 Hello everybody and welcome to the first pre-conference workshop for past Forward 2022 online. I'm Rhonda Sincavage with the National Trust for Historic Preservation and we're happy to have you here for this session, The Journey of Preservation, exploring the process of historic building development from conception to operation. We have a fabulous lineup of speakers for you today, but before we get started, there are some logistics that I need to go over. First of all, we'd like you to welcome yourselves and introduce yourselves in the chat. Secondly, we ask that you abide by our conference code of conduct, which is available to view in a tab on the conference form and also on our conference landing page at savingplaces.org. Secondly, please know that this session is being recorded and will be available afterwards for viewing. We will have some time at the end of the session for audience Q&A, so we ask that you put any questions for the panelists into the chat for us to address at the end of the session. And lastly, for those of you that are seeking continuing education units, for those seeking AIA credits, please fill out the AIA attendee form for this session, which is available on the session landing page. And if you are seeking AICP credits, please self-report for the session. Our speakers today are Jonathan Beck, who is the Development Project Manager with Alexander & Company. Heather Beuthy, who is Senior Director of Project and Asset Management at the National Trust Community Development Corporation, and Elizabeth Rosen, who is the founder of Rosen Preservation. All of their complete bios are available on the landing page for this session below the streaming link. And with that, I'd like it to turn it over to Jonathan for the first presentation. Take it away. Hi, thanks Rhonda. So, Rhonda Setem, Jonathan Beck with the company. We are a development firm that focuses on historic preservation, adaptive reuse and urban infill throughout the United States. I've been with the firm for over 18 years. The firm now has been in existence since the early 1980s. We've done over 200 buildings. Most of those have been historic rehab. And we currently are working on projects throughout the United States. We're wrapping up projects right now in Providence, Rhode Island, Greensboro, North Carolina. We do, of course, a lot in Wisconsin, but we have a national reach and we're willing to work much anywhere. In regards to, you know, my position, company, I had first started out at the National Trust Community Investment Corporation nearly 20 years. And I saw a number of historic projects being completed throughout the U.S. of all types. So I'm going to touch on some of those types of development from non-profit to for-profit to affordable housing, community centers, theaters, and so on to show you some of projects that without the federal tax credit would just not be actually feasible. But in my role at the Alexander Company, you know, we have to oversee the architects, brokers, marketing, design, equity, the construction. And then we hand off the property then to, you know, the options side. So in the development process, I just went through some things. But in the majority of our projects, we use a number of federal tax incentives. The rehabilitation historic tax credit is most important. Again, the firm started in, you know, 1982. And this is right when the first federal incentives started rolling out. We use the low-income housing tax credit, which carries very nice with the federal historic credit in doing combined utilizing both the historic and low-income credits. And their current form had been part of the 1986 Tax Reform Act with some changes given to the historic rehab credit in 2017. We also use the new markets tax credit heavily. I'll touch upon those. We tend to shy away from qualified conservation contribution. That's another incentive that can be out there for preservation dates in the history of the rehabilitation tax credit in 1970. The first incentives were rolled out as part of the bicentennial just because we wanted to make sure in our 20th anniversary that we were preserving our historic properties. The first federal tax credit for rehab was in 1978. In 1981, we saw a three-tiered credit for 25%, 20, and 15. And then 1986, that was the, we most recognized as the 20% credit. The fundamentals of the 20% rehabilitation tax credit are that the projects are administered through the National Park Service and State Historic Preservation Offices for the design review. The tax aspects are administered by the Internal Revenue Service. Tax credit, so again, that's a dollar-for-dollar reduction in tax liability. And rehabilitation tax credit has really been, you know, one of the most important federal conservation programs. So just wanted to again highlight that. The types of buildings that qualify, and Elizabeth will be covering more of this, but the building needs to be either on the National Register of Historians or be a contributing building within a historic district. At the Alexander Company, you know, we work with both types of properties, both in districts and individually listed. And then in regards to the applications, Elizabeth will also be covering this. But there is, you know, the one part two and part three. The part one is to make the properties listed correctly. The part two is the description and then of the application that, you know, a developer or an owner wants to take on the property. And then the part three is the request application of completion. And then to calculate the credit, there's qualified rehabilitation expenditures. And that's the term given to those development costs on which the rehabilitation tax credit can be claimed. So QREs are any amount chargeable to a capital account action with the renovation, restoration, reconstruction of a qualified, rehabilitated building. So it's primarily your hard and soft costs. So acquisition doesn't qualify and new addition doesn't qualify. And then calculating the allowable credit, the credit each percent of all QREs incurred. There's a 24 month measuring that's selected. But under phase rehabilitation, you can also select to do a 60 month phase rehabilitation project term for your rehabilitation. Let's see the benefit though to the developers is the 20% credit on the qualified rehabilitation. Investors and investors can pay anywhere between $82. Hopefully that pricing holds where we're seeing a lot of tax reform. And so then there's other echo that would get someone with that. But I'm going to stay off of that and hit the National Trust Community. Because pricing change, you know, with the economy is generally an investor is looking not only for the tax credit, but also for sharing cash flow and other recognize the deal. And then also, I just want to highlight that there are special rules called the tax exempt use rules so that non take advantage of the federal historic tax credit program. So I'm going to touch on a couple of product types where nonprofits are involved. And then I also highlight that the state tax credits are really key as well. Wisconsin happens to have a Wisconsin state tax credit. And so roughly around 35 that regularly changes as well. But an additional 20% credit that is tied to the 20% federal tax credit in the state of Wisconsin prior to receiving or getting the 20% credit. We had a 5% credit and see about nine to 10 historic projects done annually. When the state credit came along, we would see roughly around 40 credits. So developers and preservationists really have to push in order to keep the state credit program so that they can see it's done within the state. This is a government import where we would collect the economic data off of each development and show what was the actual benefits that roll off of taking buildings that are off the tax roll and putting them back in service. So both construction jobs, permanent jobs, what's the catalytic impact that exists. And so we would do these reports for the legislative fiscal bureau who would put out then a more formalized war. The representatives in the both the assembly and the senate and so that they would fully understand that the program is one of the best programs to revitalize downtown main streets and the white elephant projects that are in historic areas in larger areas. And so it's an investment that definitely has a big time, you know, and so this is a national trust, you know, will regularly produce about the states that are all tax credits. And then also then this this was a nice row of, you know, meeting with legislators all the federal level in 2016 and 2017 when we were at risk of losing the federal historic tax credit. So it's it's in front of your representatives to show them the products that you're working on and show the impact of the project and what it, you know, means to your community. When the Wisconsin the credit came out. The first project that we took on was a historic school and this was a for profit school development that both incorporated historic component and also an adaptable to a new construction. But it was a total of 133 23 million dollar project. And so I'm just going to show you, you know, some existing before and what the current pictures look like now. But again, this project was started in 2014 and completed just right at the beginning of 2015 is a market rate deal. You'll see that, you know, we kept the door doors, everything, including, you know, the trophy cases in the hallways, you know, really use this. And we went and took on a project that was in Madison with a project in Milwaukee called the Milwaukee Fortress. So it's 132 building 132 units, 28,000 square feet of commercial space and an overall three million dollar cost. This project also was market rate and private act provided by the National Trust real estate fund that was basically came in as a partner. And use some of the funds from the National Trust to turn on these market rate units. So this is photos of what the completed project looked like. There was nine million in state historic tax credits that were utilized project. Wisconsin currently is now like three and a half million dollars. The project would, you know, struggle right now to fill the gap in order to get done. So early on in the state of Wisconsin program from 2014 to about 2018, we had an uncapped per project credit now. Again, it's uncapped total cost, but a cap parcel of three and a half million. I wanted to then touch on, you know, the way that nonprofits can, you know, utilize the federal historic credit. So when I was at the National Trust community investment and we invested into a community to utilize both new markets for historic tax credits. And when I ended up back in Wisconsin, I ended up with the Goodman Community Center as the vice president. And we ended up advising both the federal historic and new markets to consolidate a number of community center bills into one large historic redevelopment of a warehouse. The project up becoming so successful that we took on another historic project right across the bike path. So I'm just going to show that this look like this was the Madison Works building. And again, the community center did all the 168H election. It was new already for the community center. And we combined both the federal historic new markets in the state of Wisconsin historic tax credits. Then in regards to other nonprofit organizations that have worked with, there's a lot of theaters that end up getting redone with the federal historic credit program. And most of these theaters are ended up owned by nonprofits. They have a capital campaign component that they reach out to the community. And this is one of the projects that I worked on called the L Ringling Theater. This is one of the first Palladium theaters in small town Baraboo but this is a very Main Street style program or project. As you can see, pretty grand theater development. But this is a smaller tax credit project where only a couple hundred thousand were utilized in the credit. So we found an individual who was willing to pay 85 cents on 63,000 federal historic credits. And then with our Wisconsin historic tax credit, we brought in a privately held insurance company. But the total cost of this redevelopment is half a million. Since then, we've seen theaters in West Bay and Milwaukee and throughout the Midwest utilized the federal historic program. The Beloit College powerhouse was another nonprofit that ended up utilizing our services as a developer on this to both tap into the federal historic, state of historic, and the federal new market. Credit. This is a 46 million dollar project of a former alliance power plant. The project was completed in 2020. But this was used as a union and athletic facility for Beloit College, which is right on the Wisconsin Illinois border. But the power plant was built in sections, phases over the years. So I'm just going to kind of show you some of the before and that even on power plants, the Wisconsin federal credit in order to see a project like this undertaken. And then wanted to touch upon utilizing historic credits with the low income housing credits. I'm going to show you a number of projects. We do a lot of work with the general service administration, federal agencies that are looking to dispose of their properties if they're not in use anymore. A project called the courthouse loss in Kansas City, Missouri. There is a new federal courthouse that was built down the block. This building was left vacant. We started discussions with the federal government on purchasing it through the G.A. And we repurposed this during the recession of 2010. But it was a 40 million dollar project. We utilized date historic income credits in Missouri. And we developed this while even, you know, resort, preserve the historic court doors, court rooms, and a number of law firms that are using some of the lobby as commercial space. But some other projects that we did were in a large master use developments. This is another project that is called a seminary. This was part of a girl's school. And it was taken over by the army under the War Powers Act in 1942 and then left vacant after World War actually the Vietnam War. This was an RFP process that the company was selected element where we did 66 apartments, the historic condominium, the historic room, and 90 new townhomes. This is some of the conditions and what the plan looked like. And this led us to do some master developing work on a project that was a formal penitentiary for Washington D.C. Where we did 171 apartments, 150 townhomes, 24 single family homes, retail office for a total of $190 million. But again, you know, really unique apartments and mixed use that could not have been done with the Virginia State Credit and the federal historic credit. And then this is just going to lead to my last project that I wanted to mention was the Milwaukee Soldier Home. With all these different nonprofits and, you know, government entities, we ended up responding to an RFP from the Department of Veterans Affairs to restore six buildings on this historic landmark. This was one of the acts signed by Lincoln was creating a system of care for veterans of a war. And an entire campus ended up being built in Milwaukee starting in 1867 after funds were raised in Milwaukee to care for veterans. And Milwaukee sent their dollars into the federal government and they were selected for various sites. So this is now a VAMC medical campus. And but the buildings were left vacant for the past 30 years. So while the federal government owned these, you know, they were focusing on traumatic brain injury and PTSD. And so the preservation community had to really, you know, push to get a request for qualification RFP out to select the developer in order to turn these proposing for veterans at risk of homelessness. But some of these are some of the photos of what this campus looked like back in the day. And, you know, there's a theater on the campus. There's a chapel, numerous buildings and preserving six of them in only 101 units of housing. Other bills coming up shortly, you know, in the next year to be redeveloped including this chapel and that theater. And we had 80 building, sorry, 101 units of housing, 80 units in the first main building for a total development of $44.5 million. There's about 13 layers of financing, but we use both the federal income housing at the 9% and the non-competitive federal tax credit of 4%. Federal Historic Equity of nearly $7 million, State of Wisconsin Historic Tax Credit Equity of 5%. And when it was going through tax reform, it up the pricing for the credits dropped when we went from a 35% corporate tax rate to 21%. So given that we had lined up the other sources of financing, they ended up contributing $5 million of military construction funding. We partnered with the Housing Authority of the City of Milwaukee where we're 50-50 partners with their tax credit investor. And we have a 75-year enhanced lease with the U.S. Department of Veterans Affairs. This is a very high profile project, you know, covered in New York Times and used a number of tax credit trade journals given how we put together this financing on the project. And also interesting, we used from the Historic American Building Survey, when the project was really, you know, all kind of wired up and you couldn't get into it. Historic American Building Survey, a program administered by a lab rep in the Department of Interior, we got very long as an AutoCADS in order to kind of figure out how that layout of the building would work before we even responded to the RFP. This project is received very strong bipartisan support from the state. But we started construction right prior to the pandemic. And September 19 worked through the pandemic. And the first unit opened in March of 2001. Currently 100% leased on this. And I enjoy some of the completed photos, but the project involves nonprofits, federal and state historic credits, housing credits. And it's, you know, taking a building that was originally constructed to support veterans and it's continued that day. So I kind of like, you know, projects like this being used, you know, for its intended purposes. It's one of the women's wings. And then you have these beautiful slate roofs that we had to go to remind us the original slate. Again, this is a national historic landmark. So we had to go through the state historic preservation model, then the park service, and then the national historic landmark vision of the National Park Service in order to complete this project. These are some of the single-family homes and duplexes that used to be off-quarters that are now in three and four bedrooms. And again, just a really complicated project that I'm pointing the Richard Greenhouse Navigation Award, as well as the advisory council on historic preservation. Those are just some of the types of projects to do that would not be anywhere of reality or possibility without the federal and state programs that I touched upon. That's it for my section. Thank you. Great. Thank you, John. It's so good to see pictures of those historic buildings sort of brought back to life and put to good use. Perfect. So I wanted to talk to you a little bit about some of the basics of the historic tax credit, which as John said, is vital for a lot of the rehab work that's being done to these buildings, as well as some of the things for how the projects monetize the historic tax credits and what the investors in the historic tax credits are looking for. Next slide. So I work at the National Trust for Community Investment Corporation. We are the for-profit arm of the National Trust for Historic Preservation. And so we have a number of hats that we wear, but we are a mission-based organization to support the country's architectural heritage, community development. And we also have renewable energy initiatives all doing all that really through federal and state tax credits. So one of our primary roles is syndication services. We really try to match up projects with investors so that projects can get funds that they need to finish up their capital stocks and complete their projects. We also provide technical assistance and asset management and compliance. We've been around for 22 years now, really know the ins and outs of the credits and the requirements. So we have a lot of expertise to offer on that front. And then we have a very great public policy and advocacy team. We work with the Historic Tax Credit Coalition to make sure that we're advocating for improvements or survival of federal historic tax credit in particular. Next slide. So as I said, we've been around for 22 years and have done a lot of good over those 22 years, both on the historic and community development fronts. We've done 187 investments, almost $2 billion into projects. And from small Main Street projects to, you know, large 10, 16, 18 building campuses. So all over the place as far as types of projects and types and asset types. John mentioned theaters and housing and community centers. We do them all. And one of the good things to notice here is, you know, not only are we bringing these historic buildings back to life, but they're creating construction jobs and permanent jobs and bringing services to communities that need them. Next slide. And you can go to the next one as well. John mentioned, as he was showing some of the projects, you know, the laundry list of financing tools that are used in these capital stacks. Obviously, there's equity that sponsors bring those loans that they that they source from typical market rate lenders to, you know, HUD loans to USDA loans. There's all kinds of different programs that are available there. There's bonds and there's grants and there's tax payment. But as you can see at the top of the list, and as John mentioned, a lot of times tax credits are what really finish up the capital stack. So we can go to the next slide and you can see, although we focus primarily on historic tax credits. As John mentioned, there's low income housing tax credits, there's new market tax credits and all of these tax credits can generally play together. So if you've got a historic building that's in a low income community, you can pair historic and new markets to get some extra benefit and extra sources for your project. And then as John mentioned, there's also li-tech can be included in the capital stack. So if you're doing a housing project that's eligible for low income housing tax credits, there's just a variety of ways to enhance your capital stack as you're trying to build the budget for your project. Go to the next slide. So on the HTC in particular, as John mentioned, it's a 20% credit. Nowadays, it's earned 4% per year over five years. I think there may be a few remaining projects that are eligible for the grandfathered credit before the Tax Cuts and Jobs Act. The credit was actually all earned in one year. So now it's been shifted to 4% over five years. And it's important to note that it's generated when the building is actually completed and ready to be used for its intended use. So it's very important to investors that we can see a completed capital stack and the ability of the sponsor to get the building completed and ready for use. It does have a five year compliance period. So this is the period in which the credits are subject to recapture. So obviously that's something that investors are paying attention to because once they get the credits, they want to be able to book them and not have to go back and amend tax returns and lose the credits. So to avoid that, we want to make sure that there's no material alterations to the building that what you told the National Park Service you would do actually gets done and stays that way for five years. And then there's also a restriction on transferring ownership of the building to make sure that it stays in the same hands for the compliance period. The good thing on the historic tax credit front is that as each year passes, there's what we call a 20% burn off. So it's not 100% recapture for the entire five years. It burns off 20% each year. One of the other important things about the tax credit is that it cannot be freely bought and sold have to be have to hold a profit's interest in the partnership in order to be eligible to receive the credits and have those allocated to you. And you have to be for the investor has to be in the partnership prior to the time the building is completed and placed in service. So obviously timing is important when you're considering doing a development. Make sure that you identify your investors and get them in there before the building has been placed in service so that you can take advantage of the equity that comes along with the historic tax credits. And you can go to the next slide. So there's four tests that you have to meet to qualify for the 20% historic tax credit. One is one is John mentioned it has to be a certified historic building, which means it can either be listed on the National Register, or it could be a contributing building to historic district. It must also be a certified rehabilitation, which I know Elizabeth will touch on, but it means that the rehab that you do has to adhere to the secretary standards for historic rehabilitation. It has to be an income producing asset. So like we talked about lots of different asset classes, apartments, hotels, office retail theaters, but owner occupied residents don't qualify. And then as John briefly mentioned, there is also a substantial rehabilitation requirement. So you have to do have to meet a test on it for a minimum amount of work that's done on the project in order to be eligible for the for the credit. You can click to the next slide. And so, because I'm here talking about investors, obviously, there are, there are parties that are interested in these credits that are not just the sponsors. And some of the accounting rules are a little bit intense, but in general, it's important to know for the investors that you can carry it back one year and carry credit the credit forward 20 years. So there's some flexibility in how to apply the credit. Generally, the investors that we work are with our C Corp's large or regional banks insurance companies and other corporations that have some federal tax appetite. In some cases, there are sponsors that qualify as real estate professionals or have have some passive income that falls below a particular threshold that allows them to use it. But in general, they're difficult to use sometimes for individuals. So you'll see larger companies with federal tax appetite come in and be willing to pay for those credits. Go ahead, shift to the next one. And so you heard John mentioned qualified rehabilitation expenditures, we call them QREs. So you take those QREs and multiply by 20%. And as I mentioned, if building owners can't use the credits, they need a third party investor, which is where we come in and try to match you up with your product up with an investor. And the pricing is, as John mentioned, sort of tends to vary. It's generally less than a dollar credit in order for them to actually realize the benefit of the credit. And it depends on whether it's a one year or five year credit, how many credits are available, what the size of the project is, and then various factors like, you know, what is the asset type? Where is it? Are there community impacts that make it attractive? And then when you figure out the credits and you figure out the investor pricing, that is results in the HTC equity. And that's the amount that the investor will put into the project to enhance your capital stack. We'll shift to the next slide. And so, as John mentioned, there's typically some other things that the investor is looking for. So one of those things is that not only do they look for credits, but they also look for what we call a priority return or some cash to come out of the deal as well. That's generally in the 2% range. So they're looking for cash and credits. And then we also need to just make sure that the money actually comes in over time on a pay-in schedule. So you'll typically get 25 to 30% at closing. And then the remainder will come in over time, typically another big tranche after the building is completed. And then once the part 3 is received and then a small piece for stabilization. And the reason for that is because obviously the credits will be available once place and service occurs. But since there's usually a cash component of it, the investor wants to see that the building is doing well and performing. There's also at the back end, we talked about the five-year compliance period. So once that compliance period ends, there's usually a put option where the investor has the option to get out of the deal. And the price for that is usually 5% of equity. So we can switch to the next slide and actually go to the next one. We'll talk a little bit about structures because obviously when you involve an investor, you've got to figure out a way to insert them into the ownership structure so that they can be allocated the credits. And it all starts with the HTC landlord who's usually an affiliate of the sponsor and the entity that owns the building and secures the financing and works with the general contractor and the architect and a historic consultant and actually does the rehabilitation. So we start there and then we move to the next slide and you start layering on some of the sources of funds. So obviously this is where the HTC landlord is the level that where the loans will come in and then the member equity will come in. And then if you go to the next slide, you'll see our federal investors. So as we talked about, they have tax credit appetite. They have capital. They want HTCs to offset their federal income tax liability as well as cash flow. And so there's two primary structures to insert the investor into the existing structure. So you can go to the next one. The one that we see most often is what we call the HTC lease or pass through structure. The IRS permits the tax credits to be passed through to a tenant which here we call the HTC tenant. So the HTC tenant is set up so that investor owns 99% of that and 1% is owned by the another sponsor affiliate. And that way the tax credits can be 99% of them can be provided to the investor. And then the HTC tenant will be the landlord for any residential commercial tenants. They'll receive rent and then they'll pay rent over to the landlord through the HTC lease. This allows the HTC landlord level to keep some of that appreciation and just sort of separates the HTC transaction from where the lender and some of the other capital is located. We'll go to the next slide. The other option is to actually have the federal investor invest directly into the HTC landlord. Sometimes this is a little bit more difficult because as part of the IRS requirements, the investor has to have a 99% interest in the landlord to get 99% of the credits. So that is typically a big percentage that the project sometimes has a hard time giving up that much in their HTC landlord. But in this situation then the HTC landlord is the landlord for the residential and commercial tenants. The other difference between the two as we'll as we'll see in some future slides is a lot of times the investor would like to see some restrictions on the remedies of the lender. Those are a little bit easier to do in the pass-through structure. We call it an unconditional SNDA so that the lender can foreclose on the property but has to keep the master lease in place. Whereas if you have this direct investment structure, you would need to ask the lender to actually forbear from exercising any remedies at all. So sometimes the lender remedies are one of the things that to consider when you're trying to decide what structure you're going to use. You can go on to the next slide. There you go. So one of the things, obviously we've seen a number of deals and just wanted to share a little bit about what investors are looking for when they're looking at projects. We talked a little bit about using HTCs with new markets and we call them twinning. We have done investments in 35 different states and as John mentioned, a lot of times the states that we invest in also have a state historic credit because obviously that helps with the capital stack. So like I mentioned, a range of investment sizes from less than a million to over 20 million and a range of asset classes. And so in working with the investors on these types of projects, we've found some commonalities as we look at what investors are looking for. So you can click to the next slide. So one of the big things we look for is project readiness. As I mentioned, one of the key components of being able to take the credit is getting to completion. And so investors want to know that the construction and design drawings are done, that the part one and two are complete. And the NPS has signed off on the design, but the construction budget is in place, that the due diligence has been done, that the financing has term sheets that are and is ready to go. And then on the operations side, I want to make sure that we understand what the use is and that if it is as any sort of commercial aspect or retail aspect that there is, there are at least some leases in place, but it's not completely spec. And then a lot of this will be shown the terms of the financing, the terms of the HGC equity, the operations assumptions that will all be shown in a pro forma or projections. So those numbers are very important for an investor to see and when they're considering a project. You can go on to the next slide. So some of the risks that an investor is keyed in on obviously structuring, we want to make sure that it's structured appropriately to avoid loss of historic tax credits, you know, that there's not a 991 breakout so that the investor can get 99% of the tax credits and that we're making sure to address any nonprofit issues, ownership issues, that kind of thing. So those are things that the investors that are important to the investor and one of the reasons why we want to make sure that there is tax credit council involved and accountants involved that are very familiar with the rules. Construction completion is very important. Like I said credit delivery is contingent of on place and service so want to make sure that there are sufficient sources to get the deal done or the project completed. As far as credit delivery. Obviously, we need the project to be done in accordance with MPS requirements. And normally when we underwrite the projects from an investor perspective they price it based on their appetite for credits in a given year. So anytime that place and services delayed or that curie amounts change, obviously that impacts the investor return. So we want to make sure to take a look at that and see that that solid operations are another area that we make sure to look at. And not only the credits are important to investor but typically there is some interest in the success of the project and seeing it generate some cash flow, obviously to cover debt service and make sure there's no issues with the lender, but also provide a small return to the investor. And then as we talked about we want to avoid recapture during the compliance period. So we want to ensure that there's no change in ownership, no material alteration of the building. And then obviously no one wants to see anything bad happen to it from a casualty perspective. Go to the next slide. So some of the mitigants that are that are put in place here obviously having an experienced team on all fronts really helps with the underwriting and the comfort level. And the sponsor who's done a historic feel before is always nice, certainly not a requirement, but surrounding themselves by a general contractor and architect of preservation consultant that has done these things before is, it's helpful. And we also talked about having accountants and tax credit council that have experience from a construction budget perspective. So we want to have a engage a construction consultant to take a look at the plan and review the costs and just make sure that it seems doable for the budget that's out there. And then, obviously as we've seen over the last several years with costs rising and, you know, things just change so we want to make sure that we have an appropriate contingencies and reserves to deal with those unexpected issues. So we'll look at Garantor financial strength if we have a guarantor that has, you know, significant net worth and liquidity that's providing a guarantee for completion, standing behind the ability to pay expenses for the project and avoid recapture. That's obviously a positive factor. I mentioned briefly the beyond unconditional snda. This is important for investors to ensure that the, that the structure isn't disturbed during the compliance period so in one way shape or form we typically look for lenders to limit their remedies as it relates to historic tax credit structure. So we can go to the next slide. There's also a lot of underwriting that's done. Like I mentioned, the environmental title, all that kind of due diligence we do we do get an appraisal to see that the revenue and expenses and lease up assumptions are supported. We look at the lease up status and want to see that there's a property manager with experience in that asset type. And then we typically look for, you know, debt terms that that go out through compliance and have a healthy debt service coverage ratio. Operating reserves are obviously key in case, you know, things don't lease up as quickly as you thought or the rental rates aren't as high from the beginning as as might have otherwise been anticipated. And then we also to address some of the casualty aspects look for appropriate insurance. So those are the some of the things that just help address the risks that investor might be concerned about. And then you can go to the next slide. One more. And as John mentioned, the product, the HTC was enacted in the late 1970s. So it's been around for a long time and is a permanent credit. It has had some challenges along the way. Historic boardwalk and the revenue procedure, what we call the safe harbor was a really hard look at how the structuring was done and really guides us now on how to structure a partnership. We also had some heartburn over 50 d guidance several years ago trying to figure out how to recognize some of the income that's generated by the tax credit. And so that shifted the way that investors look at the credit and the pricing that they were able to pay. And then obviously the tax cuts and jobs act nearly did away with the HTC credit that we were able to save it. It did shift from a one year to a five year and did away with the 10% credits. So you can go to the next slide. And one more. We do have and we've been trying to make some headway with Congress to make some changes to the HTC to make it more attractive and have investors be able to pay a little bit more so that it contributes to the capital stack even more than it already does. So the HTC go is a piece of legislation that is out there now that temporarily increases the HTC from 20 to 30% to address some of the challenges that we've been seeing with increased, you know, loan terms interest rates and also just the material costs as well. And then some of the permanent enhancements that we're advocating for is to make this credit even more valuable to small projects by increasing the credit from 20% to 30%. So we're covering the substantial rehab test so that you have to put less and less into it than is otherwise required in order to qualify. Eliminate the basis adjustment requirement to make it a little bit more attractive to investors and simplify some of the tax rules for the nonprofits so that makes it easier for nonprofits to take some of these beautiful historic buildings and repurpose them. The last slide is just giving you some information about how to how to help with these advocacy efforts we think there might be a busy lame duck session coming up here. So if you've got projects or an interest in the historic tax credit please talk to your representatives see if you can get them to sign on to this legislation so that we can have an even more valuable credit than we have now. Great, thanks Heather. Could put up the new slides. Great. So I am at John and Heather walked you through sort of the developers perspective and the investors perspective on how a development project comes together, and I am going to dive into the weeds on the technical side of the historic tax credit. So I'm Elizabeth Rosen. I am the principal at Rosen preservation. We are historic tax credit consultants and work with developers building owners across the country to help them secure both the National Register designation and their federal and state historic tax credits. Since 2006, we have secured historic tax credits to support about $3 billion of investment in redevelopment activity. So I think John and Heather especially have already alluded to the basic criteria for a historic tax credit project. I'm going to run through them again with a slightly different bent to them. So the first is that you have to have an income producing property. As Heather said this can be any type of use other than an owner occupied residents. It can be residential apartments for rent apartments, commercial office retail manufacturing institutional use as long as there is an occupant playing paying rent to the owner of the building. Next slide please. The developer needs to make a substantial investment in their rehabilitation. So you must spend an amount that is more than 100% of your adjusted basis. We want to get down to what is the value of the building. So if you've just purchased a property, it would be your purchase price and taking away the value of the land to calculate that agenda for a while. You may need to factor in the value of improvements you've previously made, and you can also subtract the depreciation. Next slide. The value, the amount of your substantial investment is measured in your QRE, your qualified rehab expenses. And both Heather and John touched on this a little bit. A lot of the costs related to a development will be considered QRE. It includes all of your depreciable hard costs, as well as your allocated soft costs. Next slide please. One easy way to think about this is to is to look at the expenses that are non qualified. And these generally include your, your acquisition, any type of expansion of the building footprint or mass site improvements, including landscaping, parking areas, or even new construction. That's part of the development project. Personal property, things like appliances, furniture, things that are easily swapped out, as well as costs related to your marketing lease up and things that this also includes signage. So next slide please. As, well, I think both Heather and John talked about, a project must involve a certified historic structure. And this is a building that's listed in the National Register of Historic Places, either as an individual landmark, or as a contributing resource to a historic district. In the aerial photo, you see a boundary for National Register District. All of the buildings that are contributing to that district, like those you see in the photo, would be eligible to use the historic tax credit. The National Register program predates the historic tax credit and it has a completely separate process and timeline for designating buildings. So when the historic tax credit was created, the National Park Service recognized that this 6 to 12 month timeframe for listing a building on the National Register was not compatible with the development process. And they designed the application in a way so that the developer can get assurance that their building will qualify for the National Register and can proceed with their rehabilitation while that nomination is being reviewed, going through its review. The upshot here is your building does not have to be on the National Register at the time that you apply, but you want to make sure that you know that it will qualify, that it's National Register eligible. It needs to be a certified historic rehabilitation. And this means that the work, the rehabilitation itself meets the Secretary of the Interior's standards for rehabilitation. Next slide please. The standards help us preserve a building's historic character while still allowing for it to be adapted for a new use. The whole goal of this program is to help buildings remain economically viable. So the standards apply to all buildings, all building types, regardless of their age or their function or their materials. They cover work to both the exterior and interior of the building as well as the site. A tax credit project must meet all 10 of the standards. So you can't choose which standards you want to meet or which part of your rehabilitation will get the tax credits. It's an all or nothing proposition. To discuss the standards, we can condense them into three general categories. So first it's critical to recognize which historic elements building retains and to incorporate these into the rehabilitation plan. The treatments that you see in these two images are vastly different, yet each is appropriate for its context. On the right we have what was a historic department store, which meant that the decorative plaster needed to be repaired, and new elements needed to be incorporated in a way that respected the historic finished appearance. By contrast, the functional character of the warehouse building on the left was conducive to leaving brick exposed and incorporating very utilitarian ductwork and things like that. Next slide, please. The elements will help you to retain the historic character in the new program. This project converted an old school into apartments, and the gym was an important space that helped to communicate the history of the building. So the architect designed the apartment units in this space with a lofted plan so that they would incorporate the full volume of the historic gymnasium and also included the glazed tile walls and the painted wood floor into the design. Next slide, please. Sometimes a new use requires an additional square footage, and an addition is allowed if it complements the historic building. So the layout and size of this building were so tight they could not accommodate a new elevator and an exit stair, so an external tower was added to provide the vertical circulation. You can see that the new element is set back from the street face of the historic building. It uses similar materials, but it definitely remains secondary to the original design. Next slide. Another important concept when thinking about the secretary standards is hierarchy of review. So are we talking about street facing facades or are we looking at a rear elevation that fronts on an alley? Next slide. And on the interior, again, is it these public spaces like lobbies or corridors or more private spaces, perhaps old offices or apartments? Next slide. At this project really focused on restoring the features that had been lost on the street facing elevation and on the public corridors inside, and then the more private spaces, there was more leeway for changes to create new apartment units. Next, please. Because every building is unique in its architecture, its history, its current condition, the context for the redevelopment, we have to consider its history and circumstances to determine what is an appropriate rehab, what's an appropriate way to apply the standards. What may be appropriate for one project may not be appropriate for another, and that rule can even apply to different spaces within a single building. At this project, the very traditional wood paneled boardroom look very different from the rest of the clean modern 1950s office building. And the developer really wanted all of their apartment units to have the same feel to them, but we were required to keep that paneling from the boardroom. It was an important part of that building. And ironically, that was the first department to lease up. So I think there's a lesson in there. Next slide, please. The standards give a developer a lot to think about. But fortunately, the National Park Service website features an array of technical guidance. There's no need to reinvent the wheel. If you encounter a situation or a question, chances are somebody has encountered it before and figured out a solution. So you want to talk with your historic consultant, your architect, your SHPO staff to help figure out what will be a workable approach for your project. So I want to take a deeper look at a couple of topics that we encounter frequently with the standards. Next slide. The first is windows and windows are always the most complex and most expensive part of a rehabilitation project that shouldn't dissuade you from taking on a project. Just be aware of that going in. And the NPS website has a trove of information that can help you figure out how to evaluate the windows in your building, whether it is to repair them or to replace them. Repair is always the preferred option with the cost for repairing the sash and making energy upgrades often comparable to new windows. When the existing windows are deteriorated beyond repair or not original, you can install new windows that match the configuration and dimensions and profiles of the original windows. But what my one note of caution is always, always, always make sure your new windows are approved before moving forward. Next slide, please. Auditoriums, gymnasiums, church sanctuaries, theaters, these types of large interior rooms can be a project. They were often critical spaces that defined the historic character of their building and subdividing them will compromise the historic character. This project, much of the old school auditorium was preserved as a community meeting space. But we've also seen projects where a section of the auditorium is subdivided off to create a separate use or the area behind the proscenium, the backstage area is subdivided again for a separate use. This is another topic where MPS offers a lot of guidance online that shows how other projects have grappled with the question and incorporated these spaces into their rehab project. Next slide, please. The proper handling of, and again, MPS has a lot of guidance on topics like lead paint abatement, dealing with asbestos containing materials. But keep in mind that some of these materials may be considered historic fabric. We recently worked on a project that had original historic asbestos shingle siding. And after evaluating the siding, we determined that most of it was in good condition. Most of it was solid, it wasn't friable, it wasn't creating a hazard and the shingles were retained. We found a product that matched in terms of their dimensions, the size of the reveal and the texture to replace broken shingles or missing areas and the buildings were painted to give them a uniform look. Next slide, please. We all know that a rehabilitated building is inherently green and historic tax credit projects are frequently recognized by lead and other programs that encourage sustainability. MPS has produced a number of publications on the topic, specifically as it relates to historic tax credit projects. So for instance, we're seeing a lot of projects these days that are installing solar or rare electric usage. It's something that's very compatible with many historic tax credit projects. Next slide, please. Okay, so that was a really quick overview of the standards. We could have done this whole session just about the standards, but there's a lot more to cover. So the big question now is how do I get these credits? And John alluded to this a little bit earlier. Our historic tax credit application has three parts. The first part is documents that your building is a certified historic building. So it's either in on the national register already or it is national register eligible. This is the application that you will file. Again, if your building is not already on the national register that gives you your lenders and your investors the confidence to move forward before that national register designation is fully in place. Your part two application is the meat. This is the scope of work. This is where you outline the existing conditions of the building and you detail the work that's going to be proposed. All of that information is key to photographs of the building's existing conditions and your architectural plans. This lets the reviewers determine that your project does indeed meet the standards. And an approved part two is usually required by an investor before they're willing to move forward with a project. Quite frequently a scope of work will change during construction or new information will be discovered. If that's the case, you file an amendment that outlines those changes. It's a very straightforward process. And then when construction is complete, you're going to file part three. So there's a set of photos that document a building that is submitted with your part one or your part two. And then at the end of construction, you have your after photos that shows the beautiful rehabilitated building that has come after construction. You file that with your QRE and it's at that point that you're eligible to claim the credit. Next slide please. So there's a standard IRS form that is used to claim the credit. The amount of the credit is calculated on the IRS form and again it's 20% of your qualified expenses. And that amount that you calculate will be deducted from the bottom line of your taxes owed. As Heather said, the federal credit is paid out over five years in equal installments. And the credits can be used beginning the year the building is placed in service and carried forward for up to 20 years. I reiterate it again that the credits are subject to recapture if there is a change in ownership or non-compliant alterations are made within 60 months after your part three is approved. So that is a really quick overview of the historic tax credit application and that process. And that is I think my last slide so we're ready to move into the Q&A. I know one question that had come up in the chat or that we maybe hadn't touched on was about inflation and supply chain. John, you probably have a lot of information about this. I know we have a client right now that we're working with who's experiencing a cost coming in 35% over their estimated budget. And so there's a lot of value engineering going on right now. What are you experiencing? Right, a lot of value engineering. I mean, there are labor shortages that we've never seen rates revamped to where they say we're as in six levels. And so that's what was covered heavily in our state housing conference last week. What we're seeing is supply chain issues. If we have modern projects saying like in a multifamily development, we can't get the switch gear right now. And so we have projects that are opening in act that we won't have the switch gear until next April. So our contractors are running around and finding the materials that we need to do a single meter for multiple units. And then we'll have to move residents around. We do finally have that switch gear. So a lot of the components that are coming from overseeing delays in that. And then of course, whenever we're in a project, bank financing is a large component of that. Straight swings. We have to go back and find alternative resources of dollars. So whether that be ARCA funding at a local level, it's been challenging. My bet is inflation and interest rates affecting things. Does that affect your end of the deals or is that back to John? Yeah, are you having projects stall Heather? Yeah, I mean, that's the issue is that when projects stall because, you know, in inflation and costs have increased and they're trying to find additional financing, then the interest rates are going up. So that's changing their debt service coverage ratio and, you know, the reserves they need for interest during construction. So, you know, it all sort of exacerbates one another with both issues creating concerns. So, you know, if you can get a fixed rate and you can close quickly, it seems like those are the key issues, but that's just it's not always possible. So just realizing that having to, you know, build a little bit of flexibility into the budget is important. I guess one thing that's good with the historic, the federal credit at least is that it's rolling that it's you're not locked into an amount that you estimate at the beginning. At the beginning of your project, if you end up spending more, you'll get more credit. And I know for some state credits, they roll the same way and for some it becomes a real a real burden when costs. Right. Program. With the state credits and the federal credits, at least when your costs are going up, you're getting some of that money back, whether it's 20% on the federal side or, you know, 40% when you add in the state or some of those states even have higher percentages. So not it's not 100% bad because you're getting some tax credit back for it or equity back for it, but it's still struggle. You know, it's the first time that I've ever even heard of 45 and 50 year loans that are hammered. I don't know if you've seen that at all Heather on any of your deals. We used to hug to 21 before that's 40 year financing. That was like such a great program in regard as to being able to borrow, but to actually put the station out 45 years. That's the first and deals are still, you know, seem to be struggling with that now, you know, becoming available. Another question that came up was, you know, about doing mixed use developments where you'll have his buildings and say like a new facility or new construction. Have you seen any kind of campus type of developments or multiple building developments where you also construction as a large component? A brick campus, you know, multiple phase building. We've definitely seen projects, you know, and they don't have to be a huge campus, but I there are a lot of affordable housing projects that involve a historic school building that will also have new construction in conjunction with it. That's pretty common. Yeah, same thing. You see new construction is not all not all that uncommon. It's just to keep in mind that, you know, which pieces are eligible for the credit and which aren't just making sure that you keep your financing straight. But that's certainly an option is to, you know, rehab a building and add on some construction as well. Yeah, generally some excess land, say like in a, you know, historic site or parcel. We might destruction that even then help further subsidize the historic rehabilitation. We also see that veterans home project was a good example of this of that functionally related complex where you have multiple historic buildings. That get redeveloped either in phases or in a single lump that provide a lot of opportunity. No, I mean, in regards to, you know, a careful if you have multiple things that one of your buildings doesn't jeopardize the part three. You know, of your other bell, your investor is comfortable with the phasing if you don't do it all at one time. And so I know that the park service has had, you know, new restrictions on, you know, how to do, you know, functionally related and large masters like that that we've participated in. So there's always a lot of planning that goes up front. Definitely. I also saw a question in the chat about discussing the timeline of things. It's always trying to figure out sort of who you engage when and obviously you know the idea for the project comes first but then trying to figure out your financing. So if you think that you have a historic building and you think the historic tax credits are an option, definitely working with your ship. Oh, and a preservation consultant is a good place to start from that perspective. Right. Try to keep your pre-developed down and extensions on, you know, options for sites available as it's going to take some time to sometimes, you know, catch up and figure out. How to make these projects come to fruition. Right. It's definitely a chicken and egg game. You need to have your historic process far enough along, but still keeping the other pieces in play. Let's see. The question is, can you be partially owner occupied? Can the owner maintain some offices? You know, let's say if it's a nonprofit tenant, the nonprofit can maintain 50% of the space in an owner occupied in regards to, you know, a for profit. It's got to be still commercial income. Do you want to touch on that a little bit, Heather? Yeah, I was just looking at the question. Yeah, so certainly you can maintain some of your space. But like you said, you have to be, if you're a nonprofit, you have to be wary of what percentage of the space that the nonprofit is. We've also seen projects where we call an in-place rehab. So if you've got some great tenants that you don't want to displace, you don't have to have an empty building. It's certainly easier from a security and development construction perspective, but the rules allow for in-place rehabs. There are some restrictions from a historic tax credit compliance perspective, just from a structuring perspective with the sponsor having a lease of the space. But a lot of times the lenders will require that anyways because they want the space leased up so it becomes a non-issue. But that's certainly an option. I think one important note in the whole nonprofit question is if you're rehabbing a building that your nonprofit is not currently a tenant in, excuse me, and they just become a tenant in a space paying rent. That there are no limitations on that. The difficulty comes when the nonprofit is also part of the ownership, the building ownership in the development team. Yeah, you'll hear a lot. Or they've been in the building before. Prior use. Yeah, that prior use is like a bad word sometimes. It comes to nonprofit because if you own the building but you want to, you know, rehab it and put some money into it, it makes it much more difficult to structure if you want to continue to use the space on the back end. We've certainly found ways to do it in many situations, particularly John mentioned theaters a lot of times, but they'll own the theater to begin with and they want to maintain it as a theater and operate it. So sometimes you just have to make sure that you structure the, you know, the operating agreement and the management agreement appropriately to avoid some issues. One of the next questions was how I think this is a question that's kind of dis disqualified disqualified leases kind of like the standards like interpreting the standards there's a lot that's been done before and if you have that kind of a situation just find somebody who's been through the process to help you out. Absolutely. There was a question about how the amic has affected, you know, credit pricing. The three credits that I would get called quite about was, you know, theaters pandemic. There was a theater project that's involved with that closed one week before March of 2020. So, you know, the projects where you had, you know, the unit use that struggled that hotels. I don't know how they have you seen hotel investments at all I come back. A lot of those folks seem to be, you know, in a challenging position. Yeah, absolutely. I think certainly the pandemic has affected appetite but I think it's more affected the types of projects that folks are willing to do. As you see, you know, obviously residential projects seem to do okay, but theaters and hotels I mean that those when you've got a when you've got an investor in there and you know a sponsor for that matter who want to see the project succeed and get cash flow. It's hard to, it's hard to get back in. We are seeing hotel projects come back, mostly because it's going to take, you know, 18 to 24 months to get them built. And then mostly, you know, the most attractive ones are the ones that are in sort of destination city. So you're certainly starting to see them come back. But, you know, it's, it's slow. We definitely had a couple of hotel projects that switched to multifamily. Then, you know, the projects I know that I've seen the investors are still waiting for payment for a stabilization payment coming in, you know, just really hovering and, you know, working through this. And any other Rhonda and team backstage anything else? People in the audience, anything else? All right. I think I think that we're done with questions. Great. That was wonderful. Thank you to John and Heather and Elizabeth for sharing your expertise. I know this is a topic that many people could talk about all afternoon and we really appreciate you sharing your your time and expertise with us. For those in the audience, the recording will be available following the password conference at this time presentations are not available. We'd also like to ask you to join us for our next workshop, which is being held at 2 o'clock p.m. Eastern on October 18 on the topic of issues in preservation law. And also to be on the lookout for more on demand content coming in October. So with that, I'll sign off for now and thanks again to our panelists. Thank you. Thank you.