A number of D.C. area real estate developers converting rental properties to condominiums have run into serious troubles over the last several years as interest rates skyrocketed and the market became glutted with units for sale.
Many builders in this position have turned to renting out their apartments as a desperation move. At least a few companies, lucky enough to be working with historic properties have found that going the rental route can offer special financial advantages unavailable even if they had sold out their units as condos.
One such restructured project, the Envoy, at 2400 16th St. NW, was originally purchased in December, 1979, by a joint venture group composed of the building's residents and developer David Clark and Associates. Those two recently "syndicated" the property, reselling it to a new partnership that matched up the old joint venture group with new "limited partner" investors attracted by the substantial tax benefits available on the building as a certified historic structure.
"It was not an odyssey of choice," said Robert E. Cook, as attorney for the tenant/developer joint venture. "It was one of necessity, because of a terrible condo market."
The codevelopers chose this route after the property ran into problems in the fall of 1981 when rising mortgage rates made it impossible for many prospective purchasers to quality for loans. The funds generated from the first sales were supposed to go toward completing renovation of the remainder of the structure's 302 units.
In February 1982 the situation worsened when the building's rehab contractor and all the subcontractors pulled out of the project and filed liens against it.
The joint venture considered a number of alternatives, including immediately renting out units, but decided it would be better to wait and try to qualify the project for the substantial new tax incentives available for rehabing historic properties included in the Economic Recovery and Tax Act of 1981.
That legislation, which went into effect at the beginning of 1982, included a 25 percent investment tax credit for qualified rehab expenditures on certified historic structures, generally ones at least 50 years old. Such buildings must be individually listed on the National Register of Historic Places, in a historic district on the register, or in a certified local district.
Constructed in 1918, the Envoy has been certified by the Secretary of the Interior as eligible for listing on the National Register.
Substantially renovated commercial properties at least 40 years old qualify for a 20 percent investment tax credit. A 15 percent ITC can be taken on buildings between 30 and 39 years old.
These tax credits are not available to owner occupants of historic structures. Like other homeowners, they may only take the standard deductions for mortgage interest and real estate taxes.
An investor can subtract a tax credit directly from the amount of taxes owed. Deductions, on the other hand, only reduce a taxpayer's income that is subject to taxation.
On the Envoy, the 25 percent ITC will total some $2.1 million. Each year the project will generate about $1 million more in tax deductions the limited partners can take.
Over the next five years one major investor and a number of smaller ones will put a total of $6.6 million into the project.
The building will remain as a rental for at least five years, said Cook. The agreement for the new partnership includes a "buy/sell provision that, beginning in the sixth year, would allow the property to be bought by any group that can come up with a purchase price of $28 million.
Whenever the building is resold, the original residents who have remained will be allowed to purchase their units at the discounted prices they would have paid in 1981 if the property had gone ahead as a condo. Efficiencies will cost from $26,000 to $28,000, one bedrooms will be around $35,000, and two bedrooms will go for about $41,000.
Keeping the lower income and minority families in the building was an important objective from the start of the project. The original partnership had planned to do that by offering residents lower purchase prices subsidized by market sales and by arranging HUD Section 8 rental assistance payments for others who would have remained as tenants. "We've been able to preserve that goal through the whole syndication process," said Cook.
In the reorganized project, the monthly charges for the 34 remaining original families will be subsidized, some under the HUD program, and others by special discounted rental rates mandated by the new partnership agreement.
Market rents for new residents will be from $350 and up for efficiencies, $465 plus for one bedrooms, and $575 to $600 for two bedrooms, according to Steven H. Bernstein, of the building's new management company, Total Management Inc. Since the project was "overdesigned" for a rental, the units should fill up quickly, he said.
While the Envoy's new owners are optimistic that things will work out well for them, their approach is far from universallu applicable, other D.C. developers have discovered.
Some of the difficulties in other projects have come from the strict standards needed to qualify a building for the historic rehab tax credits. There are two main tests set by the U.S. Department of Interior, which certifies projects.
The rehab expenditures within a 24-month period must equal at least $5,000 or the "adjusted basis" in the property, which is the cost of the building and its capital improvements, minus any depreciation the owner has already taken.
In D.C. where properties often have high acquisition prices, these substantial rehab requirements can make many historic renovation projects unfeasible. In one Adams Morgan building, where condo units sold to investors were maintained as rentals for the elderly residents, no attempt was made to qualify the structure as a certified historic rehab because of the high renovation costs that would have been necessary to a spokesman for the D.C. Historic Preservation Office.
The other major requirement to qualify for the 25 percent ITC is that the renovation work must meet specific standards intended to preserve the structure's architectural and historical integrity.
This has proved to be an impossible test in several properties where the rehab work had already begun before the developer decided to try to qualify the project. "Because of the certification requirements, you almost have to plan these from the begining this way" as historic rehabilations, commented G.V.(Mike) Brenneman, president of the Brenneman Associates real estate firm
One Brenneman company project in the Dupont Circle area, the Albemarle, was denied certification because it did not meet the rehab architectural standards. At least one other developer's property, on Capital Hill, was recently turned down for the same reason. The Clark Co. has had the renovation work rejected on another of its buildings, the Balfour, at 16th and U Sts. NW, but is appealing that decision
The Envoy's developers are clear about the importance of that building's historic rehab tax incentives. "The ITC's were central to this project," said Cook. "It would have been extremely difficult to attract investors to this deal without them."