Where do developers get their money

6 Replies

Hi I am trying to learn more about property developers. When a property developer finds an old property in a historic district of an urban area that currently has many code violations not safe for human habitation, is there money or tax advantages out there they can get from the state and federal government to help them revitalize the property? What type of money is there? How do you get this money? Are there certain websites to go to? Would the purchase of the property be subject to the developer obtaining this money, or is this a risk the developer would have to take?

Also Would the developer inherit code violation fines the previous owner has not paid? Or would an agreement be reached with the city those fines would be remedied if the developer revitalized the property.

Looking forward to hearing from any of the developers out there.

Thank you

Hi Rich,

This is a very interesting question. I've worked on a historic hotel restoration in the past that used state tax credits from Louisiana. My experience was a commercial property, so I'm not sure if it translates across all asset classes.

You can find money for historic rehabs at all levels of government - federal, state, and municipal.

The federal program is administered by the National Parks Service (https://www.nps.gov/tps/tax-incentives/before-you-...), and it gives you a 20% credit on Qualifying Rehabilitation Expenses (QREs). However, in order to benefit from this tax credit, you have to spend more than 50% of the underlying value of the asset. This is the only one that I'll mention in this reply, as the state and local programs are different depending on where you are.

Generally, state programs seem to be similar to the federal program. They require that the property is in a designated historic district or is on the National Register of Historic Places. Cities have additional funding mechanisms in the form of tax credits or reductions to encourage redevelopment to eliminate blight.

Most of these funding mechanisms come in the form of tax incentives, which complicates things if you want to use the money as part of your capital stack. Enter financial engineering...

Tax incentives are valuable in the open market for various types of companies and high net worth individuals. They often trade at a discount to the present value of the tax incentive, but may trade at a premium depending on the structure and market conditions. Use an attorney that has worked on these deals before. The 50,000 foot structure is that you'll be separating the ownership interest LLC from the taxable economic interest LLC, which allows you to sell your position in the latter to a third-party.

Note, there are some claw-back and burn-down provisions for this structure, so it's important to understand all the details before capitalizing tax incentives.

Note 2, there are other programs associated with energy efficient renovations and bonus depreciation that may apply.

Note 3, on the first project, I wouldn't rely on the tax credit to make the deal in your underwriting. Look at it as upside until you have a full understanding of how the process works.

On code violations and fines - those are usually title clouds that transfer with the property. Your title search should turn these up, and you can negotiate with the seller to clear the title or reduce the price appropriately.

I hope this helps.

John

@John Wijtenburg

Thanks John. So it sounds like I would need to take title to a property first then seek out the government money after. If awarded the tax credits I could monetize them and sell them to another company who has a high tax liability, in exchange I would be able to take the cash to pay for project construction costs or pay down a loan. All this would have to be done via an LLC or partnership.

Aside from tax incentives, is there any other money out there for developers who want to revitalize an area?

There is a local guy here in Mass, that owns a pizza shop and he wanted to expand into a new location. Somehow he found all this government money and bought an enormous old mill building in Lawrence mass. After revitalizing the building it now houses over a hundred nice apartments and several businesses. 

@Rich Hupper

You nailed it. Get control of the property. Arrange bridge capital for the rehabilitation. Use tax incentives to recapitalize the deal.

For other government support, look into the following:

  • Community Development Block Grants (CDBG)
  • Neighborhood Stabilization Program (NSP)
  • US Department of Agriculture Rural Development Program
  • Small Business Administration (SBA) 504 or 7a loan programs

I don't know a ton about these, but there's probably a lot of information available online. Also, check in with your local planning department, chamber of commerce, or economic development office to find out about target improvement areas. They may be able to connect you with interested investors and/or operating partners.

Thanks @John Wijtenburg

I am no where near the point where I could get my hands on a piece of property that would warrant the use of any government incentives or subsidies but I want to learn the basics because I might be putting up a 10,000 SF commercial building on some land I have. 

Heck maybe there is even some money out there for a small building like this. 

@Rich Hupper
I think you’ll be surprised what’s available. Start poking around, and you may be able to find something.
The SBA loan programs are amazing for owner-operators. They provide up to 90% leverage in some cases.
Good luck!!