Douglas Bystry considers himself lucky to do the work he does — providing funding for real estate rehab projects that can completely reshape cities and the futures of those who live and work in those places.
“We’re helping people, changing lives, and bringing life to communities, and that’s very rewarding,” says the president and CEO of Clearinghouse CDFI in Lake Forest, Calif. “As a community development financial institution and a benefit corporation, that’s what we do.”
Take the Pier South Resort in Imperial Beach, California, for which Bystry helped fund the rehab for its reopening in 2014. “If you went there now, you’d say, ‘This is a luxury hotel. What impact did this have on the community?’” he states. “It’s the city just north of Tijuana, Mexico, and it has been very low-income. There was really nothing there, and it couldn’t attract tourists.
“We did a $10-million new markets tax credit allocation and transformed a tiny, rundown, beat-up hotel,” explains Bystry. “That brought economic vitality to Imperial Beach, along with tourists. And the hotel created spinoff businesses. A little brewery opened across the street, a flower shop opened, and so on.
“That was taking a risk on a community that had been left out,” he states. “Now it’s a wonderful hotel that has changed the city.”
The new markets tax credit is just one of several tricks of the financing trade Bystry helps developers access. However, using that and other incentives to retool existing buildings can be complicated and competition for available funds can be fierce.
The Maze of Resources
The federal government and many state, county and local governments offer a range of incentives developers can seek to repurpose property. Many can be piggybacked, which can create complexity in assembling financing for each project, known as the “capital stack.”
The main resources are offered by the federal government: the new markets tax credit, historic preservation tax incentives, the low-income housing tax credit, and community development block grants.
“Most developers don’t understand what’s available and how each works,” says David Hickey, Phoenix-based managing director of Hickey and Associates. “Those federal resources are the main players, definitely. Then it becomes a matter of how different states and communities use and leverage those federal programs.
“They’re all complex in their own way,” he adds. “All have timing elements and different qualifications, and they may require a consortium of players to be involved. There’s also a time element to secure those funds. Sometimes the speed of government and the speed of business don’t match up.
“Part of our job is to educate on how these programs can be used and leveraged,” states Hickey. “The challenge is that they can be so complex, and you also have turnover. Politicians come in and out of office, state and local economic officials come and go. There’s always that potential loss of direct knowledge of how these tools can be used.”
Many states offer historic preservation tax incentives and tax increment financing.
To add complexity, many states offer versions of federal incentives — such as historic preservation tax incentives — along with other programs, such as tax increment financing.
“The Council of Development Financing Agencies [cdfa.net/] is one group helping educate and creating a trade association, I guess you could call it, for this work,” says Hickey. “It tracks federal policies and educates on how these tools are used at the local level, like tax increment financing. For instance, some states don’t use TIFs at all.”
Hickey’s firm is also documenting which tools have been used for which projects. “We have a real-time database that tracks incentive programs around the world,” he says. “It’s not just tracking the precedent side and how these resources came to be used and delivered, but also what rules, timing, and other factors govern.”
Nearly 50 Years of CDBGs
Though financing to repurpose assets isn’t one-size-fits-all, the most common incentives can be incredibly valuable and incredibly complex to secure. Community development block grants originate from the U.S. Department of Housing and Urban Development [hudexchange.info/programs/cdbg], and competition is intense for the funding, reports Marion McFadden, HUD’s principal deputy assistant secretary for community planning and development.
“This is a formula program that’s 49 years old, and it’s built on the chassis of federalism,” she explains. “It’s the federal government providing money, and states, cities and counties make their own decisions on how to fund projects.”
States and local governments must create a plan and seek public comment. Seventy percent of funding benefits low- and moderate-income residents. There are several CDBG programs, with the disaster relief and Section 108 programs best fitting efforts to repurpose assets.
Section 108 offers what’s called a “multiplier amount” of up to five times the total amount a state, county or city can have outstanding. Those governments select activities that would generate revenue, says McFadden, which could range from affordable housing that generates rents to the expansion of businesses.
One Section 108-funded project was the Aurora Arts Center in Illinois, which opened in 2019. “That was a collaborative effort to bring new economic opportunity mixed with affordable arts education,” explains McFadden. “It was put in two historic buildings that were on the National Register of Historic Places. There’s now arts education, business, a restaurant, lofts, rehearsal spaces and a school of the arts.”
Raising Low-Income Housing
The low-income housing tax credit (LIHTC) [huduser.gov/portal/datasets/lihtc.html] is offered by states and the federal government. Its purpose is to acquire, rehab or build low-income rental housing.
“You can’t get the state LIHTC unless you qualify for the federal,” explains Mark Shelburne, a Raleigh, N.C.,-based housing policy expert at Novogradac. He consults with multiple parties, including developers and investors, on the LIHTC and other development tax credits and helps states determine requirements for their LIHTC programs.
“The only two credits you can’t combine are the LIHTC and the new markets tax credit,” he explains. “The only way to combine those would be in a structure that had separate ownership. For example, maybe you have a 10-story building, and you split it into distinct entities. Maybe the ground floor is owned by one owner, and low-income housing on floors 2-9 is separately owned.
“There are a lot of transaction costs for these credits, such as legal and administrative costs,” says Shelburne. “The LIHTC has a cap on how much funding is available within a state, and those funds are very competitively sought. Every dollar gets used.”
What helps a project get funding? It’s complicated. But Shelburne says unfunded projects often “don’t compete well enough,” he explains. “Other applications do better under the selection criteria. Maybe they weren’t as close to amenities like grocery stores as another application.”
New Markets, Big Impacts
Almost all of Bystry’s great examples of repurposed properties involve developers accessing the new markets tax credit. “One of the perceptions is that it’s extremely complicated and difficult,” he explains. “It can be, but it depends on what role a party plays in the process.”
The credit applies to projects in low-income census tracks, and there’s a competitive process to receive an allocation of these tax credits. Funds are distributed to a community development entity such as Bystry’s CDFI.
“We’ve applied for these credits since the very inception of the program,” he explains. “The U.S. Department of the Treasury makes the decision. The application is extremely difficult and complex and kind of like doing a college dissertation. However, if you’re so fortunate to win an allocation, you can use those tax credits on a project, and it can be extremely beneficial to the project sponsor.”
Here’s how it works. “Let’s say our company applied to the Treasury and got an allocation of $100 million,” Bystry explains. “We now have $100 million in tax credit allocation we can divide up and put on projects. That will generate a federal tax credit.
“We know some developer wants to take an old, beat-up warehouse in downtown and turn it into an art gallery,” he states. “That project will cost $10 million, and we designate $10 million to it. It’s in the right geographic area, and we think it’s worthy enough for this valuable resource.”
“The developer says, ‘What does that mean for me?’” continues Bystry. “If we place that amount, it will generate 39 percent in federal tax credits over 7 years. That’s $3.9 million. Because there are parties — companies, banks, and other entities — that want to buy federal tax credits, we’ll find a party to do that. U.S. Bank is the largest purchaser of new markets tax credits in the country.”
“A bank might say, ‘We love these credits, but we’re not going to pay $3.9 million; we’ll pay $2.5 million,’” he says. “We say, ‘That’s a deal.’ That $2.5 million comes into the project and functions like equity or debt the borrower doesn’t have to pay back. Now as the lender, I know we need to find only $7.5 million in funds. Let’s also say the developer is coming in with $500,000, so now we need a loan for only $7 million. This credit often makes a project that wouldn’t pencil out otherwise work.”
Developers can’t get the new markets tax credit on their own. “They need to find one of the parties that win the awards each year,” he says. “If you go to the CDFI Fund list [cdfifund.gov/] and look up the new markets tax credit allocatee list, you’ll find everyone that got an allocation and how much they got. When that list gets out, our phones ring off the hook.”
What makes a project stand out? “It’s a horserace and a beauty contest,” says Bystry. “If your project is ready, that puts you higher on the list. And, we provide impact. Is your project going to create jobs? Is it a factory you’re starting in an area with a high unemployment rate? Or is it the beat-up building in the middle of town that makes everyone think this town is terrible and gross? Every story is unique, but we’re looking not just at what will be the most successful financially but will also be the most impactful.”
Old Buildings, New Life
The new markets tax credit and historic preservation tax credits are the best incentives to use to restore or repurpose property, Bystry states, and they can be used together. Harvey Kaplan, an architect who oversees the preservation tax credits program for New Mexico, agrees these are powerful tools.
“For rehabilitating historic buildings, New Mexico has a state tax credit program, and there’s the federal program [nps.gov/subjects/taxincentives/index.htm],” he explains. “The state credit is available for properties listed in the state register of cultural properties, covers 50 percent of eligible expenses, and is capped at $50,000. So, the maximum credit is $25,000 in most circumstances. If the property is in a New Mexico designated arts and cultural district, the cap is $100,000 for a maximum $50,000 credit.
“We had a hospital that was reused to become Hotel Parq Central in Albuquerque, and that developer used the federal historic tax credit,” says Kaplan. “There are different names for the credit, and it doesn’t have a high percentage — it covers only 20 percent of eligible expenses. But there’s no cap. I’ve seen projects of $100 million that have used the credit, though not in New Mexico. That’s really potent.”
The Castañeda Hotel in Las Vegas, N.M., also used a federal historic tax incentive. It was a Fred Harvey hotel, named for the developer who built hotels and dining rooms for the Santa Fe Railroad. It was constructed in 1889 and by 2010 was boarded up with only the bar still operating.
“It was on the market for a few years, and a developer who owns another Fred Harvey hotel bought it,” explains Kaplan. “They spent almost $7 million rehabbing it into a small hotel with a great restaurant and a wine bar, and it now does weddings and other events. They used the federal tax credit and had roughly $6 million in eligible expenses, so credit would have been about $1.2 million. The developer combined that with the new markets tax credit.”
Bystry’s company financed both the Castañeda and the Plaza Hotel, another Harvey hotel in Las Vegas, N.M., and both reopened in 2019. “Their first year, they served more than 50,000 patrons annually and created 60 full-time hotel and dining jobs,” he notes. “They’ve inspired dozens of new businesses.”
Another project that used both credits was the 2018 rehab of Albuquerque’s El Vado Hotel, a small auto court off Route 66 with guest rooms and a carport between each room. “It had been limping along,” recalls Kaplan. “Eventually the owner pulled out, and the city got it for back taxes. It was going to be demolished.
“Preservation planners convinced the city to not do that, and the city used its eminent domain power,” he says. “The city took care of it for years and eventually got a developer to take it over and spend about $7.5 million to convert the front third to an open-air food court. Each little guest house has a food business, and the office is a tap room for a brew pub. The back two-thirds is a motel. The developer used the federal historic tax credit — he would have gotten about $1.5 million, or 20 percent of $7.5 million — combined with a new markets tax credit.”For Bystry and others in the repurposing business, it’s all about the end game. “While we’re for-profit, we don’t make all our decisions based on the bottom line,” he notes. “We often fund loans other banks would never do, and we do it because we think the risk is worth the upside.”