Adaptive Reuse Case Study Project:
Foch Street Properties

I.  Executive Summary: 

A developer in possession of three buildings on Foch Street in Fort Worth seeks advice regarding the highest, best and most profitable use for the properties.  These vintage concrete buildings date to the 1940s.  The project would be an urban infill redevelopment.  The questions that enter into this analysis are numerous, and include the following: 1) What, if anything, should be developed?  2) Are tax credits available, and if so, should they be utilized? 3) Is it prudent to demolish one, or more, buildings to create additional parking? 4) Should development be mothballed? 

 The district surrounding these buildings on Foch Street began booming around 2007.  Foch Street is in the center of Fort Worth's new major regional retail destination: the Cultural District/ West 7th Street Corridor. This is a vibrant, rapidly urbanizing district between Downtown and the Cultural District. Very close to the city's best neighborhoods, TCU, and the University of North Texas medical school. Major mixed use projects surround the Foch Street Warehouses. More than 2,000 new residential condos and apartments have been built in this district in the last few years and 1,000 more units are scheduled for delivery in the next 5 years.

 Cypress Equities' W 7th Project was built immediately west of Foch Street, had leased to approx 12 restaurants, a movie theater, a gym, and some clothing boutiques. The W 7^th project was generating significant visitor traffic to the neighborhood and the initial 345 apartments in the project leased up immediately and had awaiting list upon opening.

Evaluation and analysis of the challenges and opportunities these properties provide yield the following recommendations: Maintain Building #1 and lease it up; Demolish Building #2; and Continue current operations for Building #3.

II.  Salient Property Facts:

Subject properties are owned by two separate partnerships and are actually a collection of two different parcels containing 3 buildings at 821-1059 Foch Street, Fort Worth, TX. According to Tarrant County Tax District, Building 1 is situated on 2.82 acres and is its own partnership. Buildings 2 & 3 are situated on 3.53 acres and are held together by the other partnership. Building one is approximately 68K s/f, Building two is approximately 80K s/f, and Building 3 is approximately 14,300 s/f.

III.  Property History and Current Conditions:

Building one was purchased in 2001. Buildings two & three were purchased in 2004. Building one was redeveloped from 2002-2003. Building three was redeveloped from 2004-05 and building two was already 100% leased to an industrial user through 12.31.10 at $2.5 s/f gross on the entire space. As of January 1, 2011, Building two was vacated and empty. The roof required replacement if another tenant were to take the space. Building three was fully leased with one restaurant/bar tenant and seven office tenants. Building one was 60% leased with in place rents of $14.50 NNN. Typical size was 4K s/f with restrooms in the rear of the spaces. Typical dimensions were 27.5x145 s/f demised spaces.

At this point the two partnerships are effectively at break even cash flow. Tenants of buildings three and buildings one are covering their portion of taxes and insurance and their rents are covering the debt service. However, the property taxes on the unoccupied space and building two would require a capital call to fund the balance at year’s end. The partnerships were not interested in funding the delta.

IV.  Analysis:

     The subject property lies within the very popular West 7^th area of Fort Worth. New retail and multifamily projects have been developed up and down the 7^th street corridor in the last 5 years. MF in the area may be close to the point of saturation with 2,000 new units recently added to the market and another 1,000 planned for the next 5 years. Retail seems to be the highest and best use for the subject property as evidence by the retailers currently leasing the property.

     However, neither building one nor two work for traditional retailers. The buildings are too deep at approximately 180’ in total depth. Existing tenants are only utilizing 145’ of depth leaving 35’ unused at the rear of building one. Further, retail parking at this site is a nightmare. You can’t park building one retail as is. Building two won’t work as retail.

     Further, in order to get building two in a leasable condition, it appears that the partnership would need to replace the roof. The cost of replacing the roof - approx $400K (80K s/f @ $5) would make the project cost prohibitive. It is important to note that the assessed improvement value for each of these two buildings is $1.934MM for building one (valued on income) and $124K for building two (valued on a per lb basis). It’s hard to justify a speculative roof cap-ex project that costs approximately 3x the vacated assessed value of building two. It’s even harder to justify when the parking situation at buildings one and two are placed into the context of the decision.



     Finally please consider the assessed land value of the subject properties. Since 2008 the land on which building two & three are situated has appreciated from $770K to $2MM. Further, in 2008 the improvements were valued at $1.6MM (based on income), but today are again only valued at $124K. It’s clear, with all the new development in the surrounding area, the value is in the land. The current improvements are functionally obsolete. The partnerships need to utilize a land bank strategy that allows them to hold for an additional 36-60months without funding the deal and let the land appreciate closer to the high water mark levels of 2008. How do you get there?

V.  Recomendations:

Recommendation #1: Demolish Building Two And Utilize Area For Parking

     Because of the costs associated with repairing building #2 and the need for additional parking in the general area, we recommend demolishing this building.

Reasoning behind recommendation:

1.  Support building one as retail, there is still some value there. The location is incredible, but the building won’t park well for most retailers. Level building two and utilize the space as parking that supports retail during the day and perhaps generates some income at night by providing a pay lot for the surrounding nightlife.

2.  Lower the property tax basis to save on tax bill.

3.  Avoid the $400K roof expense and any further TI dollars for prospective tenants

Recommendation #2 – Lease up Building One

     Building #1 has solid potential for increase cashflow.  Indeed, in the recent past, this building was nearly fully occupied with paying tenants.  Since the economy has stabilized and this area has been rejuvenated, the time is ripe to find additional tenants.

Reasoning behind recommendation:

1.  Building one is already 60% leased at $14.50 NNN

2.  Additional parking should help positively impact leasing effort

3.  Sign short term NNN leases and avoid the estimated $5 TI expense with rent abatement

4.  Lease the unutilized space at the back(35’x500’) as storage space

5.  Retail market rents for the area are $13 - $14, this space is irregular, so go below market at $12 and fill the space!

6.  The intent is to have the tenants float your insurance and property taxes – break even while the partnership banks the land

     Building One occupants include the Bikram Yoga Studio, the Greener Good (retailer of sustainable products for the home/ office/ children), Red Productions (film production), La Familia (award-winning local Tex-Mex), Chimy's Cerveceria (popular patio bar/cafe), Bess & Evie's Vintage Clothing.

Ideal prospective tenants would include exceptional quality restaurants and retail shops such as: cafe/coffee bar; gourmet casual restaurants; Spanish restaurant; Thai or other Asian restaurant; active/athletic-oriented retail and apparel; fashion retail (various prices); top quality tailor; and a top quality dry cleaner.

Recommendation #3 – Leave Building Three Alone

     Building #3 is fully leased and performing like a champ!  We recommend maintaining current operational strategy in place for this building.



Reasoning behind recommendation:

1.  Building is 100% occupied; it works

2.  Overall location is great

3.  Location and visibility relative to the rest of the site is terrible, but it works because it parks and rent is cheap (assuming same $14.50 NNN).

4.  Leave it alone!

VI. Conclusion

     The West 7th area has quickly become a European urban village, nestled between downtown, the cultural district and Trinity Park. The city of Fort Worth says it has added millions in property value and sales taxes.  All this momentum bodes well for recently completed developments and for the prospects of development projects scheduled to occur in the foreseeable future.

Live Oak Bar and Grill --

Eclectic Adaptive Reuse:

To witness adaptive reuse in action, we visited the site of the soon to open Live Oak Bar & Grill in Near Southside Fort Worth.  For years, this building located on Lipscomb Street, served as a Lion's Club Hall.  Now, it is being redeveloped by Bill Smith into a multi-purpose building that may well become the revitalized heart of this sleepy district in Cowtown.

     The Vision:  The Live Oak Lounge will offer up a savory menu in a comfortable and cozy setting reminiscent of the historic building's 1950s founding.

Complete with full lunch and dinner menus, the lounge is only to be challenged by the brilliance of its adjacent bar offering assorted cocktails and lined with over 80 domestic, imported and craft beers.

      Just a quick trip down the hallway, folks will enter into one of the area's most highly advanced listening rooms. The Live Oak’s Music Hall will feature national touring artists, the hottest new acts to hit the scene, as well as D/FW’s bright local talent. With a state of the art sound system in place, the Music Hall promises an ideal setting for a wide range of genres.

 

  The rooftop patio offers a beautiful view of the Fort Worth skyline and a great setting for outside dining. All rooftop patio seating is accessed by an outside staircase.

     The Village on Magnolia:  The Live Oak Bar and Grill has become an anchor for the revitalization of the surrounding blocks.  Indeed, so many additional business are moving in beside and behind the Live Oak Bar and Grill that the area will resemble a small village.  These other complimentary businesses include Ryan's Grocery & Deli; a coffee and beer establishment named "Brewed;" a Latin American Seafood Restaurant, a Home Health Provider, and Hot Damn Tamales.  Collectively, these establishments will be know as "The Village on Magnolia."  When complete the Village should lend a vibrancy to this area that will attract regular patrons and the curious alike.

Ft. Worth South, Inc. & The Near Southside:

    

     On April 7, 2012, Mike Brennan of Fort Worth South, Inc. visited our class to discuss his organization's goals and adaptive reuse in Fort Worth.  The information he provided was interesting and informative.

     Fort Worth South, Inc.:  Fort Worth South, Inc. (FWSI) is a private, member-funded, non-profit 501(c)(4) development company dedicated to the revitalization of Fort Worth’s Near Southside. FWSI began as a small coalition of Near Southside businesses and community leaders and has grown dramatically over the last decade.

This district’s history dates back to the beginning of the 20th century, when it was developed as the city’s first streetcar suburb. Today the Near Southside is an eclectic and diverse mixed-use community and the second largest employment center in Tarrant County, with around 30,000 jobs. The economic anchors for the district are the longstanding institutions and industries that continue to prosper. The most renowned economic engine is the Near Southside’s Medical District, home to Tarrant County’s five major hospitals as well as dozens of independent medical clinics. Other types of businesses, including a concentration of creative firms, are now calling the Near Southside home, diversifying the district’s employment base.  Well known companies that call Southside home include Williamson-Dickey, Dannon, and Vanderborg Dairy.

     "Friday on the Green":  Friday on the Green is a marketing event that allows the Near Southside District to demonstrate its uniqueness and charm.

  

     The focus is on music and street arts.  The event is designed to draw in folks from across the region to the Near Southside for the first time, or the first time in a long-time.  The event is normally attended by hundreds of people, sometimes over a thousand, and generally leaves people with a positive impression of the district as an "up and coming" area of town.

Sources:

http://www.fortworthsouth.org/about-fws/

Transit Oriented Development: 

     A transit-oriented development (TOD) is a mixed-use residential or commercial area designed to maximize access to public transport, and often incorporates features to encourage transit ridership. A TOD neighborhood typically has a center with a transit station or stop (train station, metro station, tram stop, or bus stop), surrounded by relatively high-density development with progressively lower-density development spreading outward from the center. TODs generally are located within a radius of one-quarter to one-half mile from a transit stop, as this is considered to be an appropriate scale for pedestrians.

Benefits:  TODs provide several benefits to the areas where they are located.  For example, they add sustainable density that accommodates expected growth.  Additionally, TODs improve mobility, energy efficiency and provide new retail, entertainment and employment for local neighborhoods.

      TODs & TIFs in Big-D:  The local governments in Dallas County have sought to incentivise the creation of transit focused developments.  To this end, the Transit Oriented Development (TOD) TIF District was created in 2008, to encourage dense, pedestrian friendly transit oriented developments adjacent to DART light rail stations. There are four sub-districts within the District: Lovers Lane/Mockingbird station area, Cedars West, Lancaster Corridor area, and Cedar Crest area. These areas have been developed with varying degrees of success.  However, on balance, the developments have been positive additions to the Dallas metropolitan area. 

Sources:

http://en.wikipedia.org/wiki/Transit-oriented_development

http://www.dallas-ecodev.org/redevelopment/tod/

http://www.dallas-ecodev.org/business/tifs/todTIF.htm

Pedestrian Oriented Development:

     Walk to work.  Cycle to the store.  Stroll through an esplanade from your townhome to your favorite restaurant.  Such is the nature of pedestrian oriented developments.  These types of developements are popular with young urban professionals and empty nesters. 

     Considerations for Pedestrian Oriented Development:  The following list includes ten important factors to be addressed in developing a pedestrian oriented area:

     1. The neighborhood has a discernible center. This is often a square or a green and sometimes a busy or memorable street corner. A transit stop would be located at this center.

     2. Most of the dwellings are within a five-minute walk of the center, an average of roughly 2,000 feet.

     3. There are a variety of dwelling types - usually houses, rowhouses and apartments - so that younger and older people, singles and families, the poor and the wealthy may find places to live.

    

     4. At the edge of the neighborhood, there are shops and workplaces (and/or transit stations leading to workplaces) of sufficiently varied types to supply the weekly needs of a household.

     5. An elementary school is close enough so that most children can walk from their home.

     6. There are small playgrounds accessible to every dwelling - not more than a tenth of a mile away.

     7. Streets within the neighborhood form a “connected network, which disperses traffic by providing a variety of pedestrian and vehicular routes to any destination.

     8. The streets are relatively narrow and shaded by rows of trees. This slows traffic, creating an environment suitable for pedestrians and bicycles.

     9. Buildings in the neighborhood center are placed close to the street, creating a well-defined outdoor room.

     10. Parking lots and garage doors rarely front the street. Parking is relegated to the rear of buildings, usually accessed by alleys.

     Implementation & Benefits of Pedestrian Oriented Development: Successful implementation requires a shift from modern, automobile-dependent development toward more traditional design practices that provide safe, convenient opportunities for walking, biking and otherwise accessing key destinations such as school or work. This transition to pedestrian- and public transit-oriented development will help to eliminate quality of life impairments, such as congestion and air pollution, loss of open space, costly road maintenance and public health services, inequitable distribution of economic resources, and loss of a sense of community.

Sources:

http://www.cooltownstudios.com/2005/05/03/the-13-points-of-pedestrian-oriented-development/

https://www.google.com/#hl=en&sclient=psy-ab&q=playground+picture&oq=playground+picture&aq=f&aqi=g8g-m2&aql=&gs_l=serp.3..0l8j0i5l2.4179l9402l1l10801l29l18l0l0l0l4l138l1850l8j10l18l0.frgbld.&bav=on.2,or.r_gc.r_pw.r_qf.,cf.osb&fp=21ba5269d78bca91&biw=1311&bih=625

 http://des.nh.gov/organization/divisions/water/wmb/repp/documents/ilupt_chpt_3.2.pdf

Superfund & Brownfield Grants:  The federal government assists states and communities in cleaning up brownfield sites, which are real property affected by the potential presence of environmental contamination.  These efforts have been an ongoing issue for more than a decade. With the enactment of the Small Business Liability Relief and Brownfields Revitalization Act in 2002, Congress provided specific authority for EPA to address brownfield sites.  In contrast to Superfund sites, environmental contamination present at brownfield sites is typically less of a risk to human health. With the primary motivation to aid cleanup efforts, the 2002 statute, among other things, authorized two grant programs: (1) a competitive grant program to address specific sites; and (2) a non-competitive grant program to support state cleanup programs.

Superfund Sites More Dangerous Than Brownfields:  When compared to a Brownfield site, Superfund sites and their cleanup are considered more carefully, and for good reason. Usually, these sites are not simply abandoned industrial areas but rather have experienced active dumping of dangerous chemicals in the past. These sites usually have unsafe contamination levels of petroleum products, toxic chemicals or both.

This increases the dangers associated with cleanup so the EPA oversees the projects internally. There are, however, some opportunities for communities wishing to get involved in the process in some way.

Sources:

http://www.policyarchive.org/handle/10207/bitstreams/19366.pdf

http://www.oicnorthhempsteadny.net/pdf/GillibrandBrownfields&SuperfundCleanupFundingOppurtunitiesGuidebook.pdf

https://www.google.com/search?q=Superfund+Pictures&hl=en&prmd=imvns&tbm=isch&tbo=u&source=univ&sa=X&ei=jIt_T8XgBZD69gSI17H6Bw&ved=0CCYQsAQ&biw=1311&bih=625

Building Codes & Adaptive Reuse:

     Bring older buildings into compliance with modern building codes can be very difficult and expensive.  Accodingly, many localities exempt adaptive reuse buildings from some or all of today's building codes.  One example of this is the Adaptive Reuse Ordinance in Los Angeles, California.

The Adaptive Reuse Ordinance has become one of the most significant incentives related to historic preservation in Los Angeles, facilitating the conversion of dozens of historic and under-utilized structures into new housing units. The Ordinance was originally approved in 1999 for downtown Los Angeles and was extended into other neighborhoods of the city in 2003. It provides for an expedited approval process and ensures that older and historic buildings are not subjected to the same zoning and code requirements that apply to new construction. The result has been the creation of several thousand new housing units, with thousands more in the development pipeline, demonstrating that historic preservation can serve as a powerful engine for economic revitalization and the creation of new housing supply.    

     Tyler, Texas Adopts New Adaptive Reuse Code:  The City of Tyler, Texas, adopted new a new code that will help to encourage the reuse of older existing buildings. By approving the International Existing Building Code, the City is providing property owners who possess an older existing building to utilize this new code rather than codes written for new construction. While the IEBC still requires that buildings meet safety standards, the code provides a different method to achieve safety points. A special task force arraigned by the City examined the potential code and ultimately recommended that the City adopt it. Tyler hopes to see the majority of impact in its downtown where there are a number of historic and older buildings. Reuse of the buildings will be less cost-prohibitive while still providing safety as well as revitalizing the downtown.

Lance Armstrong Foundation & Adaptive Reuse:  After leasing corporate office space for over a decade, The Lance Armstrong Foundation now has a permanent home for the LIVESTRONG offices in East Austin, Texas. The headquarters is part of a larger revitalization effort within the underserved neighborhood of Austin. The adaptive reuse of this warehouse has provided new life and a commitment to the local community.

     The renovated space provides a number of private office and meeting spaces as well as large open areas to host meetings for other local non-profits. The work has resulted in LEED Gold certification, codifying the Foundation’s concern for the environment.

Sources:

http://preservation.lacity.org/reuse-ordinance

http://adaptivereuse.info/tag/building-code/

http://adaptivereuse.info/tag/texas/

Tax Increment Financing:

     What is TIF?:  Tax Increment Financing, or TIF, is a public financing method that is used for subsidizing redevelopment, infrastructure, and other community-improvement projects in many countries, including the United States.  TIF is a method to use future gains in taxes to subsidize current improvements, which are projected to create the conditions for said gains. The completion of a public project often results in an increase in the value of surrounding real estate, which generates additional tax revenue. Sales-tax revenue may also increase, and jobs may be added, although these factors and their multipliers usually do not influence the structure of TIF.  When an increase in site value and private investment generates an increase in tax revenues, it is the "tax increment." Tax Increment Financing dedicates tax increments within a certain defined district to finance the debt that is issued to pay for the project. TIF is often designed to channel funding toward improvements in distressed, underdeveloped, or underutilized parts of a jurisdiction where development might otherwise not occur. TIF creates funding for public or private projects by borrowing against the future increase in these property-tax revenues.

     Crticisms of TIF:  Although politicians portray TIFs as a great way to boost the local economy, there are hidden costs they don't want taxpayers to know about. Cities generally assume they are not really giving anything up because the forgone tax revenue would not have been available in the absence of the development generated by the TIF. That assumption is often wrong.

     “There is always this expectation with TIFs that the economic growth is a way to create jobs and grow the economy, but then push the costs across the public spectrum,” says Greg LeRoy, author of The Great American Jobs Scam: Corporate Tax Dodging and the Myth of Job Creation. “But what is missing here is that the cost of developing private business has some public costs. Road and sewers and schools are public costs that come from growth.” Unless spending is cut—and if a TIF really does generate economic growth, spending is likely to rise, as the local population grows—the burden of paying for these services will be shifted to other taxpayers. Adding insult to injury, those taxpayers may include small businesses facing competition from well-connected chains that enjoy TIF-related tax breaks. In effect, a TIF subsidizes big businesses at the expense of less politically influential competitors and ordinary citizens.

     TIFs in Garland, Texas:  In Garland, Texas, a TIF District board of directors (TIF Authority) chooses how to spend the money captured in the TIF fund. TIF funds can only pay for a specific menu of eligible projects. When the TIF expires, all assessed value revenues are paid to the respective taxing districts like before the TIF was designated. The illustration below depicts how a TIF district works.

     TIF-eligible Projects in Garland:

• Project costs related to the cost of buildings, schools or other educational facilities owned by or on behalf of a school district, community college district or other state political subdivision.
• Railroad or transit facilities.
• Affordable housing.
• Remediation of conditions that contaminate public or private land and buildings.
• Preservation of the façade of a private or public building.
• Demolition of public or private buildings.
• TIF administration fees.
• Financing costs, including interest and payments to TIF bond holders.
• Land acquisition, capital costs and interest before and during construction related to the acquisition and construction of public works of public improvements (streets, streetscape enhancements, utility infrastructure, alleys, sidewalks, parking garages).
• Land assembly costs for projects listed above.

Sources:

http://en.wikipedia.org/wiki/Tax_increment_financing

http://reclaimdemocracy.org/articles/2006/tax_increment_financing.php

http://www.ci.garland.tx.us/gov/lq/pcd/ed/partners/financing.asp

HUD Mortgage Guarantee Programs:

     The HUD 184 loan guarantee program:  Much of the land in Indian country — some 55 million acres — is held in trust by the federal government.  In enacting the Housing and Community Development Act of 1992 established a Native American Housing Loan Guarantee Program — Section 184 of the act— administered by the Department of Housing and Urban Development (HUD) through its Office of Native American Programs (ONAP), Offi ce of Loan Guarantee, based in Denver. As of September 30, 2001, the Office of Loan Guarantee had underwritten 864 loans valued at $84.7 million.

     Through this program, HUD guarantees the mortgage loans made by approved lenders to eligible borrowers. The loan guarantee assures the lender that its investment will be repaid in case of foreclosure. Loans are originated and serviced by supervised lenders approved by ONAP.

     Rural Housing Program Through HUD:  The Section 502 Guaranteed Rural Housing Loan Program is designed to serve rural residents who have a steady, low or modest income, and yet are unable to obtain adequate housing through conventional financing. These loans enable low and moderate-income rural residents to acquire modestly priced housing for their own use as a residence through the purchase of a new or existing dwelling or the purchase of a new manufactured home. In this variation of the Section 502 program, RHS does not make a loan directly to an eligible borrower, but guarantees a loan made by a commercial lender. lender. This guarantee substantially reduces the risk for lenders, thus encouraging them to make loans to rural residents who have only modest incomes and little collateral.

Sources:

http://www.occ.gov/static/community-affairs/community-developments-newsletter/Fall-5.pdf

http://www.hud.gov/offices/cpd/economicdevelopment/programs/rhed/gateway/pdf/502_GuaranteedLoans.pdf

https://www.cfda.gov/?s=program&mode=form&tab=step1&id=84b4059a4f6213e9237563b343f9fbab

Community Development Block Grants:

     What is CDBG?:  The Community Development Block Grant (CDBG) program is a flexible program that provides communities with resources to address a wide range of unique community development needs. Beginning in 1974, the CDBG program is one of the longest continuously run programs at HUD. The CDBG program provides annual grants on a formula basis to 1209 general units of local government and States.

      Primary CDBG Objective:  The primary objective of the CDBG program is to develop viable communities by providing decent housing and a suitable living environment and by expanding economic opportunities. These grants primarily serve persons of low- and moderate-income, as the State must ensure that at least 70 percent of its CDBG grant funds are used for activities that benefit these persons.

    

     CDBG In Action in Springfield:  The above picture shows the results of the CDBG program in Springfield.  The city’s Community Development Block Grant Small Business Assistance Program resulted in 50 jobs created or retained and nine revamped facades on commercial buildings.  The city made $340,000 in grants and low-interest business loans between 2010 and 2012 to 32 businesses, including nine new businesses and 23 existing businesses, according to a news release.

There were grants of up to $10,000 per storefront for exterior improvements like signs, doors, windows and paint and loans of up to $25,000 for equipment and interior renovations. The property must be in a low-income neighborhood the federal government has deemed eligible for Community Development Block Grants and businesses must create or retain at least one job for each $10,000 and they must remain in Springfield for a minimum of three years after the grant is made.

Sources:

http://portal.hud.gov/hudportal/HUD?src=/program_offices/comm_planning/communitydevelopment/programs

http://www.nccommerce.com/cd/investment-assistance

http://www.masslive.com/business-news/index.ssf/2012/04/springfield_cdbg_money_spruces_up_storef.html

Low Income Housing Tax Credits:

     What's a LIHTC?:  The Low Income Housing Tax Credit (LIHTC - often pronounced "lie-tech", Housing Credit) is a dollar-for-dollar tax credit in the United States for affordable housing investments. It was created under the Tax Reform Act of 1986 (TRA86) that gives incentives for the utilization of private equity in the development of affordable housing aimed at low-income Americans. LIHTC accounts for the majority - approximately 90 percent - of all affordable rental housing created in the United States today.

The credits are also commonly called Section 42 credits in reference to the applicable section of the Internal Revenue Code. The tax credits are more attractive than tax deductions as they provide a dollar-for-dollar reduction in a taxpayer's federal income tax, whereas a tax deduction only provides a reduction in taxable income. The "passive loss rules" and similar tax changes made by TRA86 greatly reduced the value of tax credits and deductions to individual taxpayers. As a result, almost all investors in LIHTC projects are corporations.

     How Tax Credits Are Allocated:  Each year, the IRS allocates housing tax credits to designated state agencies-typically state housing finance agencies - which in turn award the credits to developers of qualified projects. Each state is limited to a total annual housing tax credit allocation of $1.75 per resident, with only the first year of the 10 years of tax credits counting against the allocation. 

     States allocate housing tax credits through a competitive process. The state allocating agency must develop a plan for allocating the credits consistent with the state's Consolidated Plan. Federal law requires that the allocation plan give priority to projects that (a) serve the lowest income families; and (b) are structured to remain affordable for the longest period of time. Federal law also requires that 10 percent of each state's annual housing tax credit allocation be set aside for projects owned by nonprofit organizations.  The credit amount for a project is calculated based on the costs of development and the number of qualified low-income units, and cannot exceed the amount needed to make the project feasible. 

     A State has two years to award housing tax credits to projects. Tax credits not awarded in a year may be carried forward to the next year. If a state is unable to use its tax credits over a two-year period, they are returned to a national pool for re-allocation. If a state awards tax credits to a project that is not completed and the tax credits are returned, the state has an additional two years to award the tax credits to another project within that state.

Sources:

http://en.wikipedia.org/wiki/Low-Income_Housing_Tax_Credit

http://www.hud.gov/offices/cpd/affordablehousing/training/web/lihtc/basics/allocating.cfm

http://www.youtube.com/watch?v=XxwpoLztx70

Rehabilitation Tax Credits

     Often times rehabilitation of a property can provide a renewed feel to the surrounding block and community at large.  In an attempt to encourage such renewal, Rehabilitation Tax Credits are offered by government entities.

     How Credit Applies:  The rehabilitation credit applies to costs you incur for rehabilitation and reconstruction of certain buildings. Rehabilitation includes renovation, restoration, and reconstruction. It does not include enlargement or new construction.

Generally, the percentage of costs you can take as a credit is 10% for buildings placed in service before 1936, and 20% for certified historic structures.

     Rehab Credits in Virginia:  To encourage the adaptive reuse of existing buildings, Virginia offers substantial relief from real estate taxes in Virginia is available to property owners who rescue, repair and rehabilitate qualified older buildings. Subject to the following qualifications, real estate tax is deferred on the value of the improvements to residentil and commercial property.

           Residential Property

Residential includes single-family dwellings, duplexes, multi-family dwelling units, & townhouses; and 1) Structure be no less than fourty (40) years of age; 2) If structure is assessed at less than $10,000, said structure can be demolished if not a registered Virginia Landmark or is determined by the Department of Historic Resources not to have contributory significance if in a registered historic district. If demolished, the replacement structure must be a single-family residence with an assessed value of at least 120% of the median value of other dwelling units in the neighborhood; 3) Assessed value must be increased by at least forty (40) percent, be designed for residential use after completion of improvement, and be improved without increasing the number of living units; and 4) Increasing the total square footage of structure will have no restrictions on size, as long the increases comply with City zoning ordiances.

Commercial real property

     Commercial property qualifies for the tax credits if:  1) It is not less than twenty-five (25) years of age; 2) Can be improved so as to increase the assessed value of the structure by no less than sixty (60) percent; 3) Can be improved without increasing the total square footage of such structure by more than one hundred percent (100%); and, 4) Can be designed for and suitable for commercial or industrial use after completion of such improvement.

Sources:

http://www.irs.gov/businesses/small/industries/article/0,,id=97599,00.html

http://www.roanokeva.gov/85256a8d0062af37/vwContentByKey/N255RS9L166CFIREN

http://www.youtube.com/watch?v=7wdxaYaIE8I

Community Development Entities

     What Is a CDE?:  The investment vehicle for the NMTC is a Community Development Entity (CDE). An organization must be certified by the CDFI Fund as a CDE to be eligible for NMTCs. Two important considerations for certification are that the organization must have a track record and demonstrate accountability to the community. After receiving certification, a CDE may then apply for credits through an annual competition conducted by the CDFI Fund. CDEs successful in receiving an allocation must have a strong business plan, good management, proven track record of working with investors and proposed projects that will have a substantial impact in low-income communities. In March 2003, the CDFI Fund made its first allocation of $2.5 billion in NMTCs to a total of 66 CDEs. Over 300 Community Development Entities (CDEs) applied in the first round, requesting $26 billion in credits.

     How CDEs Work:  Typically, tax credits and incentives come after a company has had significant up-front cash outlays. While tax credits and incentives are valuable offsets against total project costs, what if you could reduce total project costs overall? By reducing the cost of debt interest, thereby limiting cash outflows for the project itself, a project is more likely to survive the first few years.

     Capital market rates are computed on a project-by-project basis utilizing multiple factors, including but not limited to credit score, type of financing, and location of the project. The NMTC is designed to provide eligible lenders an incentive to offset the cost of doing business in low-income communities (LICs).

     Since its inception in December 2000, the U.S. Congress has promoted the NMTC as an economic development catalyst for LICs across the country. It is designed to provide a federal tax credit to investors of CDEs, which in turn utilize investor funds to make below-market financing available in LICs.

     To offset the reduced return rate and risk factors associated with these projects, eligible CDE investors receive a 39 percent tax credit over a seven-year allowance period. Thus, the credit subsidizes the investor’s risk and provides a significant return for pursuing LIC projects.

     Requirements For CDE Certification:  To become certified as a CDE, an organization must submit a CDE Certification Application to the Fund for review. The application must demonstrate that the applicant meets each of the following requirements to become certified:

     1) Be a legal entity at the time of application;

  
     2) Have a primary mission of serving LICs; and

     3) Maintain accountability to the residents of is targeted LIC.

Sources:

http://www.frbsf.org/publications/community/investments/0308/article1a.html

http://www.areadevelopment.com/taxesIncentives/dec09/new-markets-tax-credit-incentive1103.shtml

http://www.cdfifund.gov/what_we_do/programs_id.asp?programID=10

New Market Tax Credits
Incentivise Adaptive Reuse   

     The NMTC Program, established by Congress in December of 2000, permits individual and corporate taxpayers to receive a credit against federal income taxes for making qualified equity investments in investment vehicles known as Community Development Entities (CDEs). The credit provided to the investor totals 39 percent of the cost of the investment and is claimed over a seven-year period. Substantially all of the taxpayer's investment must in turn be used by the CDE to make qualified investments in low-income communities. Successful applicants are selected only after a competitive application and rigorous review process that is administered by the CDFI Fund.

     Through calendar year 2010, the CDFI Fund made 594 awards totaling $29.5 billion in tax credit allocation authority. The CDFI Fund anticipates announcing the availability of another $3.5 billion of allocation authority to CDEs later this spring. The NMTC Program is currently set to expire in 2011, but the Administration has asked Congress to extend the Program with a $5 billion authorization for 2012.

     NMTCs So Popular They Have Lobbyists: The New Markets Tax Credit (NMTC) Coalition is a national membership organization founded in 1998 to advocate on behalf of the NMTC program. The Coalition, which now includes more than 150 members, is managed by Rapoza Associates, a public interest lobbying, policy analysis and government relations firm located in Washington, DC that specializes in providing comprehensive legislative and support services to community development organizations, associations and public agencies.

The Coalition serves its members in the following capacities:

• Worked with the Clinton Administration to design the Credit and lobbied Congress for its enactment;
• Collaborated with the Bush Administration to launch the program including the original rules, regulations and application;
• Build bipartisan Congressional support for the Credit as an efficient market-based incentive for community revitalization;
• Lobbied successfully for four extensions of NMTC totaling $17 billion in additional credit authority;
• Conducted annual surveys of Community Development Entities and published 7 annual NMTC Progress Reports, state profiles of NMTC projects (50 Projects – 50 States), and reports on the overall effective ness of the credit (10th Anniversary Report);
• Convened two annual Washington conferences where Coalition members have a chance to brief policymakers on the NMTC.
• Responded to Treasury and IRS’s requests for comments and technical feedback on the Credit; and
• Served as the eyes and ears of the NMTC industry in Washington, alerting members to the latest developments with regular emails via NMTC Bulletins.

     The Coalition also manages the Investor Advisory Committee (IAC), co-chaired by Gary Perlow and Mike Novogradac, as a venue for investors to discuss NMTC issues and encourage ongoing policy discussions between CDEs and investors.

      NMTCs Create Jobs in Philadelphia:  Building America CDE Inc. allocated $5 million in new markets tax credits (NMTCs) for Paseo Verde, a $48 million mixed-use development in a distressed area of Philadelphia, Pa. Jonathan Rose Companies and Asociación Puertorriqueños en Marcha are developing the transit-oriented community. The development, situated on 1.9 acres near Temple University's Regional Rail train station, will feature 120 units of affordable workforce housing and 30,000 square feet of commercial and retail space. Paseo Verde will also include a primary health-care facility and a social services office. The project, which is expected to achieve LEED Gold certification, is expected to generate 150 union construction jobs, create 42 new permanent jobs, and preserve another 39 jobs.

Sources:

http://cdfifund.gov/news_events/CDFI-2011-05-New-Markets-Tax-Credit-Named-Among-Top-25-Programs-In-The-Innovations-In-American-Government-Award-Competition.asp

http://nmtccoalition.org/2012/02/about-the-coalition/

http://www.novoco.com/journal/2012/04/briefs_nmtc_201204.php

Historic Preservation Tax Credits

     History, culture and identity are important to communities across the country.  In an effort to encourage their preservation while supporting future development efforts, federal, state and local governments offer tax credit or abatement programs.  The following summary represents the types of programs that are available.

     Federal Program:  The Federal Historic Preservation Tax Incentives program encourages private sector investment in the rehabilitation and re-use of historic buildings. It is one of the nation's most successful and cost-effective community revitalization programs. It has leveraged over $62 billion in private investment to preserve 38,000 historic properties since 1976. The National Park Service and the Internal Revenue Service administer the program in partnership with State Historic Preservation Offices.  A 20% and 10% credit are available.

    Federal 20% Tax Credit:  A 20% income tax credit is available for the rehabilitation of historic, income-producing buildings that are determined by the Secretary of the Interior, through the National Park Service, to be “certified historic structures.” The State Historic Preservation Offices and the National Park Service review the rehabilitation work to ensure that it complies with the Secretary’s Standards for Rehabilitation. The Internal Revenue Service defines qualified rehabilitation expenses on which the credit may be taken. Owner-occupied residential properties do not qualify for the federal rehabilitation tax credit. Each year, Technical Preservation Services approves approximately 1000 projects, leveraging nearly $4 billion annually in private investment in the rehabilitation of historic buildings across the country.

     Federal 10% Tax Credit:  The 10% tax credit is available for the rehabilitation of non-historic buildings placed in service before 1936. The building must be rehabilitated for non-residential use. In order to qualify for the tax credit, the rehabilitation must meet three criteria: at least 50% of the existing external walls must remain in place as external walls, at least 75% of the existing external walls must remain in place as either external or internal walls, and at least 75% of the internal structural framework must remain in place. There is no formal review process for rehabilitations of non-historic buildings.

     City of Fort Worth Historic Site Tax Exemption:  The City of Fort Worth freezes the assessed value of Historic and Cultural Landmark designated property for 10 years for owners who spend an amount equal to 30 percent or more of the pre-renovation assessed value of the improvement on rehabilitation. Owners of Highly Significant Endangered designated property who similarly rehabilitate their property qualify for exemption from City taxes on the improvement and a freeze of the land value for 10 to 15 years.

     City of Dallas:  The City of Dallas offers tax incentives to property owners completing rehabilitation projects to historic properties (City of Dallas Landmarks or structures in Landmark Districts) administered by the Historic Preservation Program. These incentives consist of tax exemptions for rehabilitation or residential conversions. In order to qualify, property must be designated a City of Dallas Landmark or be a contributing property within a Landmark district.

Sources:

www.nps.gov/tps/tax-incentives.htm

http://fortworthtexas.gov/uploadedFiles/Planning/Comprehensive_Planning/23FinancialIncentives_06.pdf

http://www.dallascityhall.com/development_services/historic_preservation.html

The Kress Building: An Iconic Example of Adaptive Reuse Success

 

The Kress Building Lofts were originally built in 1936 as the home of the Kress five & dime store.  The Kress Building has served a variety of uses over the course of its life. This Art Deco building has most recently been home to the Fox & Hound pub, which occupies the building’s ground floor retail space. For many years, the upper floors have been vacant – but the building’s most recent previous owner redeveloped those upper floors into loft apartments in 2006.  In 2007, the Kress Building was listed in the National Register of Historic Places.  The converted lofts were updated in 2008.

The Kress Building Lofts range in size from 803 to 1,144 square feet. There are eight different floor plans on each floor of the building, for a total of 24 units. Units on the building’s east end have east and south views, and units at the building’s west end have west views. All other units in between have south views via new windows carved into the building during redevelopment (the building originally had no other windows besides those on its east and west elevations).  One of the buildings most famous former residents is none other than the Honorable Dr. Fred Forgey.