Leveraging Historic Tax Credits To Rescue Historic Property

Play This Episode

0 Votes

If you re interested in rehabilitating and repurposing historic properties then this episode is for you Kyle Southard started his investing journey by buying a single-family home in Colorado Springs with zero down and no money out of pocket using VA loans He also purchases and renovates historic buildings in downtown Shreveport Louisiana and is utilizing historic tax credits Tune in as Kyle dives deep into federal and state historic tax credits and how these tax incentives can make a difference in your deals 00 01 – 04 12 Military Homeownership and Real Estate Investing Becoming a real estate investor and developer How he was able to benefit from VA loans 04 13 – 10 07 Bringing New Life to Communities Kyle breaks down their development project in downtown Shreveport The uptick of new residents moving into downtown Shreveport especially millennials Revitalizing abandoned buildings and properties Finding a gap in the market for short-term rentals 13 42 – 22 13 Understanding Historic Tax Credits Historic tax credits incentivize people developing a historic buildings You have to own the building for a period of five years in order to get the full benefit of historic tax credits Federal and state tax credits You don t get the incentives until the completion of work Kyle explains their deal structure with investors 22 14 – 23 48 Closing Segment Reach out to Kyle Read his book Military Homeownership and Real Estate Investing Links Below Final Words Tweetable Quotes It s incredibly risky but we think with great risk comes great reward – Kyle Southard There s a lot of wealth in the world and people want to utilize their wealth wisely and we can help them do that – Kyle Southard —————————————————————————– Connect with Kyle Follow him on LinkedIn and contact him directly at 318-900-1070 Head over to the Barksdale Real Estate website as well Connect with me I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns Facebook LinkedIn Like subscribe and leave us a review on Apple Podcasts Spotify Google Podcasts or whatever platform you listen on Thank you for tuning in Email me sam brickeninvestmentgroup com Want to read the full show notes of the episode Check it out below 00 00 00 Kyle Southard So a historic tax credit is basically a dollar-for-dollar trade-off to incentivize people to develop And so the way this works is I acquired this building for 160 000 totally vacant 160 000 acquisition None of that acquisition cost goes towards historic tax credits at all So if I pour 1 5 million into the building through construction costs and soft costs hard costs et cetera to develop the building Not all of that is going to go into the bucket of money that we can call historic tax credit eligible And so that bucket of money is called a qualified rehabilitation expenditure 00 00 52 Sam Wilson Kyle Southard is an investor He s a developer as well as a real estate agent licensed in Louisiana He left the military a year ago to pursue real estate full-time and hasn t looked back Kyle welcome to the show 00 01 03 Kyle Southard Thank you It s good to be here Sam 00 01 05 Sam Wilson Hey man Pleasure is mine Yhree questions I ask everyone who comes into the show in 90 seconds or less where did you start Where are you now And how did you get there 00 01 13 Kyle Southard All right well I started out as a military guy I went to the air force academy four years spent the following nine years on active duty I was in Turkey Louisiana Indiana and Colorado and somewhere around the Indiana Colorado range I got interested in real estate investing through a book called Rich Dad Poor Dad And that changed my world paradigm I realized that if I wanted to have a life of freedom then I needed to get some passive income going 00 01 38 Kyle Southard And I thought real estate was the best way to do that So I looked into how do I buy a house first and foremost And I knew that I had a bit of a VA eligibility to tap into for VA loans So I bought my first house in Colorado Springs Colorado with zero money down And I m sure a lot of our viewers and listeners will know that Colorado Springs has become a really hot market 00 02 00 Kyle Southard So I was right place right time refinanced my first ever single-family home that I bought I bought a second single-family home lived in that for a year sold that home a year and a half later for 130 000 profit And then bought another bigger home in Colorado Springs and then some stuff here in Shreveport Louisiana as well 00 02 19 Kyle Southard And because of that I was able to get some passive income through Airbnb and long-term rentals as well And it allowed me some financial freedom to take some risks in life So I left the military And started investing in real estate full-time and I m developing as well So I ve got a development in downtown Shreveport right now that s using historic tax credits 00 02 39 Kyle Southard And that is a really exciting frontier that I m learning a lot about every single day And I m just amazed at how wonderful real estate can be when I really let go And let God take over for me and really help some of this stuff take shape 00 02 54 Sam Wilson That s cool man I love that Let s talk I guess you know on a VA loan side of things what s the limit of VA loans you can have active at a time 00 03 04 Kyle Southard That s a really good question And it s going to depend from person to person But what I have found for myself is that I was able to have one active VA loan in Colorado Springs And because there was still some availability left in my VA loan limits I was able to then finance a second property using a VA loan 00 03 23 Kyle Southard However I couldn t just do another 0 down again because for me I only had about 120 000 to work with in terms of VA loan eligibility And so I had to make up the difference and there s a ratio to make up there as well So I bought a second home for 270 000 and it had to come out of pocket about 30 000 but it was still a really good rate and a really good situation because it s pretty close to 20 down anyway 00 03 49 Sam Wilson Right right Yeah Do you guys or do you still have your rental portfolio or have you sold that off 00 03 55 Kyle Southard So we still have a rental portfolio in Colorado Springs We sold one of those houses because the getting was just too good not to But with the proceeds of that we use this section 1031 exchange to trade up to a bigger property and that produces a little bit more cash flow per month And we hope that this one should appreciate quickly as well 00 04 12 Sam Wilson Right That s cool All right Let s talk about the historic tax credits project you re doing right now You said it s a development project Is that a redevelopment What is this project Give us the skinny on the whole the whole project and how you discovered historic tax credits and how you re using them 00 04 30 Kyle Southard All right Well downtown Shreveport is relatively vacant compared to your average mid-sized cities downtown And what I mean by that is there are several buildings probably more buildings are boarded up than are active in commerce And so we were looking around I was looking around with some friends of mine at some possible properties to acquire and rent 00 04 52 Kyle Southard And one property that came to mind was this shoe store on the bottom that had been vacant since 2002 but it used to be a shoe store And then on the top it used to be a hotel apparently but it had not been used as a hotel since the 1930s And so a lot of the original features are still on that hotel all the way down to the wainscoting pink color et cetera 00 05 13 Kyle Southard And this particular building is called the Sanger Drug Building because it was built in 1900 by the Sanger brothers who went on to build Sanger Entertainment Industry who then sold out to Paramount for a good sum of money So it s a good bit of history in this building and in researching what we could do with the building I just learned about historic tax credits and I have a friend of mine who was a gym partner turned into a business partner and we researched together the benefits of historic tax credits and how we can get creative financing done and and bring in investors in syndicated deal to everyone s benefit 00 05 49 Sam Wilson Right That is really interesting Let s find out first Why is half of Shreveport not I mean why are the buildings all boarded up 00 05 58 Kyle Southard It s a great question I mean I know that you know Shreveport has had about a 1 per year decline in population over the past 10 20 years And that s just due to economic situations that have you know bigger picture macro take on on the world than I could possibly imagine right now 00 06 16 Kyle Southard But as a result of that you know a lot of folks are moving to south Shreveport or moving across the river to Bossier City Or they re just choosing not to live in downtown Shreveport anymore And because of the lack of downtown residents there s a lack of downtown commerce as well But what we ve noticed in the past five to eight years is that there is new influx of residents moving into downtown Shreveport And because of that there s a slight influx now of commerce going in there too And so we ve got the military installation across the river here called Barksdale Air Force Base And I know when I first moved here to Barksdale Air Force Base I was looking for a place to live in downtown Shreveport 00 06 53 Kyle Southard At that time there weren t many places but now you re seeing lots of mom and pop investors like myself and developers turning formerly abandoned buildings into something really cool and a place where people can live and thrive 00 07 05 Sam Wilson And that was gonna be my next question is is if you can define why half of the buildings are boarded up what gives you the courage to move forward on this product and say Hey this is this is a viable asset 00 07 16 Kyle Southard Great question And I m glad you asked it because I have to plug my community here Shreveport Louisiana has such a tight network of people whether they re developers artists business people investors who hang out together And there s a recent development that was made here by guy named Jim Malsch 00 07 34 Kyle Southard And he converted an old parking garage into the Artist Entrepreneur Center And that s become kind of the hub of innovation And there s been a big uptick in millennials moving to Shreveport and kind of centering around downtown Shreveport just because it s a cool funky place to hang out with a lot of history 00 07 52 Kyle Southard And so because of that I think we re all banding together at this point and kind of moving the needle slightly day by day together as a as a community And so I always joke like if an investor wanted to come in and buy a downtown Shreveport they could probably do it for you know 20 million bucks and get a vast majority of this but that hasn t happened in Shreveport 00 08 12 Kyle Southard And I think it s a good thing There s a lot of people taking stake in downtown Shreveport And because of that there s a lot of buy-in and momentum 00 08 19 Sam Wilson Yeah That s really cool I love that So what is the project going to become You told us a little bit about what it was and the history of it What are you turning it into 00 08 27 Kyle Southard All right It s a four-story building and I say four stories because there s a ground floor a mezzanine level and then two stories above that So the ground floor and mezzanine level will be a blank canvas kind of build to suit commercial lease space We re advertising right now looking for tenants to move in there either as a restaurant bar or just anything that would work well for the community and work well for the investors and the tenants as well 00 08 52 Kyle Southard The top two floors will be short-term rentals And so across what used to be 22 total hotel rooms we will be making seven short-term rental units with kitchens bathrooms et cetera There ll be a two bed two bath three one bed one baths and then three studio apartments in there And so the reason we chose to short-term rentals for this is that right now we ve got a couple of hotels in downtown Shreveport 00 09 18 Kyle Southard Then we ve got maybe one or two short-term rentals in downtown Shreveport But other than that it s all long-term And we think that there could be a good gap in the market for short-term rentals 00 09 27 Sam Wilson Yeah No that sounds awesome How much of what your business plan is was defined by the historic tax credit 00 09 35 Kyle Southard Hmm that s a good question So I think I would say this project would not be done without historic tax credits I can say that s probably the case for a lot of my friends who are investing as well the historic tax credits really incentivize people developing historic buildings And so I don t think we would be brave enough to take this on without that 00 09 55 Sam Wilson Right but I guess I guess let s see if I can clarify the question Does the historic tax credit so you know you re doing you know the bottom two floors meds or the bottom two floors built to suit and then you re turning the the other remaining units into shorter remaining rooms into short term rentals 00 10 11 Sam Wilson Was any of the decision to what this ultimately becomes based upon was it was it any of it driven by the historic tax credits saying Hey if you re gonna do this you re gonna get the tax credits You re going to have to put an X Y and Z was any of that in 00 10 24 Kyle Southard Yes Yes it was So because the historic tax credits are meant to incentivize development that ultimately stayed in the federal government one they do have some stipulations on what you re allowed to do And so we re not allowed to turn it into something with the sex industry or something like that right There are all kinds of stipulations on what you can and cannot do there And I mean ultimately what it comes down to as the developer and investors that when you use historic tax credits you have to own the building for a period of five years in order to get the full benefit 00 10 57 Kyle Southard And so we were apprehensive about doing something that was not going to work long-term And so because of that we know my business partner and I know residential we know a little bit of commercial real estate but that s about where our imagination ends right now And so since we were going to be married to this project for five years we figured we d do something that we thought was A going to work but B be something we understand and would enjoy 00 11 23 Sam Wilson Right right No that s a that is really cool Yeah I guess that that that s something I hadn t really thought about was up until this point Everything you ve done has been has been in the residential side This is your first foray into commercial real estate And it kind of sounds I mean this is it s a pretty it s a pretty not audacious is the wrong word is courageous was probably the more word I m looking for 00 11 46 Sam Wilson Okay cool We re going to take 122-year-old building and we re going to put it in short-term rentals and do a build to suit and like There s a lot of moving parts and do hit the housing tax credits I want to hear before you know one of the I got some uh one question on build a suit before we get to that 00 12 00 Sam Wilson Tell me can you just break down the 62nd soundbite version of this is how a historic tax credit actually works 00 12 08 Kyle Southard Yes So a historic credit is basically a dollar-for-dollar trade-off to incentivize people to develop And so the way this works is I acquired this building for 160 000 Totally vacant 160 000 acquisition 00 12 22 Kyle Southard None of that acquisition costs goes towards historic tax credits at all So if I pour 1 5 million into the building through construction costs and soft costs hard costs et cetera to develop the building not all of that is going to go into the bucket of money that we can call historic tax credit eligible 00 12 45 Kyle Southard And so that bucket of money is called a qualified rehabilitation expenditure And so a qualified rehabilitation expenditure s for things like mechanical electrical fire safety plumbing major fixtures but it does not include appliances cabinets certain things that could be considered you know manipulative or or subjective when it comes to cost 00 13 07 Kyle Southard And so because of this when we look at our numbers we have a 160 000 acquisition costs a 1 7 million renovation costs and of that 1 7 million about 1 5 to 2 million are going to be qualified rehabilitation expenditures What you do with that 1 5 million is you break it up into 20 of that is eligible for state historic tax credits And 20 of that amount is eligible for federal historic tax credits 00 13 41 Sam Wilson Is my number right that s roughly 300 000 00 13 45 Kyle Southard That s right exactly 00 13 46 Sam Wilson On both sides 00 13 47 Kyle Southard On both sides And so the trick here is that one it s not automatic but it s pretty close if you do your do your steps right And what I mean by that is you have to get this renovation plan approved by the state level and for Louisiana it s the state historic preservation office down in Baton Rouge 00 14 04 Kyle Southard And then it has to get approved at the federal level which is the National Park Services in DC And that s about a two-month process at the state level and a two-month process at the federal level they look at our plans They make sure that we re not changing the building s historic integrity things like that 00 14 21 Kyle Southard But once that gets approved you re clear to start work And when you start work you basically have to finish it right And so what I mean by that is you don t get any of the tax credits until you ve finished the work But once you finish the work you get the state tax credits issued to you And then the federal tax credits get issued at let s see it s 20 per year for five years 00 14 48 Kyle Southard So if there s a hundred percent of your federal historic tax credits which in this example would be 300 000 You re getting paid out one fifth of that every year for five years And so that is essentially a tax liability offset I personally do not have 60 000 worth of federal tax liability every year 00 15 10 Kyle Southard And so because of that we have to bring in investor an investor or multiple investors who do have that tax liability problem to solve And so what we have done is we have syndicated the deal to where we bring in third party investor who has a tax problem to solve has too much federal tax liability invest a certain amount of money with us and we issue him or them the tax credits 00 15 32 Kyle Southard And so that s a nice deal because our ask in our project is 300 000 capital contribution give or take I mean there s room for negotiation always but the nice thing is that that person is going to get paid out a lot of about the same amount of money in federal historic tax credits over five years 00 15 48 Kyle Southard So they almost can t lose And so that s really nice There s a lot of nuances to this too but I hope that it s just like a broad stroke overview of historic tax credits 00 15 57 Sam Wilson No that s really good That s actually super helpful Does that 304 000 Yeah Cause it goes you get 304 000 on both sides of the of the equation at the state level Does that come in over five years as well 00 16 10 Kyle Southard That is not over five years You know that s basically once it gets issued you can use that And there s an there s a rule where you can go back a year to offset some of last the previous year s tax liability at the state level you can use the current and I think you can carry it forward 00 16 25 Kyle Southard I would consult a lawyer cause that s what I have to do on all this but what we have opted to do I m glad you asked that question One cool thing about this is the state historic tax credits are transferrable What I mean is you can sell these state historic tax credits to people who compete for them 00 16 42 Kyle Southard What we ve found is there s a firm who we found a firm in new Orleans who wants to purchase our state historic tax credits call it 300 000 for 87 cents on the dollar So they re effectively saving 13 in their taxes for that 00 17 00 Sam Wilson Right Are they gonna are they gonna they re going to buy it from you cause it s a firm that s going to be the end user or are they going to turn around and then resell those to somebody else So they just do an arbitrage on it 00 17 11 Kyle Southard That s a question I have not asked I think it could go either way And with this particular firm I I m not exactly sure I just know they re going to pay us you know at loan closing they re going to pay us the the capital that s required to purchase the state historic tax credits from us 00 17 26 Kyle Southard And so again we re getting deeper in the weeds I want to point out we are going to be able to use some of this capital from the state historic tax credit investors So to speak this from at in new Orleans that I mentioned we re going to be able to use like a quarter million dollars of that for our down payment on our construction loan through a bridge loan 00 17 44 Kyle Southard So it s just wild how good of a deal this can be if we have the right players And of course you have to have a great lender a great flexible you know loan officer to work with you on all this 00 17 54 Sam Wilson Right Somebody that understands what it is you re doing and and the and the lineup of these different pieces because it would be yeah that s really really cool because yeah because but you have to have the work done Let me get this right You have to have the work done in order to get the state historic tax credit 00 18 12 Kyle Southard It s exactly right 00 18 13 Sam Wilson So how do you time that out 00 18 16 Kyle Southard How to yeah so everyone s taken a lot of risk on it And so that s why we have to re build a really strong team that makes everyone really confident about it So like you mentioned if we get a quarter million dollars from the sale of our state historic tax credits before we are issued our state historic tax credits and we do not finish this construction project we owe I now owe 250 000 to someone and probably a lot more than that And so because of that we have you know we purchased this building back in June of last year So it s been close to a year now that we ve been working on really making sure that this is fully vetted on every aspect so that somebody well so that everyone on board can be very comfortable moving forward And that includes me And so you know at the end of the day I m the one signing the personal guarantee And so as my business partner in this and yeah it s it s incredibly risky but we think with great risk comes great reward So I hope to have a good news story for you in about a year or two 00 19 11 Sam Wilson Yeah absolutely And again just to understand this completely you have to hold this for five years 00 19 17 Kyle Southard Right 00 19 17 Sam Wilson Right right Sell it off or do something else with it cause you you re going to need your and I m sorry to get into the weeds on this thing That s really interesting that the nuance here I think is really valuable 00 19 28 Sam Wilson And so in order for your syndication LPs limited partners in this indication to be able to capture that tax credit you re going to have to lease hold it for five years so okay 00 19 39 Kyle Southard That s right That s exactly right So they will be in the project for five years as well And so that s a you know it s a big deal but I think you know a lot of people have tax problems in this world And that s what I ve learned through talking with guys like you listen to your podcasts going to different conferences And you know I was talking with an investor the other day from Indianapolis and he said how much is your ask What s the raise on that project downtown And I told them it s around 300 000 00 20 04 Kyle Southard And he just laughed because he hears numbers that are 10 times that every single day a hundred times that every day So for us in Shreveport you know it s and for me as a brand new investor 300 grand is it s going to be hard to find but I m learning that there s a lot of there s a lot of wealth in the world and people want to utilize their wealth wisely and and we can help them do that 00 20 24 Sam Wilson So let me get this right So somebody puts in 300 grand they get 60 grand back a year Is that treated Is that tax credit per the way you underwrote this And I go and I m getting really in the weeds here but I think this is there s a lot to learn from you on this Is that treated as a return of capital or return on capital 00 20 42 Kyle Southard Hmm Well that s a great question too I think for an accounting principle I m not sure what that would be classified as and I ll tell you this though It s basically just offsetting their tax liability So it s by no means as good as cash but it is something to where there can be I don t know if we want to be and this is not an accounting term for give me phantom income right I mean you were going to have to pay 60 000 this year to the federal government You don t have to anymore you can go buy a truck and so or whatever It is to me I feel like it s it s a great way to save money if nothing else 00 21 17 Sam Wilson Well for sure for sure No it s interesting because and then that would be the the question do they retain their position in the deal 00 21 25 Kyle Southard Yes Yes And you know the way we have structured that we can structure it any way we want the way we have structured this is that we re aiming to do a five-year flip 00 21 34 Kyle Southard And so the goal here is you know when someone signs in and they they give us 300 000 they give the company 300 000 They own 99 of the company because that way they get 99 of the federal historic tax credits That gets paid out over five years At the five-year point it can flip to where now we own say 75 or 80 or whatever of the company They own 20-25 And so they still get to participate in the profits and losses for those five years but then they also get to participate in the exit of the sale whether it s at the five-year mark or at the 10-year mark or or somewhere in between 00 22 13 Sam Wilson Right That s really cool Kyle I love it Thanks for taking the time to break down your thoughts behind the historic tax credit the nuance of it We don t talk about that very often on this show So that s it s always fun to kind of learn some of those those more unique unique sides of that Man loads of fun Sorry for going so deep with you there but here s the final question for you If our listeners want to get in touch with you or learn more about you what is the best way to that 00 22 39 Kyle Southard All right So I recently started this endeavor It s trying to talk more about military real estate investing and military homeownership using VA loans wrote a book called Military Homeownership and Real Estate Investing You could probably just check me out either on LinkedIn or at the book s website which is barksdalerealestate com 00 22 57 Kyle Southard It s Barksdale like B-A-R-K-S-D-A-L-E realestate com Also check me out on LinkedIn Kyle Southard And you can even hit me up on my cell It s 3 1 8 9 0 0 1 0 7 0 I love talking about real estate So I look forward to talking 00 23 14 Sam Wilson Kyle Thank you man I appreciate it Y all we ll make sure we plug all that there in the show notes You have a great rest of your day Thanks for coming on the show 00 23 22 Kyle Southard Thank you Sam Take care Click here to visit this podcast episode