Just a few steps from Chicago’s Magnificent Mile and Millennium Park stands the 17-story art deco masterpiece that is the Chicago Motor Club. The 1920s property with limestone, terra cotta, and brick walls was vacant for more than a decade until Chicago-based Aries Capital stepped in with a mezzanine loan to get the property restored and on the market. “There are very few vacant historic buildings,” says Jeffrey Bucaro, senior vice president of Aries Capital. “You have very limited supply.”
Bucaro says 20 percent of the renovation costs qualify for historic tax credits and are used as an offset to any federal tax liability. “Typically a developer doesn’t have that type of tax liability, so they then bring in a tax credit investor to buy the credits,” he says. “It would be someone who has a lot of federal tax, and so they buy the credits and immediately benefit from them.” And sometimes the developer doesn’t have to pay for the credits until sometime in the future.
Bucaro’s group is using the projected $12 million in tax credits as part of the sales pitch to the private hotel real estate company that will eventually buy the Chicago Motor Club. Neil Freeman, Aries Capital president and CEO, says investors will often buy the credits at more than face value. “The tax credits and real estate tax savings are estimated at about $12 million, which is a meaningful equity enhancement to make the deal an attractive development,” says Freeman.
Historic tax credits help hoteliers finance development or renovations of historic properties as long as developers follow certain preservation guidelines. Those historic credits can often be combined with new market tax credits to make a package more attractive, says Brandon Comer, managing partner of Comer Capital Group. That’s the approach Bucaro used in a separate project, combining new market and historic tax credits to create 21c, a museum boutique hotel in Louisville, Ky. The 90-room hotel includes a contemporary art museum, a cultural civic center, and an award-winning restaurant. “The larger the transaction and the stronger the property plays, the more creative solutions become available,” says Seth Grossman, managing director for Meridian Capital. “When you’re dealing with $15 million transactions in big cities, then you have the opportunity to bring in other entities.”
Comer explains that in addition to new market tax credits there are plenty of other options available to help hoteliers round out their capital stacks. In some areas, municipalities may create a tax increment financing (TIF) district that channels funding toward improvements in blighted areas. TIF is a method that uses future gains in taxes to subsidize projects such as hotel development.
“You have so much flexibility with that because taxes can be leveraged to help cover the cost of the infrastructure of the project,” says Comer, adding that, in many cases, a hotel or lodging tax can also be leveraged back to the project as well.
EB-5 financing is another item Comer says hoteliers should look into when structuring their stacks. The EB-5 Immigrant Investor Program, overseen by the Department of Homeland Security, is a federal program that provides green cards for foreign nationals who invest money in a business while creating or preserving at least 10 full-time jobs for U.S. workers.
Photo credit: Stack of Coins via Bigstock.
