take-away that a property owner, historic preservation advocate, or public sector representative should be able to get from working with and reading through this toolkit is an understanding of what historic preservation building be located within a historic district, a common misperception, and that they do not even require that a building necessarily have toolkit should serve to bring together the larger Downtown Miami community into a conversation about what role historic preservation incentives can play in the development future of Downtown, allowing for conversations about how the incentives can be improved and what other incentives or support would be necessary to allow for the successful redevelopment of Downtown Miami s historic properties. Through the toolkit s creation, the analysis of the pros and cons associated with each inventive helped highlight the 6 most applicable and effective incentives for preservation and redevelopment of Downtown Miami s historic properties. These 6 most useful incentives, all with a Usefulness Ratio of 1, present the most ways to earn development equity for project. Downtown Miami property owners should focus on these 6 incentives for their historic properties Program National Trust Small Deal Fund Miami DDA Property Improvement Grant Program The hypothetical case studies for 101 SE 1ST Street and The Shoreland Arcade buildings show that after a standard 10-year operations analysis, the redevelopment scenario involving preserving the building and leveraging historic competitive in comparison with the alternative of redeveloping the property for its highest and 6

8 best use in 10 years. Both buildings have higher Internal Rates of Return, and comparable or higher Net Present Values, when their most optimistic historic preservation development scenarios are compared with the option of holding and redeveloping the properties in 10 result of both the lower development cost basis achieved through the use of incentive funds and of the higher premium rents that can be rapidly The case studies in the toolkit help demystify in an actual private sector-led redevelopment of a historic property, along with sparking conversation about how the public sector can redevelopment. A lot of attention was focused on ensuring that the development and operational cost and revenue assumptions that were input into each project were based on real industry standards and comparabales. However, the hypothetical nature of the pro-forma analysis of the different analyses can be scrutinized, and might be found to be unrealistic to certain developers. Nevertheless, the case studies provide settings for an effective discussion on what are the strengths and shortcomings of the private and public sector can work together to enhance these incentives and their subsidies. Thus, this toolkit should encourage redevelopment deals, and more focused advocacy efforts on how to support the historic preservation efforts in Downtown Miami. As the public sector aims to preserve and enhance Downtown s quality of life and character, and redevelopment opportunities, the knowledge shared through this toolkit will help demystify the role that these incentives and subsidies can play in supporting historic buildings ability to enhance Downtown s character and real estate market strength.the Historic Preservation Development guide for navigating this toolkit s compendium of information. It provides an overview of all of the incentives discussed within the toolkit. 7

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10 INCENTIVES 9

11 Federal Historic Rehabilitation Tax Credits Incentive Summary The federally administered historic rehab tax credit is applied to projects that have official national or local historic designation or were constructed prior to The restrictions on what kind of redevelopment work can be done to a building are stringent. The tax credit is awarded based on the value of the rehab development work done to a building, and can either be used by the individual owner or sold for an equity investment in the project. Basic Characteristic & Incentives 20% Historic Rehab Tax Credit (20% HTC), usually meant for projects that cost at least $2.5 million to develop 10% Historic Rehab Tax Credit (10% HTC), must be used on a building that is from 1936 or older Historic Rehab Tax Credit Investment Funds: Small Deal Fund; Banc of America Historic Tax Credit Fund; National Trust Community Investment Fund Most require that a property be non-residential, including rental apartments and condominiums Administered by a combination of the IRS, National Park Service, and State of Florida s Division of Historical Resources Pros And Cons Ratio / Usefulness Ratio The federally administered historic rehab tax credit has different usefulness ratios, depending on its format. 20% Historic Rehab Tax Credit Score: 2 Although it is highly restrictive as to which buildings it can be applied to and requires significant effort to apply for them, it can bring a lot of investment equity to a development project. 10% Historic Rehab Tax Credit Score: 3 Within Downtown Miami s building stock context, its applicability restrictions are too restrictive in comparison to the limited amount of financial equity it can bring to a deal. National Trust Small Deal Fund Score: 1 Its unique applicability to Downtown Miami s smaller historic buildings, allows this format of the 20% HTC to be more useful. Banc of America Historic Tax Credit Fund Score: 1 This fund scores highly because it further augment the pros of the 20% HTC program by coupling funding for projects that can qualify for HTC funds and for New Markets Tax Credit funds. National Trust Community Investment Fund Score: 2 Same limitations as the general 20% HTC, with the one added benefit being that the Fund as an organization can provide support to a developer applying for the credits. Case Study / Example Although South Florida as a whole does not have a large list of historic rehab tax credit projects, Miami Beach has a lot of examples of HTC-funded projects. Most of the Miami Beach examples are hotel properties such as the Clinton Hotel, the Victor Hotel, and the Surfcomer Hotel. Within Downtown Miami, the Royalton Hotel was converted into a non-profit managed rental housing property using the 20% HTC credits, and this case will be covered in more depth in the Case Study sections of this toolkit. There are many examples of Downtown properties that have successfully applied and qualified for the tax credits, but many of them have not executed the final step of drawing the tax credits. 10

12 Incentives successful historic preservation development project. The federal program is comprised of the 20% tion of non-historic, non-residential buildings built before The Internal Revenue Service (IRS), on behalf of the US Department of the Treasury, serves publishes regulations governing them; The National Park Service (NPS), on behalf of the US Department of the Interior, reviews most of the application materials, issues all necessary historic designation decisions and bilitation work to ensure that they comply with preservation standards. department serves a role, and in Florida the Division of Historical Resources serves as the intermediary point of contact for property owners throughout the application process, providing them with all necessary information from the both of the regulatory agencies mentioned above, and the department assists by making recommendations to applicants on how to structure a successful application. The information cataloged in the following section serves as a basic summary of the two programs. The two programs share many of the same processes, but also differ in some of their requirements. The 20% Historic Rehab Tax Credit (HTC) the more popular funding program and deliv- and standards. program but is structured around many of the lighted in 10% Historic Rehab Tax Credit (HTC) section below. Finally, there are a series of private-sector - The leading entities and their programs are described in National Trust for Historic Preservation Tax Credit Funds. 11

13 Qualifying A Building Rehab Project For 20% And 10% Historic Rehab Tax Credits Test Qualifying Conditions for 20% Credit Approval for 20% Credit Denial for 20% Credit Approval for 10% Credit Test Format Building Must Have Historic Designation Historically significant property per National Park Service standards National Register of Historic Places; local historic designation; contributing property for a national or local historic district Non-contributing property within a national or local historic district Property must be built in 1936 or older and cannot be on the national or local register of historic places nor can it be a contributing property for a national or local historic district Part 1 of Historic Rehab Tax Credit Application process; Part 1 is not required for 10% credit unless building is within a historic district and needs to be proclaimed noncontributing Building Must Be an Income producing property Must qualify as incomeproducing/ depreciable property per Internal Revenue Service standards IRS determination that property is income producing, even if owned or occupied by a non-profit entity; property must be considered a depreciable asset Residential condominium buildings; non-profit or government owned building that does not have a lease-hold forprofit tenant; building with 50% or more of its use run by a non-profit or government entity IRS determination that property is income producing, even if owned or occupied by a non-profit entity; property cannot be rental or condominium residential IRS determination throughout application process Rehab Work Must be Deemed a Substantial Rehab Cost of rehab expenditures in a 24 month period must be greater than the adjusted basis of the building Cost of rehab work performed within application-defined 24 month period (60 month period can be requested) is greater than adjusted basis of building (cost of building minus value of land, value of previously completed improvements, and depreciated value) Cost of rehab is less than the adjusted basis of the building or is less than $5,000 Cost of rehab work performed within application-defined 24 month period (60 month period can be requested) is greater than adjusted basis of building (cost of building minus value of land, value of previously completed improvements, and depreciated value) Form 3468 must be filed the year a building is placed into service Rehab Work Must Comply with Federal Rehab Standards Rehab work must comply with NPS standards for historic rehab projects NPS review of the planned and completed work is Accepted as compliant NPS review of the planned and completed work is Denied as noncompliant 75% of exterior walls must remain intact; 50% of external walls must remain as external; 75% of interior framework must remain intact Part 2 and Part 3 of Historic Rehab Tax Credit Application process for the 20% credit; Wall test for the 10% credit 12

14 Incentives syndication process. with the syndication process are time-intensive and can require a series of administrative costs. Thus, it is a general rule of thumb that a building should be able to qualify for an allotment of at least $1 million in HTC credits for the costs of the application process and rehab compliance funds for investment in the development project. Thus, rehab costs need to be high up in the credits, which inevitably begins to limit the size of project that can be done with the 20% HTCs. Must be considered to be historic per the National Park the National Register of Historic Places or as a locally designated historic site, or by being building within a national or locally designated historic district; Building s use must be income-producing for at least 5 years after the rehab is completed and the building itself must be depreciable; credits cannot be used for residential ownership/ condo buildings. There are some additional rules that limit how organization can own the building, which in general is that they cannot; Rehab work must comply with the strict NPS standards for historic rehabs, which focus on ensuring that buildings are restored to The cost of preservation-related rehab work completed over the 2 year reporting period must be greater than the adjusted basis of the building at the time that rehab work is begun. The adjusted basis is essentially the cost of the building when purchased minus the value of the land, plus previously made building improvements, minus the depreciated value of the building. 13

15 that will use the credits and the developer that will use the equity investment derived from the spent on rehabbing the building s structure, and thus do not include costs related to the price of the land, improvements to the areas surrounding the buildings, and new construction work beyond the original building s structure, and any of determined by calculating 20% of the QRE value. fee and administrative costs associated with acquisition process; cost of land and building; appliances; cabinets; carpeting (if tacked in place and not glued); decks (not part of original building); demolition costs (removal of a building on property site); fencing; feasibility with moving building (if part of acquisition); new as any amount properly charged to a capital account for property for which depreciation is allowable under section 168 Thus, a well focused auditing process must be followed to The QRE value can only consist of those hard and soft costs associated with work done within the applicant in their application. The option to determine QREs during a 60-month rehab period is available if pre-rehab plans document this intentional phasing timeline for the rehab project. coverings, such as paneling or tiles; windows and doors; components of central air conditioning or stairs; escalators, elevators, sprinkler systems, operation or maintenance of the building. 14

16 construction costs or enlargement costs (increase in total volume); outdoor lighting remote from building; parking lot; paving; planters; porches and porticos (not part of original building); retaining walls; sidewalks; signage; storm sewer construction costs; window treatments. Understanding the Value of Tax Credits credit allocated towards an individual or entity s each. This valuation, however, is usually only obtained in real estate development projects in which the developer/ owner is an individual themselves. These instances are not typical in large scale development scenarios, as the ownership structure of larger buildings is usually structures. Furthermore, newer IRS regulations make it challenging for individual owners to apply derived from a building-ownership arrangement in which a passive investor owns upwards of from the developer that they were awarded to. The credits are purchased at a rate based on market parameters, which usually generate investor becomes a member within an ownership project s inherent investment risk (a requirement to meet the IRS standards for credit eligibility), but sets them up as a passive partner. The investor member has access to the percentage of their ownership, usually 99% or more. The investor member provides the developer with an equity investment based on paying a price for each credit that they have ownership rights to. These prices are determined by market forces, but Processes The processes involved in qualifying for and considered to be one of the shortfalls to the describe these processes, but there is a lot that is determined on a case by case basis. The following The application process is comprised of three credits are not allocated until this whole process is completed. NPS determination of whether the property is Determination that all rehab work complies with the NPS Standards for Rehabilitation, and a to simplify the process of ensuring that rehab work and compliance with its approved rehab plan is conducted. Upon successful determination of completion, the NPS alerts the IRS of the project s 15

17 A multi-partied ownership structure must be created if it is determined that the developer/ owner will need a project investor to obtain the developer does not have a use for them. The IRS guidelines for how these Historic Rehab be created allow for multiple structures to be used, but they assert two overall guidelines. The investor s ownership role in the project must put them in an At-Risk position and the investor must have true ownership intentions in the project. Both of these conditions must be in place for at least 5 years. Any indication of either of these not being present in the deal structure can put the successful allocation of credits at risk of being recaptured by the IRS. The two main types of ownership structures that can be coordinated are either a multiple member majority member, or a single-owner structure in which a master tenant lease is used to pass the position. In both structures, provisions are put ownership rights back to the developer/owner. owner must be carefully crafted with legal guidance to ensure that they not reduce the IRS assurance that the investor is fully invested in the will invest in. The investor-owner, whether it be an individual, a corporation, a bank, or a fund, usually pays their equity investment into the project immediately upon allocation of the credits by the IRS, but the credits are disseminated to the investor in 5 parts across the 5 years of the compliance period. of the property, since the building cannot building is located within a historic district, but is non-contributing, then this does need to be documented by submitting Part 1 of the application to have the NPS declare it as non- buildings under the 10% HTC are different, and are based on preserving at least 50% of least 75% of the building s internal framework must remain in place. when a completed building is placed into service. The actual syndication process is usually handled by entities within banks that will use them for their own corporation or will sell them, or by funds that operate with the sole purpose of purchasing Historic Preservation has many of these funds, and each has its own criteria for what deals they 16

18 Incentives built before 1936 that are being rehabilitated for non-residential use. The regulations for the use of the of the property, since the building cannot building is located within a historic district, but is non-contributing, then this does need to be documented by submitting Part 1 of the application to have the NPS declare it as non- The rules for the rehabilitation guidelines for buildings under the 10% HTC are different, and are based on preserving at least 50% be preserved overall, whether as internal or internal framework must remain in place. 17

19 Incentives The Banc of America Fund is a New Markets government. This fund is focused solely on funded projects in which Bank of America is the leverage the two credits with each other. Bank of America sources this investment through the Banc of America Historic Ventures, which the National Trust for Historic Preservation s for- Investment Corporation, manages in conjunction with Banc of America Community Development Corporation. from this fund combines with Federal Historic rehab development costs are $2.5 to $25 million, credits. Equity awards ranging from $500,000 to $5 million are available. Hotels are not an allowed use. The National Trust for Historic Preservation s NTCIC serves as a one-stop shop for all Historic syndication, and focuses on also leveraging other The NTCI Fund can provide equity investments as small as $1 million, through a combination of HTC and NMTC funds, which assumes at least $5 million in historic preservation development costs. Consists of a pure HTC fund that for projects yielding between $200,000 and $1.5 million in in total development costs. The fund has many The National Trust Loan Fund is a CDFI that is currently not initiating any new transactions at the time of the production of this report. Its loans can serve multiple stages of development process. Its terms are usually $500,000; 5 years; 30 year amortization; 80% LTV; 1.10 DSCR; 2% origination fee. 18

20 New Markets Tax Credits Incentive Summary The federally administered New Markets Tax Credit program is an incentive for those investments endeavors focused on neighborhoods whose economies are in transition, otherwise known as new markets. The credit is earned through a competitive application process and is based on the amount of investment put into a project. The tax credit is awarded to a financial institution, which in turn sells it for equity and utilizes this equity to create other equity and debt investments into projects. These projects can include the development of historic buildings located in low to moderate-income neighborhoods, as these redevelopments can have a positive economic development impact. A significant amount of Miami s downtown still qualifies as low to moderate-income. Basic Characteristic & Incentives that have a positive economic development impact NMTC-qualified projects through equity or debt investments Pros And Cons Ratio / Usefulness Ratio The NMTC receive a usefulness ration score of 2 because it can deliver a significant amount of funding to a project and it is flexible in what kind of projects it can fund. However, because of the competitiveness of the application for funds it is difficult to be selected to receive the NMTCs, and only the larger projects fare well in the competitive application cycle. Case Study / Example The role of NMTC credits in supporting historic preservation development efforts is well illustrated in the efforts of the Waterfront Historic Area League (WHALE), a non-profit that leads community and economic development initiatives in New Bedford, MA. In 2004 WHALE was trying to preserve a series of 100-year old historic buildings and convert them into residential lofts. Cost overruns in the project led to a $3.9 million equity gap. Through a series of outreach efforts from multiple involved parties, it became clear that the Union Lofts would qualify well as the recipient of NMTCs, and the Massachusetts Housing Investment Corporation provided the needed gap funding through a NMTC investment. No HTCs were used in this project, but the State of Massachusetts did provide $220,000 in historic preservation grants _pipeline_flow_1010.pdf

21 Incentives NMTCs generate funds for the project developer on the funds that they invest into the CDEs that will be investing in the projects. The purposes of NMTCs are to encourage investment in areas and thus the goal is to revive the target areas markets, thus the New Markets name. The funds can only be invested in these low-income and currently only about half of Downtown Miami is considered a low-income area per these federal guidelines. The Community Development Entity (CDE) is the Investment from the investor seeking the NMTCs. The CDE is usually a middle-man entity that Low-Income Community Businesses. A NMTC Credit is equal to 39% of each investment dollar made into the project. The investment is made all up front, but the investor claims the credits over 7 years. competitive application process and only a select number of CDEs can receive an allocation each year. Actual real estate development projects strategically combine HTC allocations with NMTC NMTCs can bring a 30-35% equity increase to real estate transactions. NMTCs can play an important role in historic preservation development as they can be used to support the development of businesses and projects located within historic buildings. The NMTC policies do not require that a building leverage both NMTC and HTCs a building does need to comply with all HTC rules. 20