Bashar Issa anticipates the work stoppage at the Statler to be temporary. The developer is working to obtain over $20 million in historical tax credits, a process that may take 90 to 120 days according to news reports. Meanwhile, Issa is negotiating with Wyndham Hotels and Resorts to put a hotel in up to eleven floors of the eighteen-story property, significantly larger than previously planned.
Several downtown adaptive reuse projects have utilized historic tax credit financing in recent years. Under the Tax Reform Act of 1986, a privately owned building that is listed in the National Register or is a contributing building in a National Register historic district may be eligible for up to a 20 percent federal income investment tax credit based on the costs of a qualified rehabilitation of the building. The qualified rehabilitation expenditures include all hard and soft costs associated with the rehabilitation but do not include site work, new construction, landscaping or acquisition. These incentives have sparked interest in rehabilitating overlooked local landmarks.
Under the federal program, if a developer entity spends $10 million on qualified expenditures for a project, there could be $2 million in tax credits available to directly offset income taxes. These tax credits can be either used to offset the property owner's tax liability or sold to a tax credit investor in exchange for additional equity capital that can be used for the project's long-term financing.
In order to obtain the 20 percent historic preservation tax credit, the following requirements must be met: •The property is listed on the National Register of Historic Places •The property will be depreciable residential, commercial or industrial property after completion of the rehabilitation project •The property is a certified historic structure •The work to the building is a certified rehabilitation •The project costs qualify as a substantial rehabilitation
“Use of the 10 percent tax credit is limited to non-historic buildings constructed prior to 1936 and cannot be utilized for residential rehabilitation, though hotels qualify,” according to Nick Kraus, an Associate with Heritage Consulting Group, a historic tax credit and real estate redevelopment consulting firm based in Portland, Oregon.
Tax credits are valuable since they represent a dollar-for- dollar reduction in federal income tax liability. Developers may also sell the tax credits. The market for tax credits is currently weak however. One year ago the credits could be sold for approximately $.90 per $1 of credit. Today, that is closer to $.80.
With a much bigger hotel a possibility, the final mix of uses in the Statler remains unknown. Issa previously discussed placing up to 200 condos on the upper floors of the building which are reportedly now being eyed by Wyndham.
One of the requirements of the tax credit program is that the building must be depreciable, so it must be income producing or used in a business. Rental housing, commercial and industrial uses all qualify. Condos do not. If tax credit financing is secured, does that mean that condominiums cannot be built at the Statler? Not necessarily according to Kraus.
“If Issa wishes to put in condos and they occupy less than half the usable square footage then he can still get the credit as long as the qualified rehab costs exceed the adjusted basis: building value minus land value,” says Kraus. “The work done on the condos cannot be claimed towards the qualified rehab costs and thus are not eligible for the tax credit.”
Issa’s renovation plans would need to respect the historical integrity of the building, something the Wyndham Hotel Group also is said to be insisting on. According to federal guidelines, the distinguishing original qualities or character of a building, structure or site cannot not be destroyed. In addition, the removal or alteration of any historic material or distinctive architectural features must be avoided where possible. The building owner must also retain ownership of the property for at least five years after the date the project is completed.
According to Kraus, “The condos and all work done, even if not utilized towards the credit, must meet the Secretary of the Interior’s Standards for Rehabilitation or the project will be denied the tax credits. Oftentimes with hotel rehabs the rooms are gutted, since no one would stay in a room with a 1920’s floor plan, but the corridor location and dimensions are maintained.”
Currently the Statler is not listed on the National Register of Historic Places. The National Register nomination can be completed concurrently with the tax credit application. The tax credit application is reviewed by the State Historic Preservation Office (SHPO) and National Park Service (NPS) to ensure that all work complies with historic standards. Any adjustments to the rehabilitation plans must be approved by the SHPO and NPS and can extend the project schedule. Tax credit investors typically require state and federal approvals prior to closing the deal.
Kraus gives this example:
In order to illustrate the use of the tax credit, assume that the total qualified rehabilitation expenditures are $100 million. The tax credit program requires the project to be completed within 24 months, or it can be completed in phases within 60 months. Once the project is completed, the developer must prove that the approved work was undertaken. Work which does not conform to the approval could be cause for denial of credits. Upon certification of a completed project the developer can claim the tax credits. In this scenario the developer would receive $20 million in dollar-for-dollar tax credits. In order to sell these credits, many developers utilize limited liability corporations (LLC) to pass the tax credits to limited partners in exchange for a cash return.
In many other states, a state historic tax credit is available in addition to the federal credit and can add upwards of 30 percent to the credit, allowing the developer to recover 50 percent of qualified rehabilitation expenditures. Unfortunately the NYS historic tax credit is extremely small and of little use to a major project such as the Statler rehabilitation.
If Issa snares Wyndham for the Statler, the hotel is expected to open in mid-2009. It may become one of Wyndham’s Historic Hotels. There are currently just eight Wyndham Historic hotels in the United States. According to their website, “At these special properties, you'll find a luxurious blend of classic charm and top-notch modern-day service, presented with warmth and artistry. Steeped in history and restored to their original grandeur, our historic hotels dot cultural and business districts across the country - offering you the best of a bygone era with modern conveniences.”
There are ten brands in the Wyndham Hotel Group with 6500 franchised and managed properties totaling over 543,000 rooms.
Photos by Matt Shaver.