Talking Heads: Albert Rex, CEO, MacRostie Historic Advisors
By Darryl Hicks
11 min read
Historic Credit Market and Policy Update
For 24 years, Albert Rex has been a key player in America’s historic preservation movement.
As a consultant, he has guided developers, lenders, investors and others through the complex process of getting projects approved for Federal and State Historic Rehabilitation Tax Credits (HTC).
As a policy advocate, he helped draft the legislation that led to the creation of Massachusetts’ HTC program, and has replicated those efforts in other states.
Today, Rex is partner and CEO at MacRostie Historic Advisors, LLC, a national leader in Historic Tax Credit consulting with offices in Washington DC, Chicago, Boston, Charleston, San Jose (CA), Houston and New Orleans. The firm has been actively involved on over $2 billion of historic projects in 39 states, including the much-heralded renovation of the TWA Flight Center at John F. Kennedy Airport into the TWA Hotel.
He is also a former executive director of the Boston Preservation Alliance, Boston’s citywide nonprofit preservation advocacy organization. While at the Alliance, he was involved in numerous projects and planning processes that focused on historic preservation’s role as an economic development tool.
Tax Credit Advisor sat down with Rex to talk about major issues and trends in the HTC market.
Tax Credit Advisor: What are you seeing in the HTC market?
Albert Rex: The amount of time and effort that goes into HTC deals has increased a little bit relative to investor due diligence. There has been a lot more activity during construction. Changes that before we were comfortable advising clients to keep moving forward on, now we’re going back to the State Historic Preservation Office (SHPO) or the National Park Service to get those changes approved. Some of that may be related to tax reform but also the Historic Board Walk court case from a few years ago, which left investors feeling like they needed a certain level of comfort during pre-construction.
TCA: How would you describe investor appetite for HTCs in the wake of tax reform?
AR: Investor appetite remains strong, though pricing has softened in the marketplace now that the Federal HTC must be claimed over five years instead of one year. Credit prices were probably in the high 80-cent to low 90-cent range prior to tax reform. Now prices are in the mid-70s to low 80s.
TCA: Have lower prices put added pressure on developers to finance historic deals?
AR: Sure. It depends on the market and project type. The good news is that there are over 36 states with HTCs. The trade-off is that state HTCs are less stable. It’s much easier for a state legislature to change the rules. State credits can go up and down in value as changes are made, but nevertheless they are a valuable gap filler. As you go through the process of getting a Federal HTC application approved, most states piggyback on the same design requirements. This makes qualifying for State HTCs that much easier. In the Low Income Housing Tax Credit (LIHTC) market, a typical transaction has six or more financing sources in the capital stack. Clients in the affordable realm are used to squeezing dollars from local municipalities, HOME funds, etc. Lower pricing hasn’t impacted the desire to use Federal or State HTCs or a developer’s ability to find enough financing.
TCA: Have there been any improvements, or major changes, to state HTC programs?
AR: Things are happening in almost every state that has a program. On the positive side, Texas’ program continues to be among the strongest. It’s a 25 percent credit with no recapture that has created a lot of development opportunities. Louisiana’s credit is sunsetting in a couple years. There has been some resistance in the legislature to pass a bill that would extend the sunset. It has been a very important credit post-Katrina and has played an important role throughout Louisiana, not just in New Orleans. Wisconsin’s program went through some ups and downs but has balanced out. New York’s credit is among the most widely used in the country. Efforts are underway to convert the credit into a certificate. Right now, it’s set up so that you can get a refund, but generally you need a big federal investor that can also claim the state credit. There’s constant activity going on in the states and a lot of it’s being driven by developers and syndicators who keep these programs moving in a positive direction.
TCA: Do you see any new state tax credits being created?
AR: There have been discussions in Florida. People have asked whether Florida has anything historic. Yes, it does. Tennessee is another state where there has been some traction. Three other states that people are looking at include Michigan, which lost its credit five or six years ago but may bring it back, New Jersey and California. California has a LIHTC program and there has been strong sentiment to create a historic program. At the federal level, California is on par with Connecticut in terms of historic deals that are getting done. It’s not a huge market, but our sense is that if California added an HTC program that could create a lot more opportunities.
TCA: In which states are you seeing the most HTC activity? What types of structures are being rehabilitated? What popular end uses are you seeing?
AR: New York is high on the list. Its Historic Tax Credit is being used predominantly in the upper part of the state more than in Manhattan, for instance. It is being used for market-rate residential, hotels, co-working spaces, all sorts of things. We’re still seeing a lot of twinning of HTCs with LIHTC programs in order to do affordable housing. That’s still a large portion of the market. Massachusetts, where I am based, has a State Historic Tax Credit program with three application rounds annually, the last one generating 236 applications. That shows that there are still a lot of opportunities in Massachusetts. We’re also seeing a lot of interest with nonprofits. We’re working on several art centers and some theater projects. Although construction prices are high, we’re still seeing nonprofit deals going forward. Texas is still going strong, with a lot of housing and commercial, mixed-use. Activity in Georgia has dipped. That’s because the state’s HTC program changed with no allocation remaining through the sunset date of the program in 2021.
TCA: When you say there has been an increase in nonprofit activity are you talking about developers, or end-use?
AR: It can be either. We are seeing more nonprofit developers restructure deals using a for-profit subsidiary. In Massachusetts, nonprofits are treated like for-profits, so they can utilize the state HTC without having a for-profit subsidiary. Other states we’re seeing the same thing. In New York, there are nonprofits that are making the election to put their building into a for-profit subsidiary in order to have a taxable entity that can use the HTC. The big question that arises with nonprofits is the value of the tax credit. When they put a property into a for-profit subsidiary, they pay local real estate taxes, which they historically have never done. The nonprofit must calculate the numbers and then determine that if they do bring capital into the project is it worth doing so if they must pay taxes? Most often, the answer is yes.
TCA: What building types do you find most appealing? Which building types do you find the most challenging and why?
AR: The Modern Movement buildings from the late 50s and early 60s are interesting from a design perspective. We’ve grown up with these buildings. They are the newest buildings that are coming of age and qualifying for National Register status under the 50-year rule. They do pose challenges. Some office buildings that we are working on were constructed for the federal government and have been put out into the private market. They have very changeable floor plans, so there have been challenges around what new floor plans are acceptable to the National Park Service, especially if we convert them into hotels. Many of these buildings had open spaces, but hotel floor plans are more closed.
TCA: What federal policy changes would you like to see enacted to improve the Federal HTC? Do you anticipate any action on the part of Congress to address these issues?
AR: This past spring, the HTC Growth and Opportunity Act was introduced by Rep. Earl Blumenthal (D-OR), who has been a real leader in this area. The bill is designed to make smaller projects with total development costs under $3.75 million more attractive to developers. The bill increases the credit amount from 20 percent to 30 percent for projects of this size and it allows credits to be transferred or sold similar to some state tax credits, which reduces legal and accounting costs. In order to utilize the federal credit, you must have 100 percent of your basis in the building. So, if you acquire the building for $1 million, you must spend $1 million rehabilitating it. The bill reduces that basis by 50 percent. This would expand the market to a lot more buildings that don’t need 100 percent rehab but still need fixing up. The bill would remove the basis adjustment, which could help restore pricing back to that 90 cent range we had previously. Lastly, the bill would change the disqualified lease rules. Right now, you can only lease 50 percent of the property for a term of 20 years to a nonprofit. The bill would remove that restriction and allow nonprofits to lease the entire building for up to 20 years. This would allow developers to open the potential pool of renters to their properties. There are not a lot of individual bills that are moving in Congress right now, so there is an expectation that some of these reforms could be pulled out and attached to a bill that is moving, like a budget bill. The one provision that people are most focused on is the basis adjustment and finding a way to get that into a vehicle that is likely to pass. That would have a positive impact on the entire industry from a pricing perspective.
TCA: What are some of the common reasons that applications are denied? What advice can you give our readers to avoid these mistakes?
AR: As I noted earlier, the complexity of these projects has increased somewhat. The need to get projects filed as quickly as possible and to keep them advancing means that some applications might be coming in with less information. We are finding that the National Park Service is coming back with a lot more questions. My recommendation is to plan out the development process. Know how long the State Historic Preservation Office takes to review applications. Is it 30 days or 45 days? What common questions do they ask? No states are alike. Even some reviewers at the National Park Service examine applications in slightly different ways. Understand your state. Give yourself enough runway, so that you can answer these questions and you’re not under the pressure of ‘well, we need to order these windows tomorrow’ but you’re looking at a 60- to 90-day approval process. It’s difficult, with the pressures that our clients are under, to slow down. Time is money. But it’s important to address as much as you can and that will help smooth the process going forward.
TCA: Have you seen any improvement in project approval turnaround times at the National Park Service? To the best of your knowledge has the NPS filled the staff positions that had contributed to longer wait times last year?
AR: Wait times have improved a little bit. The National Park Service is filling five positions now. We are hopeful that those review times will come down. They are still above what they were historically. It’s not just with the Park Service. The SHPOs are understaffed too and with the projects becoming more complex I think everyone is still a little overwhelmed.
TCA: What one piece of advice would you give to a developer who is considering his/her first historic rehabilitation deal?
AR: Developers must understand that all levels of government subsidy come with some type of brain damage. Be patient and thoughtful. The application and review process may not always seem logical, so don’t always think that logic will prevail. Going in with eyes wide open, thinking through the timing of all facets of the project, and understanding the different elements that could create issues, is very important. The sooner you start having conversations with a historic consultant, and having that consultant work with your architect, will give you greater comfort. Not every project makes sense from a Historic Tax Credit perspective. I think most of them do, but you need to confirm with your consultant that the program fits with what you’re trying to do.
