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Main Street South Carolina Retreat 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

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Main Street South Carolina Retreat Demystifying Real Estate Development and Financing

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  1. 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

  2. OBJECTIVES • DETERMINING THE RIGHT FINANCIAL TOOLS • ACCESSING THE FINANCIAL TOOLS • MONITORING REAL ESTATE PROJECTS

  3. 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

  4. 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

  5. Finance Toolbox of the National Trust for Historic Preservation • National Trust Loan Fund • National Trust Community Investment Corporation • Small Deal Fund • Southern Regional Office

  6. 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

  7. About NTLF - Financial Assistance • Participation Loans • Predevelopment • Acquisition • Rehabilitation • Lines of Credit • Bridge loans • Intermediary Loans*

  8. 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

  9. About NTCIC • 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. Masonic Building, Baltimore, MD American Tobacco, Durham, NC

  10. 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

  11. About the Regional Office • The Southern Regional Office of the National Trust for Historic Preservation • Charleston, SC • Joe McGill

  12. 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?

  13. 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

  14. Severs Block BuildingMuskogee, 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 207,866 Loans Armstrong Bank 900,000 National Trust 450,000 Historic Tax Credits Federal 273,337 State 273,337

  15. Newell Shirt FactoryMedina, 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

  16. 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

  17. 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

  18. National Trust Loan Fund - Terms and Conditions

  19. 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

  20. 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

  21. 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

  22. 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. NTCIC/SDF - About Historic Tax Credits • 20% HTC eligibility • Four Tests: • Certified Historic Structure • Qualifying Property Category • “Substantial” Rehabilitation • Secretary’s Standards for Rehabilitation Aladdin Hotel Kansas City, MO

  23. About Combining HTC and NMTC Federal HTCs and NMTCs are calculated as follows. • 20% federal HTC investment calculation: • Estimated QREs = $8,500,000 • EstimatedHTCs 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

  24. 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 = $179,189) • Investor pays more equity for those NMTCs--$.70 x $179,189 = $125,432 • This function continues until the total equity from additional NMTCs is $172,533 • Total QEI $1,683,000 + $459,459 + $172,533 = $2,314,992 NMTC leveraged an additional equity of $631,992 then HTC alone leverage

  25. From a Lending PerspectiveReal Estate Financing • The Five C’s of Credit: • Character • Capacity • Collateral • Capital • Conditions Green Tambourine Bldg, Keokuk, IA

  26. The Main Street Four-Point Approach Organization Design Promotion Economic Restructure Severs Block Building

  27. Linking the 4 Points with the 5 C’s From Organization to Character Management – Experience – Financial Strength Volunteers/Board - Development Team Standing Committees – Designated Roles

  28. 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

  29. Linking 3. Promotion to Capital Investors - Equity contribution Confidence – Reserves Live/Work/Play

  30. 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

  31. Linking 5. Forces to Conditions Social Economic Political Preservation

  32. 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?

  33. Proper Planning Prevents Poor Performance!

  34. 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

  35. 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

  36. Packaging Your Vision – Capacity and Capital • Project Budget • Sources and Uses of Funds • ProForma Operating Income and Expense Statement Cash Flow Projections

  37. 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

  38. Uses of Financing • Mixed Use Development • acquisition, predevelopment, rehabilitation • Housing Development (single or multifamily) • acquisition, predevelopment, rehabilitation • Commercial Development • acquisition, predevelopment, rehabilitation • Façade Improvements • Relocation of threatened historic property

  39. Building a Sources and Uses • Total Project Cost $1,000,000 • Sources of Funding • National Trust Loan Fund $350,000 • Local Bank $350,000 • State Economic Development Grant $200,000 • City of MyTown CDBG $50,000 • Façade Grant, Main Street $50,000 • Total $1,000,000 • Uses of Funding • Acquisition $200,000 • Rehabilitation Costs (Hard Costs) $600,000 • Soft Costs $150,000 • Façade Improvements $50,000 • Total $1,000,000

  40. 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

  41. Managing construction/restoration • Time is always a challenge - Gaining Site Control • Someone has to be responsible - Managing Repayment Source • Construction/restoration - Is always unpredictable There are some underlying rules.

  42. Loan maintenance • Reporting Requirements • Insurance Coverage • Timely Payments • Payoff Process • Extension and Modification Requests There are some underlying rules.

  43. Managing Cost Overruns • Change Orders • Time • Materials • Labor • Scheduling • Inspectors • Environmental • Acceptance vs. Approval • Contingency –10%/15% - 20%

  44. 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

  45. 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

  46. Mixed-Use DevelopmentMacGillivray'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 neighborsworking with CDC 2000 Population: 651,154

  47. Affordable HousingWauregan 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

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