Rehab Projects: Arts Districts, Cultural Districts, Design Districts

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Working with Your Lender: Learning How to Obtain to the Best Financing for Your District's Historic Rehabilitation Projects



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Working with Your Lender: Learning How to Earn the Best Financing for Your Urban District's Historic Rehabilitation Projects

Your 7 Arts Foundation staff has compiled a certified and complete preliminary summary, suggestive of a practical checklist, to consider when putting together your urban district's historic 'rehab' projects. Our instructional studies show that one in five destination districts include two or more historic structures on their campuses. Further, our training research reveals that the success or failure of nearly every historic 'rehab' rests with a number of essential decisions and workloads that make for careful, fitting actions taken to save valuable time, energy and money for applicants, guarantors and lenders. It turns out, when it works for one member of this development triad, it often works for all parties concerned.

Both study outcomes (edited for web page content) were made available to Founding Members immediately upon completion in 2005 & 2006. The combined report outcomes are re-released in 2008 as a courtesy for Collaborator & Partner Members and Guests. ____

Our 2004-05 study and training outcomes:

  • The majority of local lenders did not accept loan applications from developers because the lender did not have an 'expert' on their staff who could help the lender or broker navigate 'historic building' projects
  • The lack of underwriting expertise more often than not resulted in highly conservative terms and conditions that lessened the owner-developer's rate of return by offering lower than normal LTVs, above-average interest rates, the need for comparatively larger guarantees, more points than conventional projects and a bevvy of strange, isolated requests of the loan applicants
  • Overall, the majority of local lenders lacked comfort underwriting historic project 'rehabs' in most districts
  • National lenders, almost without exception, accepted underwriting opportunities for large historic 'rehab' projects in nearly all varieties of destination districts
  • National lenders and brokers without in-house intermediary 'experts' in this lending field were hiring a consultant or project advisor who walked projects through the due diligence requirements that mitigated the lender's risk, limited the possibilities for cost over runs, lowered project risks and assured the lender that the proforma was reliable, accurate and comprehensively drafted
  • National lenders readily accepted historic rehabilitation tax credits as an equity source because, it was shown, that the lender knew which homework needed to be completed before making an underwriting offer
  • Both local and national lender-generated construction loans were seen to be shopped around to other lenders for a permanent loan which reflected the borrower's position of strength and stabilization
  • Local lenders prevailed as originators for construction loans in over 60% of all district developments because the majority of projects were less than $5MM; the primary reason local lenders were chosen was because they could turn around the loan application more quickly than national lenders; the secondary reason local lenders were chosen for construction loans was because the local lenders knew the smaller markets better than their national counterparts
  • In over 50% of all district projects where local banks underwrote the initial loan, owners put 25% down (as an equity position) to 'rent' debt with a 12-18-month construction term
  • In over 50% of all loans issued to owner-developers of district 'rehab' projects, the interest rate was based on the prime lending rate; in less than 40% of all loans studied, the interest rate was based upon the Libor Index
  • Local lenders tended to gauge the smaller property types accompanied by comparatively low risk with a low interest rate spread; their points hovered closer to 1 than to 2; too few larger property types were considered by local banks to draw a reliable picture of what they offered in average terms of the interest spread and points
  • Local lenders tended to require some liquid net worth plus a loan guarantee for the construction period; both requirements were decreased or eliminated by the time the district 'rehab' project was built and stabilized
  • National lenders consistently accepted outside guarantors, looked at but did not rely heavily upon owner liquidity for the construction period; the guarantor's position was consistently decreased or eliminated by the time the 'rehab' project was stabilized

Advisory Sample: The Steps to Choosing a Lender or a Good Broker that Finds the Right Lender

Our 2005-6 follow-up study underscored what our operating foundation staff has learned over the last twenty-nine years of working with developers, applicants, brokers and their lenders. The follow-up study points to the need to know every detail of a project before deciding which lender is needed. The outcomes follow, below:

  • The study showed that the developer's due diligence was consistently the most critical factor to making the choice of a lender possible
  • The study made clear that the feasibility study of the engineer and the corroborating assessment of the chosen general contractor and architectural firm are of equal weight to the market feasibility study
  • The study showed that most pro formas cover 3-4 years of projections to evaluate the loan package; it was observed that only rarely will a national lender require a 5-year projection
  • The study revealed that the most neglected budget items include setting aside enough capital for interest carry, loan fees ( a good broker was often seen as the party providing help here whenever they advised owners to add the correct, and often otherwise unknown, amounts to pro formas)
  • The study showed that the next most neglected pro forma items were monies set aside for professional fees and artist/artisan participation that went beyond decoration (a good destination project consultant was often found to mitigate the risks of underestimating the costs to hire architects, CPAs, lawyers, a resident artist/artisan, a restoration expert and a destination budget for public art)

  • The study revealed that developers who hired professionals - market experts, appraisers, historic properties advisors, arts, design & cultural district consultants, preservation experts and construction estimators (architect/engineer/specialty contractors/restoration experts) - to complete their due diligence package improved their chances by 3:2 to successfully complete an HITCredit project over those who conducted their own market study and by 2:1 over those who guessed at the scope of work to meet value projections or to get the work done on time and on budget.
  • The study showed that developers spent, on average for large projects, between $30-45,000* on the front end of the majority of projects to estimate use adaptability, correct cost estimates of de-construction and construction, market feasibility and tax credit investor packaging. Smaller projects using tax credits as part of the equity package spent, on average, between $20-30,000
  • The developers polled indicated that the front end expenditures saved an average of two months off the planning stage work, another month off the de-construction stage and 6-7 weeks off construction phases
  • The study revealed that developers who chose construction managers and GCs with experience rehabilitating historic spaces and buildings in districts saved, on average, more than 13% of overall deconstruction and construction costs over those who worked with professionals with little or no similar experience
  • The study showed that developers undertook to upgrade all electrical, plumbing and HVAC systems in over 88% of all projects submitted; further, it was seen that nearly all developers who made full upgrades reported that the architectural designs chosen for their 'rehab' essentials impacted their HITCredits approval curve significantly
  • The study outcomes showed that developers who hired their team of dedicated 'rehab' professionals from the beginning of the district project and structured all efforts toward an historic 'rehab' undertaking showed higher instances of overall successful completion (>94%), on-time completion (>92%) and on-budget or below budget completion (>90%) compared with those who hired only one or two outside experts
  • The study revealed that developers who engaged a construction manager who could synthesize the diverse and sometimes obliquely different styles and approaches each team professional brought to their 'rehab' project were more than 8% more successful at achieving every essential objective than those who tried to rebuild structures or sites without the technical assistance of such an experienced, able project manager
  • The study showed that developers who hired their team of historic 'rehab' professionals were able to consider the type of lender that would match up with their project specifications; all others in the study, irrespective of project size, attempted to convince local lenders to underwrite their loans along conventional terms and conditions

          *   Two district projects reported they spent over $63,000 each to locate initial guarantor and lender participation becuase one owner endured five rounds and ten years of effort and another spent four years and four rounds of effort; we averaged only the costs associated with successful campaigns


Our 2004 study of 50 historic rehab projects in 16 destination districts indicated clear tendencies that fell into two classifications - projects requiring construction loans over $5MM and those that fell below $5MM. Aspects of those tendencies follow in our observations, below:

  • Loan packages under $5MM warranted conventional terms and conditions for 70% of projects where the profit margins were comparatively high and the equity position was 75% or higher
  • Loan packages over $5MM warranted tailored, flexible terms and conditions from national lenders with both the sophistication and expertise to fit the loan package to the destination project, with all studied loan underwriting packages offered at comparatively lower loan terms based solely on the destination property and the guarantor's strength
  • Loan packages over $5MM were largely targeted to Wall Street criteria
  • Loan packages over $5MM were almost always 15 year term notes with a 30 year amortization rate
  • Loan packages over $5MM were consistently placed into permanent financing with longer loan terms than any offerings studied from local banks
  • District destination 'rehabs' in redevelopment areas and enterprise zone overlays were always candidates for superior alternatives to conventional lenders in all cases studied
  • Nearly 30% of these 'district 'rehab' projects qualified for aid and assistance packages from city agencies
  • Nearly 40% of these emerging destination sites qualified for loan terms from CDEs, CDFIs and HUD financing, often at lower interest rates with superior terms and conditions
  • Nearly 50% of these sites lacked the Banking Institute's 'textbook project criteria' most conventional lenders were seen requiring of owners, but all the larger projects located loan terms from national lenders with flexible underwriting practices
  • All lenders studied required some guarantees from owners-developers or outside guarantors, with two exceptions being noted for HUD-financed projects in blighted areas, both of which offered loan products that allowed superior leverage to all other types of loans accompanied by no guarnatees
  • The more poular HUD 221(d)4 construction-to-permanent loan offered a project the capability to leverage up to a 90% loan-to-cost ratio for a loan amortized over 40 years at a very competitive interest rate, and the only loan studied which was also assumable; the downside of this otherwise attractive loan package was navigating a complicated formula-laced application

  • Nearly every national lender and all local lenders offering a construction loan required that a bridge loan be accepted to fill any equity gap in the tax credit capital until full pay-in was to be received; all the required bridge loans were placed prior to closing the construction loan to assure the lender that all funds for deconstruction and construction were available to the owner-developer
  • All owner-developers who were relying upon HITCredits as part of their project equity had completed Part One of The National Park Service application for approval so the tax credit investor and construction lender could begin to close escrow; over 40% of all such owner-developers had completed Part Two of the application, many of them waiting to learn how the financing was to be structured before completing Part Two to enable the investors and lenders to close escrow
  • In all cases studied, a bridge loan was issued to help solve any problems, anticipated or not, with the National Park Service designation of the income-producing properties
  • All HITCredit investors sought a guarantee from the owner-developers so the historic 'rehab' would be completed in addition to having demanded a market-based return on their investment in full accordance with the rules and standards set forth by the Internal Revenue Service




Owners and developers of district properties are always looking for incentives to attract investors to their projects. Owners and developers of qualified historic properties can attract equity in the form of historic investment tax credits. HITCredits provide investors an upfront federal tax credit to participate in destination district projects which preserve, restore or rehabilitate historic properties. These attractive investments generally allow the full amount of the tax credit to flow to investors in the year the district building is placed into service.

In some instances, the Internal Revenue Service (IRS) allows projects to fold both traditional low-income and rehabilitation credits into the same transaction. When using these doubly attractive investment vehicles, owner-investors need to be competently steered through a small maze of taxable impacts, some of which have been known to effectively offset the benefits of one credit applied against another. Further, some states provide additional tax credits against state taxes.

Note: Tax accountants advising destination districts must become familiar with the federal Tax laws of 1978, 1981 and 1986 to help owner-investors and owner-developers navigate all the incentives and tax consequences, especially if the owner-investors are combining a Section 42 project with HITCredits.

Why this two-tiered tax credit can work for so many arts, design and cultural district owners and developers, lenders and investors:

  1. Tax credits reduce tax liabilities; they are not deductions subtracted from taxable income 
  2. The 20% rehabilitation credit reduces federal taxes for investors who participate in qualified income-producing buildings that are accredited as certified historic structures or buildings grouped into an approved historic district overlay
  3. The 10% tax credit reduces federal taxes by being applicable to buildings deemed both non-residential and income-producing which were put into use prior to 1936 and are not certified as historic buildings
  4. There are zero volume limits on the tax cedits available; therefore, no national or regional competitive allocation hurdle exists to keep any investors from participating in a qualified district project
  5. Lessors have no income profiles to meet and no rental charge limitations for their tenants
  6. There is no state credit agency serving as an intermediary between the owner-investor's project and the Department of the Interior's National Park Service (NPS) and the IRS; the former directly reviews conformance with established rehabilitation standards and issues certifications, and the latter makes rulings about which costs qualify for either the 20% or the 10% tax credit, determinations as to when the costs must be incurred and rulings as to what income tax implications apply to each investor's involvement
  7. The project does not require any test concerning the economic viability of the project as far as the IRS and NPS are concerned; the amount of federal tax credits equals the appropriate percentage of the qualified costs spent so long as compliance is maintained by the owner-investors
  8. HITCredits are not limited to multi-family properties; they can also apply to income-producing hotels, shopping centres, office spaces, loft apartments and mixed-use re-developments
  9. Unlike many complicated arrangements to earn other tax credits, the 20% program has three parts, a preliminary determination that the building can qualify as a rehabilitated structure, a secondary approval determines whether or not the 'rehab' plans and job specifications meet historic standards, and a final test determines whether the work was completed in accordance with the pre-approved 'rehab' plans
  10. Generally, there is one arbitrator of the technical, regulatory and material choices for the owner-developer -  the state's historic preservation officer (SHPO), often an employee of the state's historic commission or department; in addition to providing preliminary approvals that get passed along to the NPS, this official serves as liaison with both federal services and can lead owner-developers to all available state incentive programs and regulations; note, the NPS has the final word on all approvals recommended by the SHPO

20% HITCredit Calculations

  1. 20 % tax credit = Building listed on the National Register of Historic Places, or building situated in a certified historic district and determined to be contributing to the historic nature of the district
  2. 20 % tax credit = Parts II and III approved by the National Park Service (NPS) according to the Secretary of the Interior's Standards for Rehabilitation, including architectural and material requirements
  3. 20 % tax credit = Each buildings must have been originally in use prior to 1936
  4. 20 % tax credit = Each building must be an income-producing property
  5. 20% tax credit = Formal application

10% HITCRedit Calculations & Conditions

  1. 10% tax credit = Each buildings must have been originally in use prior to 1936
  2. 10% tax credit = Each building must retain its structural, retention and interior walls
  3. 10% tax credit = Each building must be an income-producing property
  4. 10% tax credit = No formal application
  5. 10% tax credit = Meeting or exceeding the spending threshhold of $5,000 for each building, or the adjusted basis of the beginning of a 24-month period selected by the taxpayer for each building, the period ending during the year each building is placed into service (alternative testing periods can provide flexibility for larger projects)
  6. 10% tax credit = The building must receive a certificate of occupancy as evidence that each building is plced into service
  7. 10% tax credit = Owner-developers add all Qualified Rehabilitation Expenditures, including hard and soft costs needed to complete 'rehab' work
  8. 10% tax credit = Compliant projects avoid recapture by satisfying conditions over a 5 year period, reducing the portion of the tax credit subject to recapture by 20% a year
  9. 10% tax credit = Owners hold onto the building without transfer, and without more than one-third of a partnership interest being disposed
  10. 10% tax credit = Owners refrain from additional construction work deemed inconsistent with the building's historic character or nature
  11. 10% tax credit = Owners-developers and investors avoid foreclosure, and any resultant building transfer, by establishing reserves and guarantees
  12. 10% tax credit = Owners depreciate the base value of the building in an amount equal to the amount the credit generates in each of the first five years, reducing thereby the overall amount of depreciation that can be deducted
  13. 10% tax credit = Owners-developers-investors adhere to applicable passive activity rules, at-risk rules plus alternative minimum tax and other tax issues which may limit the use of the HITCredit


Phases 2-31 - in progress. Next report: May, 2008.


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Sample Advisory, Summary

In order to obtain sufficient financing with little or no angst, take time to plan comprehensively. Carefully, painstakingly develop a bullet-proof due diligence package that reflects the level and intensity appropriate to your district's historic building 'rehab' project. Bring the entire package to a broker or lender when all the homework is completed. Work closely with all advisors and consultants who know the ropes of historic property rehabilitation, especially if Historic Investment Tax Credits are to be used as equity at the end of the construction phase.

Build confidence with the broker and/or lender. A fully developed plan wins all the financing it deserves because it makes it possible for financiers to do business with owners-developers in a timely, predictably orderly way. Successful financing can lead to project yields that enable your arts, design or culture-based district to have the funds and facilities to attract the next level of acclaimable artists, artisans and designers; it can also make it likely that a neighboring or tangent site will be developed to complement and strengthen current district clusters, corridors and superblocks. Therefore, meet your combined business and mission intentions with hard work and a clear idea of how to work with the experts that ultimately help save many an owner-developer and lender time and energy, reputation and money.

The contents of this page are for informational, educational purposes only. Always consult a district planning, development and management advisor or consultant, an attorney, 'rehab' specialist and a CPA before embarking on any arts, design or culture-based district building or site development project or program. Please see the NOTA BENE recorded on this web site.



  1. No matter the size of the district project, you have contracted for a construction period of between 12-18 months
  2. Map out all stages of the project in terms of research and study, design, development and due diligence, tests and approvals, State and Federal Historic Office applications, deconstruction or demolition phase, construction phase, FFE purchases and warehousing, 'dress rehearsal' and opening phase, art and artisan installations and conservation work, and the steps to ramping up to initial stabilization phase
  3. Position the project's due diligence and business summary to attract a savvy lender with the expertise and sophistication to underwrite your loan
  4. Hire the professional team (architect, CPA, attorney, tax advisor, market expert, historic property consultant, destination district professional, demolition and construction estimator, project or construction manager, artists, artisans and engineers, specialty realty coordinator, HITCredit broker)
  5. Avoid conventional, conservative terms and conditions that lessen your rate of return with lower then normal LTVs, higher-than-average interest rates, larger guarantees, additional points and lots of requests from you that clearly indicate the lender's dis-ease with an historic 'rehab' in your district
  6. If your project is large enough, position your case toward national lenders and brokers by emphasizing how your 'rehab' project mitigates lender risks, limits the possibilities for cost over-runs, lowers overall project risks in terms of HITCredit approvals, and assures the lender your pro forma is reliable, accurate and comprehensive
  7. Irrespective of project size, explore the interest level your emerging destination generates with CDEs, CDFIs and HUD financing institutions before shopping the district project to local lenders
  8. Larger projects may warrant taking the time to court city or town officials to be certain the district and its 'rehab' projects fall within a recognized, certified historic district, redevelopment area and/or enterprise zone; in some instances smaller projects may also qualify to receive these incentives, often if they are attached to hiring full-time employees or training and hiring  programs for certain types of workers; note - few 21C projects happen without City or County reseources being deployed these days
  9. Line up and complete all available and appropriate city, county, state and federal incentive applications
  10. Prepare for the permanent loan to be placed, to your advantage, with another lender once construction is completed and operations stabilize
  11. If your project is small enough, prepare the way for your finest local lender to underwrite your district project
  12. Complete Part One of The National Park Service Application while you are writing your due diligence paperwork; complete Part Two and send the application fee to the NPS on or before you enter talks with your CDE, CDFI, HUD, broker or lender contacts - but in all instances, before you enter negotiations with these financiers (Note: Your guarantors will insist upon knowing how you are proceeding with NPS; and your lender will generally not go to escrow before Part Two is approved)
  13. The engineer's report must address all 'rehab' and historic restoration and deconstruction issues
  14. The general contractor's report must complement the architect, the historic site advisor and the engineer's approach to both demolition and construction
  15. The marketing firm's approach to site use and all descriptions of future building and/or site uses within the district must reflect, in tone and general substance, the usage values understood and approved by the state historic building officer
  16. A pro forma statement must cover a minimum of 3-4 years of use; you must, at this juncture, determine if a 5-year pro forma will be necessary
  17. Check with your broker or lender prospects and your accountant how to accurately gauge the cost for all professional fees, lender points, all insurances and other lender costs passed onto your district project
  18. Check with your studios and public artwork underwriters to help you gauge the costs associated with decorating private and public spaces, mounting and conserving artwork, leasing artwork, insuring and conserving artwork, and maintaining spaces and filter systems and security systems
  19. If your project is relying upon HITCredits as part of the equity package, check with your broker and/or lender about how best to approach a bridge loan that will address any payment gap during the construction stage
  20. Draw up a guarantee from your owners-developers for the benefit of any loan guarantors so the bridge loan can be included in total financing package, and fold the guarantee into the IRS-sanctioned market-based investment return agreement with the guarantors
  21. Ask to have the construction loan guarantees and the liquidity requirement lowered when your 'rehab' is built and you go through your first year of stabilization


  1. If you are using a local lender, you have to reserve c.25% of the total development budget in equity and liquid positions in order to guarantee payback of the loan
  2. Position your smaller property to help trigger a local lender to view your district project as low risk, earning a low interest rate spread, and a 1 point charge instead of 2 points
  3. Set aside between $20-30,000 for due diligence package, including professional fees, surveys, studies, environmentals and project models, schematics and designs


  1. Prepare to have your national broker and/or lender look to your outside guarantors and tax credit investors to make the deal acceptable; very few district owners-developers have the liquidity or assets to assure sizeable loan payments
  2. If you are using a national lender, you have to reserve c.20% of the total development budget in equity and liquid positions in order to guarantee payback of the loan
  3. Position your larger property to help trigger a national lender to view your district project as low risk, earning a low interest rate spread, and a maximum 1.5 point charge instead of 2 points (often a broker's fee can be calculated into the points you are charged)
  4. Set aside between $30-45,000 for due diligence package, including professional fees, surveys, studies, environmentals and project models, schematics and designs

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