Talking Heads John Leith-Tetrault, National Trust Community Investment Corporation
By Darryl Hicks
12 min read
A passionate advocate for HTC
The federal Historic Tax Credit (HTC) program has seen a few ups and downs the past six years. The Great Recession that began in 2008, followed by the Third Circuit’s decision in Historic Boardwalk Hall LLC v. Commissioner in August 2012, led to a mass exodus of investors and caused major market disruptions.
New investors have since entered the market, but many now are anxiously awaiting the IRS’ ruling on Section 50(d) income due out this fall.
Things could be worse if not for John Leith-Tetrault, Founder and President of the National Trust Community Investment Corporation (NTCIC), and Chairman of the Historic Tax Credit Coalition (HTCC). For the past 15 years, Leith-Tetrault has been one of the HTC program’s staunchest advocates on Capitol Hill and with the IRS.
In the wake of Historic Boardwalk Hall, his leadership at the HTCC led to the publication of Revenue Procedure 2014-12, which established a safe harbor for HTC investments and perhaps saved the program.
He also pioneered the “twining” of Historic Tax Credits and New Markets Tax Credits, which has helped save countless architectural gems from the wrecking ball, while revitalizing communities at the same time and creating jobs.
Pending the selection of a successor, Leith-Tetrault is preparing to retire by the end of this year, but before he leaves, Tax Credit Advisor sat down with him to discuss the future of the HTC program.
Tax Credit Advisor: What important trends are you seeing in the Historic Tax Credit market?
John Leith-Tetrault: Activity by dollar volume (qualified rehabilitation expenditures) increased by $1 billion between 2013 to 2014, which gets us back to within a few hundred thousand dollars of the pre-recession high of $4.3 billion in 2009. The total number of transactions has remained stable, which means the average deal size is increasing. In terms of pricing and transaction terms being offered, everyone is still guessing how the IRS will rule on the 50(d) income issue, which focuses on whether the income generated from the amortization of the historic tax credit in the master tenant structure can be added to the investor’s basis. We are expecting new regulations by the end of this year. Some investors are already making downward pricing adjustments in anticipation that the IRS will disallow that benefit, while other investors are taking the position that until a ruling comes out, they are going to continue doing business as usual. So there is a split in the market right now that can equate to as much as 10 cents on the dollar between a high and a low offer. The IRS has signaled that it does not believe that 50(d) income should be added to investor basis. If we see an adverse ruling, I think marginal projects will be squeezed, delayed or even dropped. Developers may have to learn to live with bids of 92 cents on the dollar or less depending on investor return expectations.
TCA: While an adverse ruling from the IRS isn’t desirable, it doesn’t sound like developers will abandon the historic tax credit.
Leith-Tetrault: No, but it will make the tax credit less efficient and may result in fewer projects getting done. Nonprofit transactions may suffer the most. On a positive note, I think 50(d) will be the last major IRS issue that we’ll be dealing with for the foreseeable future. Hopefully, we’ll soon have a quieter, more stable marketplace.
TCA: NTCIC has syndicated over 100 deals since 2000. What do you look for in a typical project?
Leith-Tetrault: Over the years we have specialized in transactions with non-profit partners. About 40% of our portfolio is non-profit sponsored projects. The ideal non-profit partner should have a proven track record, be a stable organization, have repetitive funding sources, and provide guarantees so that cost overruns don’t jeopardize a project. We are somewhat more forgiving with non-profits on guarantor strength and will help them create reserves that are reasonable and allowable to help shore up their balance sheet. With our for-profit partners we have traditional underwriting standards where we expect to see developer experience, market demand for the proposed product, guarantor strength, contractor experience with historic rehab and reasonable debt service coverage for the senior loan. At the end of the day, we don’t want to have a lot of deals on our watch list so we are very careful to make sure that regardless of whether we are working with a for-profit or non-profit developer that they have the ability to do what they are proposing to do.
TCA: Are there any noteworthy markets where you are seeing a lot of historic rehabilitation activity?
Leith-Tetrault: I can’t really provide a true national perspective because we only see projects that NTCIC invests in. There are the usual hotspots, like Kansas City, St. Louis, New Orleans, Richmond, Philadelphia and Baltimore. New York, Missouri, Virginia and Louisiana annually top the list of federal HTC volume by state. We are seeing more projects in upstate New York, places like Rochester, Syracuse and Buffalo.
TCA: How has the investor base evolved over time?
Leith-Tetrault: Big events changed the market. It has been back and forth, rather than linear. First there was the recession. Some investors fled the market in 2008, because they no longer had tax liability. Then we had the Historic Boardwalk Hall case that redefined what a partnership is. The legal advice that some investors received led to an exodus over worries about the exposure they had in existing portfolios. For two to three months, nobody was investing and you hoped you had enough deals in your pipeline to survive. This period of uncertainty also created new opportunities. We recruited investors who had never been in this space before so they didn’t have to worry about what they had done five years ago. Now we have the 50(d) ruling that everybody is anticipating. As I said earlier, some investors have kept their pricing level, while others have assumed the worst and lowered their pricing.
TCA: NTCIC pioneered the “twining” of Historic Tax Credits and New Markets Tax Credits back in 2003. Why did you move in that direction?
Leith-Tetrault: Our first investor was Bank of America and the focus was on small historic transactions. On some of these deals, the Historic Tax Credit provided insufficient equity. Then we saw the proposed regulations for the New Markets Tax Credit. Initially, the IRS said it would rule later on what other federal programs could be used in combination with the New Markets Tax Credit. We submitted comments to the U.S. Treasury suggesting that the Historic Tax Credit be one of those programs. The Treasury agreed with us and placed the HTC on the approved list. Then we said let’s figure out a way to combine New Markets Tax Credits with Historic to create a deeper subsidiary that we could use for projects involving non-profit developers or marginal projects with for-profits and make them feasible. Typically, the more community impact the project had, the more credits it needed. The ones that provide community services, educational services or workforce development, can’t be done just with the Historic Tax Credit alone, and so we saw an opportunity to create an additional incentive.
TCA: Thirty-three states have enacted Historic Tax Credit programs to help supplement the federal credit. Which programs work the best and why?
Leith-Tetrault: States started adopting programs in the early 2000s, starting with Virginia and North Carolina. Initially these were uncapped programs, so if you qualified for the federal credit, you automatically qualified for the state credit. The two credits together have generated a lot of activity in places, like Richmond and Raleigh-Durham, and these two states have benefited tremendously. Richmond, in particular, has had 400 to 500 tax credit investments over the past decade, which is a lot of activity for one city. Unfortunately, North Carolina repealed its credit recently, despite efforts by the governor to keep it. The next group of states that came along put in place programs that were more fiscally conservative. Missouri, Ohio and Massachusetts all capped their credits at a certain dollar volume, but at the same time they gave developers more options to monetize the credits.
In Missouri, you can sell the credit as a tax certificate or allocate it through a partnership according to the partners’ pro-rata interest in the project. We like programs, like New York and Maryland, where if you are a taxpayer you can get a refund if your state taxes are insufficient to absorb all of the credits earned from the historic rehab. In my opinion, the state with the best credit is Minnesota because it offers developers so many ways to monetize the credit including a refund, a grant, a certificate sale or allocation through a partnership. Oregon is the latest state to work on a credit, but it didn’t pass this year. As proposed, it would be capped at $10 million, so it would be ideal for smaller Main Street size transactions. Oregon would also act as a syndicator and solicit bids from potential investors. This isn’t good for my company, but I still think it is good public policy because there are fewer fees, which means more money goes into the project.
TCA: What advice would you give to affordable housing (LIHTC) developers who are thinking of using Historic Credits for the first time?
Leith-Tetrault: Before going for a LIHTC allocation, ask the state historic preservation office, or a preservation consultant, to walk the building with you and identify things that could add additional cost to the project.
Determine if the windows can be replaced or if they must be repaired to meet the Secretary’s Standards. When examining the inside of the building, look for character- defining features that the state or National Park Service (NPS) will want to preserve. Schools are a good example. You may typically want three-feet wide hallways in a residential building, but the school’s original corridors may be 14 feet wide and the original lockers are still present. The Park Service may come back and say, ‘we want this to look like a school when it’s done’ and require that the original hall widths be retained. What if the original gym is still there? If the NPS won’t let you subdivide it, what do you do with that space? What does that do to your bottom line? Get advice early because if you run into these types of issues, you may want to find another building.
TCA: Next year marks the 50th anniversary of the National Historic Preservation Act. How has this legislation shaped the historic rehabilitation movement?
Leith-Tetrault: It’s the basis for all federal involvement in historic preservation. It created the National Register of Historic Places, established the State Historic Preservation Offices, and created the Secretary’s Standards. It created the federal Advisory Council on Historic Preservation and its Section 106 reviews which mandate that federal agencies undergo a review process for all federally funded projects that will impact sites listed on, or eligible for listing on, the National Register of Historic Places. It did not establish the Historic Tax Credit. It wasn’t until 1976 that the first federal incentive for historic rehabilitation was created in the form of accelerated depreciation. The current version of the historic credit was established in 1982 by the Reagan Administration and amended in 1986 as part of tax reform. There were preservation movements in certain cities and states dating back to the early part of the 20th century, but at the federal level, the National Historic Preservation Act was the beginning.
TCA: What recent projects are you most proud of?
Leith-Tetrault: I would say the Energy Innovation Center, which just had its grand opening. It’s a renovation of the old Connelly Technical Institute, a former trade school located in Pittsburgh’s Hill District, one of the city’s oldest African-American communities. It was renovated by a non-profit, called Gateway Corporation, into a campus for energy innovation and renewable energy job training for low-income people. Pittsburgh is positioning itself as a leader in the green city movement, so the whole community came together on this project, including local universities, foundations, energy companies, the City of Pittsburgh and nonprofit economic development organizations. We partnered with PNC Bank and two other CDEs to provide Historic and New Markets Tax Credits. The project was coming together right as the investor market froze post Historic Board Walk Hall. We had to re-syndicate the project, because the initial investor had to withdraw. It was a real labor of love, but the project has been very successful.
TCA: As you prepare for semi-retirement, what do you see as your crowning achievements?
Leith-Tetrault: First and foremost would be the founding of NTCIC in 2000, which has given the National Trust a mission-driven for-profit subsidiary that provides significant annual operating support. The introduction of the Historic and New Markets equity financing tool and then moving my company into the New Markets business and offering that as a marquee product is something I am very proud of. Next would be forming the Historic Tax Credit Coalition and creating a unified industry voice for Historic Tax Credit professionals that put us on par with the New Markets Tax Credit Coalition and Low-Income Housing Tax Credit Coalition and gave us a new level of respect on Capitol Hill, and within the IRS. The last achievement I will look back on is the publication of Revenue Procedure 2014-12 and our ability to work with the IRS following the Historic Boardwalk Call ruling to achieve a safe harbor. The revenue ruling was the result of the Historic Tax Credit Coalition working hand in hand with the IRS. The IRS issued the ruling but we were asked to provide input on what we thought would be a good set of definitions for a partnership in a Historic Tax Credit transaction. When it was published there was a safe harbor that said if you did this, this and this, you would not get audited. That put the market back together.
