In many cities throughout the country, developers are rehabilitating and
repositioning older, historic buildings for new uses. Repositioning historic
buildings can be positive for a community; an older property is restored
while its historic qualities are preserved. However, where the developer has
an historic tax credit investor, lenders face an intriguing set of factors when
committing to provide financing for the rehabilitation and development of
historic properties. Below, we explore some additional considerations for a
construction lender thinking about providing financing for an historic
property.
While the tax attributes of HTCs are beyond the
scope of this article, it is helpful to have a basic understanding of the HTC structure before discussing its
inherent risks.
A property
owner can
claim a 20% tax
credit for “qualified rehabilitation expenditures” for
“certified historic structures” designated as such by the
National Park Service. In order to be so designated, a
structure must be listed on the National Register or located in a registered
historic district and certified by the National Park Service as being of historic
significance in that district. The project must also satisfy basic requirements
from the Internal Revenue Service in order to qualify for the credit.
HTCs can be claimed through a single-tier investment structure or, more
typically, a master lease structure. In the master lease structure, the developer is the majority owner of the property owner/landlord, and the tax
credit investor is the majority owner of the master tenant. Within the master
lease for the property, the property owner and master tenant agree to pass
through the tax credits to the master tenant. The master tenant is treated as
having incurred the QREs and is entitled to claim the tax credits on its
income tax return.
HTCs are subject to recapture within five years of the completion of rehabilitation. In a single-tier structure, the owner must hold the building for five
full years after completing rehabilitation, or pay back the credit. In a master
lease structure, the master lease cannot be terminated for five years following rehabilitation. There are also limitations on persons to whom the property may be sold in the event of a foreclosure during the five-year recapture
period. During such period, the property must not be sold to a “disqualified
transferee.” A disqualified transferee would include: any governmental
entity; any tax-exempt organization (except those who are subject to United
States tax); a foreign person, except those who are subject to United States
tax; a mutual savings bank, cooperative bank or domestic building and loan
association; a REIT; or a cooperative organization (“co-op”).
Historic tax credits clearly provide a source of equity investment for developers restoring historic properties. Just as clearly, HTCs present a number of
considerations for lenders funding these projects. None of these—
individually or in the aggregate—should be a “deal-breaker”; however, lenders
should have eyes wide open and a full understanding of potential roadblocks when considering whether to do such a deal.
(An expanded version of this article appears on GlobeSt.com.)
Christopher W. Rosenbleeth is a partner in the Philadelphia office of Stradley
Ronon Stevens & Young LLP. He can be reached at crosenbleeth@stradley.com.
The views expressed here are the author’s own.
by Christopher W. Rosenbleeth
Out With the Old, In With the …
Not-So-Old?
GUEST COLUMN
whether, in light of this urbanization, the suburbs
were dead.
“I don’t think the word ‘dead’ should be used,” said
Donald Clow, president and chief executive officer of
Crombie REIT. His company has many well-located sites
in downtown Vancouver and Calgary, and has seen their
value increase tremendously due to urbanization, but it
still believes the suburbs hold value.
Hankowsky said people should recognize that
urbanization is not the single cause of the suburbs’
real estate troubles. Much of the suburban product is
obsolete, but just as the adoption of urban lifestyles by
the millennial generation creates opportunities for
new downtown residential, retail and office product,
he expects developers to do a lot more repositioning
of the older suburban product “in order to make it an
attractive alternative.”—Brian J. Rogal
CAPITAL VIEW
Opportunistic Fundraising
Takes Off
LONDON—The current year is shaping up as the best one
for opportunistic real estate fundraising since the capital markets meltdown in 2008, says Preqin. Year-to-date
fundraising by closed-end opportunistic private real
estate funds has totaled $47.7 billion globally, a figure
that already surpasses the $34.5 billion total of funds
that closed during 2014.
The third quarter of 2015 was an especially successful period for opportunistic fundraising. Funds that
held their final close during Q3 raised a total of $28.2
billion, three-quarters of the total raised by all private
real estate funds during the quarter. That’s nearly four
times as much as opportunistic funds raised in the
previous quarter.
Opportunistic investing appears to lend itself to scale
in real estate fundraising. Preqin says seven of the 10
largest funds that closed during Q3, and all of the 10
largest private real estate funds ever closed, focus on the
opportunistic end of the spectrum.
Both of those top 10 lists naturally include the new
record-holder for a private real estate fund, Blackstone’s
mammoth Blackstone Real Estate Partners VIII. At
$15.8 billion, the fund exceeds the previous record-holder, BREP VII, by $2.5 billion.
Even aside from Blackstone’s ceiling-buster, opportunity funds have been getting larger this year, Preqin
says. The average size of opportunistic funds has
increased to $1.47 billion for funds that have closed so
far this year, compared to an average of $460 million for
funds that closed last year.
This level of activity appears poised to continue.
Preqin has identified 125 opportunistic funds in the
market worldwide that are seeking a combined $46.9
billion. That includes a half dozen such funds with
capital targets of $1.5 billion or more.—Paul Bubny ◆
