CASE STUDY: Enhanced Lease Makes Possible Adaptive Reuse of VA Buildings
By Caitlin Jones & A. J. Johnson
5 min read
Tax Credit Advisor August, 2006: Thanks to an enhanced use lease, a group of Department of Veteran Affairs buildings in Kansas that had been headed for demolition are now being converted into affordable rental housing.
In 1998, the VA announced that it planned to tear down 38 historic buildings at the Dwight D. Eisenhower VA Medical Center in Leavenworth, Kansas, to make way for the expansion of an adjacent national cemetery for veterans. The buildings, spread out over 50 acres, had been erected between 1865 and 1930 to house disabled Civil War veterans. In the 1880s, the complex was named the Western Branch of the National Home for Disabled Volunteer Soldiers.
Thanks to the timely intervention of a number of organizations intent on preserving the buildings – and a governmental review process that allowed their voices to be heard (See Box, page 16) – the VA backed off from its plans. But, equally important, the rehabilitation of the buildings made use of an enhanced use lease structure, which permitted the VA to maintain ownership of the properties while leasing the properties to a private developer
“This project simply wouldn’t have happened without the flexibility of an enhanced use lease,” said Ross Freeman, the president of the Pioneer Group, Inc., the Topeka-based development firm chosen for the project in 2003.
Unlike traditional governmental leasing, the enhanced use lease (EUL) program, which was established by Congress in the 1990s, encourages innovative public-private partnerships, Freeman explained.
For the developer, the advantages of an enhanced use lease begin with the longterm property interest – 75 years in this case – which allows it to obtain federal tax credits. For the VA, there is a payment from the developer. In addition, the VA is not required to follow federal acquisition rules when selecting the enhanced-use leasee, although it must set up procedures that ensure the integrity of the process.
In an effort to make the program flexible, Congress also exempted enhanced use lease projects from a number of restrictive federal statutes, including the Competition in Contracting Act.
EULs also requires close coordination between the local government and community where they are being put to use. The VA is required to hold a public hearing at the location of the lease and provide notices to Congressional oversight committees.
Moving Forward with an Adaptive Reuse
In June 2005, the Kansas State Historic Preservation Office, the Advisory Council on Historic Preservation (ACHP), and VA signed an agreement establishing development requirements and concluding the review process under federal preservation law. In August of 2005, Pioneer signed an enhanced use lease.
Freeman said that financing for the project, which will cost between $60-$65 million, will come from a combination of 9 percent federal low-income housing tax credits, state and federal historic tax credits, and debt. He said that by December 2005, funding had been secured for the first 16 buildings, with LIHTC equity syndicated by CharterMac Capital comprising about 55 percent of the funding. Historic tax credit equity comprises another 35 percent, and debt about 15 percent. Sunflower Bank of Salina, Kansas, will provide debt financing as well as syndicate the historic credits.
The first 16 buildings are now about 50 percent rehabilitated, the developer said. Pioneer is currently working to put together financing for the rehabilitation of 10 more buildings, which though comprised primarily of tax credit units, could include up to 20 percent market rate rentals. Ultimately another five buildings will be dedicated to educational purposes.
He said that Pioneer has a three-year window from the signing of the enhanced use lease – until August 2008 – to complete the project.
Challenges of the Project
Freeman said that the biggest single challenge in advancing the project was the protracted nature of negotiating the enhanced use lease with the VA. He attributed this to the tendency of government administrators to narrowly define their areas of responsibility, sometimes making it difficult to obtain a response to a given issue.
“We frequently encountered situations where officials said: “˜we can’t give you an answer, and passed our question along,’” he said.
“There was also the issue that not everyone in government is committed to historic preservation,” Freeman added. “Developers [dealing with enhanced use lease negotiations] should be prepared for a lot of stops and starts,” he said.
The developer said that the project surmounted a number of other challenges, one of which was the issue of the certification of federal historic rehabilitation credits requested for the project. Generally the National Park Service generally does not permit final certification of the HTCs until the entire project is complete. This can create financial difficulties for developers because tax credit syndicators typically do not release the full HTC equity until this certification occurs. For this project, however, NPS will permitt individual certification of each of the buildings.
“We were very fortunate to get them to review the buildings one at a time,” he said.
The enhanced use structure also raised some issues for the lender, Sunflower Bank, which was not used to providing a construction loans on leased properties. He said that the lender become more comfortable with the structure after it received clarification.
Scope of the VA’s Enhanced Use Program
A Government Accounting Office study has estimated that the VA spends up to $35 million a year to maintain over five million square feet of vacant space. Some of the VA projects that have employed enhanced use leases have included low-cost senior housing, community nursing homers, office buildings, child development centers, cogeneration plants, and parking facilities.
The Department of Defense has been granted similar, though not identical, leasing authority.
