Demystifying Real Estate Development and Financing

Main Street South Carolina Retreat Demystifying Real Estate Development and Financing North Myrtle Beach, SC August 7, 2008 Presentation By: Linda B. Sorden Executive Director National Trust Loan Fund OBJECTIVES • DETERMINING THE RIGHT FINANCIAL TOOLS • ACCESSING THE FINANCIAL TOOLS REAL ESTATE PROJECTS • MONITORING The Big Picture • Cost vs. Value • Tax Credits vs. Financing (Financing vs. Grants) • Historic Rehabilitation Standards vs. Cost of Rehabilitation • Easy/Painless vs. Due Diligence R.H.Newell Building, Medina, NY Sources of Financing • Debt Financing • CDFI’s • Traditional Banks • Specialized Loan Funds Tax Credits • Federal Historic Tax Credits • State Historic Tax Credits • New Markets Tax Credits Government Sources – CDBG – State Funding – City Funding Grants – Façade • • • Finance Toolbox of the National Trust for Historic Preservation •National Trust Loan Fund •National Trust Community Investment Corporation •Small Deal Fund •Southern Regional Office What is the National Trust Loan Fund? •Community Development Lender •A Certified Community Development Financial Institute •Providing financial and technical assistance to underserved communities for commercial and residential redevelopment •Promoting the historic preservation ethic and a commitment to Main Street About NTLF - Financial Assistance •Participation Loans •Predevelopment •Acquisition •Rehabilitation •Lines of Credit •Bridge loans •Intermediary Loans* About NTLF - Technical Assistance •How to assess financial options •Real Estate development Training: one-on-one and workshops •Tax Credit and debt financing: How to access and determine readiness About NTCIC Masonic Building, Baltimore, MD American Tobacco, Durham, NC • • NTCIC’s objective: making equity investments in real estate projects that qualify for federal historic tax credits and when available, state historic tax credits and New Markets Tax Credits. Organized as a for profit, wholly owned subsidiary of the National Trust for Historic Preservation in August 2000. About NTCIC NTCIC Products: • National Trust Community Investment Fund – HTC Fund and HTC/NMTC Combination Fund – Projects yielding at least $1.5 million in HTC (approximately $7.5 million in TDC) – Competitive pricing • Small Deal Fund – HTC Fund Only – Projects yielding between $200,000 and $1.5 million (approximately $1 million to $7.5 million in TDC – Streamline closing process lowering closing fees Colt Gateway, Hartford, CT About the Regional Office • The Southern Regional Office of the National Trust for Historic Preservation • Charleston, • Joe SC McGill ONE SIZE DOES NOT FIT ALL Determining the Right Financial Tool Who are you? What is your vision? What is the scope of the project? How much does it cost? What can you afford? What due diligence is required? Initial Steps to Real Estate Development Predevelopment •Identifying the Project •Scope of Project •Putting theTeam Together •Build Relationships •Site Control •Building a Sources and Uses Budget Blue Room Lounge Bldg, Cedar Falls, IA Severs Block Building Muskogee, Oklahoma Project Purpose A devastating fire prompted the complete rehabilitation of one of the oldest buildings in downtown Muskogee into retail and offices. Finance Structure Owner equity Loans Armstrong Bank National Trust 207,866 900,000 450,000 Historic Tax Credits Federal 273,337 State 273,337 Newell Shirt Factory Medina, New York Project Purpose Renovation of factory into retail, office and loft apartments. Finance Structure $1,250,000 Acquisition Vlge.Medina-$50,000 Construction NTLF - $500,000 Ntl.Grid Gr-$50,000 NY MS Gr-$100,000 HSBC/LOC-$100,000 Permanent Community Preservation Corp. - $450,000 What bankers/investors want to know, How they gain knowledge (perform due diligence) What you provide for their underwriting Underwriting - Risk and Repayment Analysis Will the Project succeed? → Business risk analysis → Feasibility study, Market study Is the Developer/project sufficiently capitalized? → Financial statement analysis → Financial statements, Sources and Uses Can the Project support itself? → Cash flow analysis & projections → Operating pro forma Does the Collateral protect the investment? → Collateral analysis → Appraisal; Strength of Personal Guaranty National Trust Loan Fund - Eligible Uses •Mixed-Use/Upper Floor Housing •Community Facilities •Commercial Development •Residential Rehabilitation •Affordable Housing •Traditional Preservation American Brewery Bldg, Baltimore., MD National Trust Loan Fund - Terms and Conditions Eligibility Listed/Eligible on Register, in District Certified Main Street Up to $500,000 Up to 5 Years* Maximum Loan Amount Maximum Term Interest Rate Maximum Amortization Collateral Debt Coverage Ratio Origination Fee Fixed Rate Financing Up to 30 Years Required (LTV – 80%) 1.10 2% of loan amount NTCIC - New Markets Tax Credits • Designed to encourage investment in businesses and real estate projects in low-income communities. • Administered by the Community Development Financial Institutions (CDFI) Fund and the Internal Revenue Service of the U.S. Treasury Department Provides a tax credit to investors that provide equity or loan funds which support commercial activity (businesses or real estate development) in low-income neighborhoods The NMTC allows investors to provide more equity or a loan on better terms because they receive a credit on top of the return from the underlying investment or loan • • NTCIC - New Markets Tax Credits • Investors must be taxpaying entities • Credit = 39% • $1 investment yields 39¢ credit • Credits are claimed over 7 years • Example: an investor that invests $1,000,000 in a CDE in 2005 will receive $50,000 in tax credits in 2005-2007 and $60,000 in 2008-2011, for a total of $390,000 in credits • Investors will typically require a return of capital NTCIC/SDF - About Historic Tax Credits 20% HTC Certified Historic Structure by NPS Secretary’s Standards for Rehabilitation 10% HTC No Certification from State Historic Preservation Office or NPS Non Residential Buildings Older than 1936 One dollar of tax credit reduces the amount of federal income tax owed by one dollar Old Post Office, St. Louis, MO NTCIC/SDF - About Historic Tax Credits Calculating HTC • $8,500,000 in eligible QRE. • 20% x $8,500,000 = $1,700,000 Eligible HTCs • A corporation investing in a historic rehabilitation can reduce their federal income tax by the amount of the credit. 20% HTC eligibility • Four Tests: Certified Historic Structure Qualifying Property Category “Substantial” Rehabilitation Secretary’s Standards for Rehabilitation Aladdin Hotel Kansas City, MO About Combining HTC and NMTC Federal HTCs and NMTCs are calculated as follows. A. 20% federal HTC investment calculation: 1) Estimated QREs = $8,500,000 2) Estimated HTCs is 20% x $8,500,000 = $1,700,00 3) Negotiated price per dollar of federal HTC= $.99 4) HTC equity is $.99 x $1,700,000 = $1,683,000 B. NMTC investment calculation: 1) HTC equity of $1,683,000 becomes a QEI 2) Value of NMTCs is 39% x $1,683,000 = $656,370 3) Negotiated price per NMTC = $.70 4) Additional equity of NMTCs is $.70 x $656,370 = $459,459 About Combining HTC and NMTC C. $1,683,000 + $459,459 in equity has been added due to HTCs & NMTCs. Because NMTCs are earned on TOTAL equity, the additional NMTC equity earns additional credits. 5) Investor receives more NMTCs due to the $459,459 equity (39% x $459,459 = $179,189) 6) Investor pays more equity for those NMTCs--$.70 x $179,189 = $125,432 7) This function continues until the total equity from additional NMTCs is $172,533 8) Total QEI $1,683,000 + $459,459 + $172,533 = $2,314,992 NMTC leveraged an additional equity of $631,992 then HTC alone leverage From a Lending Perspective Real Estate Financing The Five C’s of Credit: •Character •Capacity •Collateral •Capital •Conditions Green Tambourine Bldg, Keokuk, IA The Main Street Four-Point Approach Organization Design Promotion Economic Restructure Severs Block Building Linking the 4 Points with the 5 C’s 1. From Organization to Character • Management – Experience – Financial Strength • Volunteers/Board - Development Team • Standing Committees – Designated Roles Linking 2. Economic Restructure to Capacity • Competition - Source of debt service/repayment • Business savvy - Cash flow • Profitability - ProFormas • Financial Statements/Operating Budget • Real Estate Development • Capital Budget Linking 3. Promotion to Capital • Investors - Equity contribution • Confidence – Reserves • Live/Work/Play Linking 4. Design to Collateral • Building improvements - Secondary source of repayment • Market - Basis of collateral value • Historic - Type of collateral • Market - Appraised value • Physical condition - Environmental Linking 5. Forces to Conditions • Social • Economic • Political • Preservation And “P” for Preservation • • • • • Is it a designated Main Street Community? Is it eligible for historic designation? Is it historic? National, State or Local? Will the rehabilitation performed to the Secretary’s Standards? How protected: Easements, Deed restrictions or covenants? Proper Planning Prevents Poor Performance! Packaging Your Vision to Access Financing • Site Control – Option to Purchase/Purchase and Sales Agreement – Conveyance of Property – Deed of Trust or Mortgage • Predevelopment Activities – Feasibility Study – Acquisition – Market Analysis – Appraisal – Preliminary architecture drawings and renderings – Engineering Studies – Environmental studies Packaging Your Vision to Access Financing • Business/Strategy Plan – Organizational and Financial Strength – Target Community – Marketing Plan – Operations • Development Team – Developer (Contact Person) – Preservation Specialist – Architect – General Contractor – Project Manager (Construction Oversight – Accountant – Management Agent Packaging Your Vision – Capacity and Capital • Project Budget and Uses of Funds • Sources • ProForma Operating Income and Expense Statement Cash Flow Projections Project Development Budget For: Location: Date: Budget Amount Soft Costs Legal Fees Borrower's Legal Fees Title & Recordation (Incl. Title Ins. & Survey) Phase I Environmental Appraisal Pre-Construction/Construction Monitoring Architect - Contract Amount Engineer Project Manager Building Permits/Tap Fees Payment & Performance Bonds Builder's Risk Insurance Other Insurance Taxes Interest Reserve Financing Fees Accounting Fees Security Soft Costs Contingency 5% Total Soft Costs Construction Costs (Hard Costs) (Per General Contractor's Contract) Hard Costs Contingency - 10% (Ground Up or 15% to 20% for Renovation) Total Hard Costs Building/Land Acquisition Sub-Total Project Costs Equipment Costs, et al Retail Fixtures, Furniture Computers/AV Equipment Equipment Contingency 5% Total Equipment Working Capital Total Project Costs Sub Total Sources of Financing • Debt Financing • CDFI’s • Traditional Banks • Specialized Loan Funds Tax Credits • Federal Historic Tax Credits • State Historic Tax Credits • New Markets Tax Credits Government Sources – CDBG – State Funding – City Funding Grants – Façade • • • Uses of Financing • • Mixed Use Development – acquisition, predevelopment, rehabilitation acquisition, predevelopment, rehabilitation Housing Development (single or multifamily) – • Commercial Development – acquisition, predevelopment, rehabilitation • • Façade Improvements Relocation of threatened historic property Building a Sources and Uses • Total Project Cost • Sources of Funding • National Trust Loan Fund • Local Bank • State Economic Development Grant • City of MyTown CDBG • Façade Grant, Main Street • Total • Uses of Funding • Acquisition • Rehabilitation Costs (Hard Costs) • Soft Costs • Façade Improvements • Total $1,000,000 $350,000 $350,000 $200,000 $50,000 $50,000 $1,000,000 $200,000 $600,000 $150,000 $50,000 $1,000,000 Understand the Costs Associated with Loans • Initial costs: • Application Fee • Origination Fee • Legal Fees • Prepayment Fees Other costs: • Interest, principal repayment, modification fees, release fees • Managing construction/restoration There are some underlying rules. • • • Time is always a challenge - Gaining Site Control Someone has to be responsible - Managing Repayment Source Construction/restoration - Is always unpredictable Loan maintenance There are some underlying rules. • • • • • Reporting Requirements Insurance Coverage Timely Payments Payoff Process Extension and Modification Requests Managing Cost Overruns • • • • • Change Orders – Time – Materials – Labor Scheduling Inspectors Environmental Acceptance vs. Approval – Contingency –10%/15% - 20% Managing Risk During Construction Construction Finance Management of the construction loan’s disbursement process. • • • • • Tracking Budget Tracking Loan to Value Pre – Construction Meeting Lien Waivers AIA Title Updates Invoices Construction Reports • • • Relationship Building Establish early in development process relationships for success! • • • • • • • National Trust SC Main Street Coordinating Program Local preservation organizations State Historic Preservation Office Local, state, and federal governments Local banks Neighborhood and Community Associations Mixed-Use Development MacGillivray's Building, Baltimore, MD • • • • Loan Amount – $225,000 Term Loan Total Development Cost – $2,594,799 Project Detail – Mixed-use development in the Mt. Vernon Historic District – Rehabilitation with upper floor housing and ground floor retail – Strong community support Other NT Involvement – HGTV Restore America grant winner • Project Genesis: • • Concerned neighbors working with CDC 2000 Population: 651,154 Affordable Housing Wauregan Hotel, Norwich, CT • Loan Amount – $350,000 term loan • Total Development Cost: – $22,249,455 • Project Detail – Formerly vacant hotel now 70 units affordable housing – Street-level retail and community function space – Located in a Main Street community • Other NT Involvement – Strong regional office leadership – HGTV Restore America grant winner • • Project Genesis: – Advocacy by nonprofit preservation community in conjunction with preservation-minded developer Population in 2000: 36,117 Contact information National Trust Loan Fund 1785 Massachusetts Ave, NW Washington, DC 20036 (202) 588-6360 (202) 588-6475 (fax) www.preservationnation.org/loanfunds