Historic Tax Credits

Fund focuses on small historic credit deals

By Donna Kimura

Affordable Housing Finance • September 2005

Many financiers are busy chasing whales – the big projects, but one unique fund is fishing for the smaller deals.

The National Trust Small Deal Fund, LP, has closed 13 deals so far this year and has about another dozen in the works.

The fund aims to finance smaller historic rehabilitation tax credit deals across the nation. The focus is on projects that have between $200,000 and $1 million in historic tax credits, said John Bowman Jr., president of the Small Deal Fund.

The fund is a collaboration of Tax Credit Capital, LLC, in New Orleans and the National Trust for Historic Preservation’s for-profit subsidiary, the National Trust Community Investment Corp. (NTCIC).

The two have been working together for approximately a year on the fund. To date, the Small Deal Fund has closed on about 48 projects, totaling about $25 million in historic tax credits. Projects receiving financing through the fund have been averaging about $500,000 in historic credits.

Watkins & Co., Inc., a commercial real estate development and brokerage firm in Kansas City, Mo., recently redeveloped the four-story Western Union office building in the city with the help of the Small Deal Fund, which bought the federal historic credits after another investor dropped out.

The fund was important because it didn’t just look at the deal in terms of the moderate amount of tax credits involved, said Rick Watkins, president of the development firm. “They really looked at the real estate, and the partnership and the developer behind it,” he said. As a result, they saw the overall merits of the project.

“The Small Deal Fund was a great partner because it’s really important to have a partner that does what they say they are going to do and do it when they say they are going to do it, especially in these kinds of projects because of the timing issues,” Watkins said.

The fund is capitalized by Chevron Texaco, a major investor in historic tax credits.

The National Trust is involved because the fund is good for historic preservation, said John Leith-Tetrault, NTCIC president. NTCIC helps locate and refer potential deals to Tax Credit Capital, which oversees the fund.

The Small Deal Fund is tapping into the marketplace for smaller deals while many other tax credit syndicators are seeking larger projects.

Smaller deals are often just as hard to do as big ones, requiring the same amount of paperwork and level of due diligence. As a result, they have had less appeal than bigger projects.

The Small Deal Fund is able to invest in the smaller deals by having a standard set of documents and focused due diligence, according to Bowman. It also uses an equity pay-in model, wherein the first major equity payment is deferred until final project approval is granted by the National Park Service. Closing costs have been $10,000.

Tax credit prices vary depending on the deal, but have generally been 80 to 89 cents per dollar of credit.

Bowman said it is important for owners to know that projects have to close prior to being placed in service. Under Internal Revenue Service rules, if a project is placed in service prior to closing with an investor, then the credits cannot be sold.

In general, the fund receives a $1,000 asset management fee to cover costs and an annual 3% return on capital invested.

The Small Deal Fund has financed museums, hotels, mixed-use developments and other projects. One is the Fitzpatrick Hotel in Washington, Ga. After being vacant for more than 50 years, the historic building has been brought back to life as a 17-room boutique hotel with conference and commercial space. The Small Deal Fund provided a $315,000 tax credit equity investment to Fitzpatrick, LLC.

Visit www.taxcreditcapital.com or www.ntcicfunds.com for more information.