Northern Virginia Developers Use Historic Tax Credits to Create Much-Needed Affordable Housing

Novogradac Journal of Tax Credits
August 2016 | Volume VII - Issue VIII

By: Bill MacRostie, MacRostie Historic Advisors, LLC

The Virginia Historic Rehabilitation Tax Credit Program will celebrate its 20th anniversary in 2017. Few other states can boast the success and longevity of Virginia’s program. A comprehensive study of the program was conducted by the Virginia Commonwealth University Center for Urban and Regional Development (VCU) and found that in the 17 years that it studied (1997-2014), the Virginia Historic Rehabilitation Tax Credit stimulated $3.97 billion in private investment in more than 2,375 projects with a yield of $1 billion in historic tax credits (HTCs). The study also found that Virginia led most states on the number of projects and investment dollars.

It may be no surprise that Virginia is a national leader in historic preservation, given  the  state’s  role in early American history and renowned sense of cultural pride. However, it is HTC equity that is the main driver for successful historic real estate development in places like Richmond, undeniably the most active market for such investments. The number of projects and rehabilitation costs in the capital city are impressive and the economic benefits are significant.

At the time of the 2014 VCU study,  Northern Virginia only produced one HTC  project  for  every 25 in Richmond. As part of the Washington, D.C., metropolitan area, the real estate development community in this region that includes Fairfax and Arlington counties and the city of Alexandria. It is focused primarily on supporting the need for new and dense expansion out from the capital, but a crop of historic buildings have been able to help meet the demand for much-needed affordable housing in the area.

These are New Deal-era garden apartments.

Garden Apartment Rehabilitations

The Federal Housing Administration (FHA) was created in 1934 under the National Housing Act. With the country still in the grips of the Great Depression, housing starts sputtered while throngs of unemployed Americans turned to rental properties. The FHA administered government stimulus incentives for housing projects and provided standards for their construction. Theses standards were not universally imposed on all new construction of the time, but adherence to them was required to receive the benefits of the program such as mortgage insurance.

  Image: Courtesy of MacRostie Historic Advisors LLC   Colonial Village in Arlington County, VA, was rehabilitated with state and federal HTCs.

Image: Courtesy of MacRostie Historic Advisors LLC

Colonial Village in Arlington County, VA, was rehabilitated with state and federal HTCs.

The first large-scale rental housing project in  the  nation to receive these incentives was Colonial Village in Arlington County, Va. Built between 1935 and  1940,  Colonial  Village was a sprawling 1,000-unit, 40-acre complex. As a garden apartment development, it was designed to be the multifamily antithesis to crowded and substandard city tenements by providing rental housing that resembled the small single-family houses that were gaining popularity across the country. They featured natural light, comfortable (if modest) amenities and materials, and a sense of openness.

In 2012, Wesley Housing Development Corporation rehabilitated a 162-unit affordable housing community within the Colonial Village complex. With development exploding in the Northern Virginia suburbs of Washington, D.C., and property values in Arlington following suit, financing for the project was challenging for the nonprofit and every bit of available capital was needed. Both the  20  percent  federal  HTC  and  the  25 percent Virginia HTC were essential to make the rehabilitation feasible.

“The state and federal historic credits were critical to our capital stack and allowed us to increase the size of many of our units and create a much nicer product for our residents,” said Shelley Murphy, president and CEO of Wesley Housing. “And with land values increasing so rapidly, quality affordable housing is more difficult to develop. We need absolutely every source of financing we can throw into the mix.”

The scope of the project included converting 17 apartments and adding 14 new family-sized, three- bedroom homes to address two key areas of need identified in an Arlington County affordable housing assessment that stressed an immediate need for families and persons with disabilities. This $42 million project earned $7.3 million in state and federal HTCs. Other public financing included a $2.5 million loan from Arlington County’s Affordable Housing Investment Fund and $8.5 million in low-income housing tax credits (LIHTCs). The complex offers 80 percent of the units at an affordable rate for residents making up to 60 percent of the area median income (AMI). The other 20 percent are market-rate.

Also in Arlington County, Developer McCormack Baron Salazar is rehabilitating 103 units in Clarendon Courts. This complex was constructed in three decades including 48 apartments in three two-story-plus- basement historic red-brick structures built in 1941 during the World War II boom. The development will create 103 affordable units and is expected to use $2.1 million in federal and state HTCs. Financing for the property will close and construction will start this fall. Meg Manley, managing director of development at MBS, echoes the comments offered by Wesley Housing. “We develop affordable housing all over the country, and especially in the first tier cities where there’s such an overwhelming need for this product, the skyrocketing cost of development puts tremendous pressure on us  to tap all sources of capital we can,” she said. “Where historic credits are available, particularly in states with good historic credit programs, we will pursue that equity.”

Multiple Property Designation

While Clarendon Courts is located in an historic district, the entire Colonial Village property was listed individually on the National Register of Historic Places in 1980, clearing the first hurdle to  certification  for the credits. And the success of the Wesley Housing rehabilitation made it clear that these types of building that had been so popular in Northern Virginia from   the 1930s into the post-World War II years could be an answer to affordable housing issues in the area.

Other garden apartment complexes, however, were hard to argue as historically significant on their own and are therefore difficult to list on the National Register. A larger context was needed in order to create access to the HTCs that were so important to their rehabilitation. To address the larger historical  context  and  to  open up historic rehabilitation funding sources for similar complexes, a thematic National Register of Historic Places Multiple Property designation was sought for Garden Apartments, Apartment Houses and Apartment Complexes in Arlington County, Virginia from 1934 to 1954. With a well-organized and strategic effort, this approach to historic designation can be the answer to challenging significance requirements for buildings that may not have individual merit. In 2003, historic garden apartments in Arlington were successfully listed on the National Register using a Multiple Property Designation Form (MPDF). The nomination was undertaken by the State Historic Preservation Office (SHPO) and identified more than 170 extant garden apartment complexes.

The listing for garden apartments in Northern Virginia is not the only use of a MPDF National Register listing used to create opportunities for rehabilitation of buildings with little historic significance on their own. In 2014, Apartments in Washington, D.C., 1880-1945 was accepted to the National Register and Historic Colonnade Apartments of Kansas City, Mo., was listed in 2004. This  fall,  an  MPDF  for  Residential  Hotels  in Chicago, 1910-1930 will also be listed in order to facilitate the use of HTCs.

In addition, the approach taken by developers, local government, and the historic preservation community in Northern Virginia is an outstanding example of one of the many ways that HTCs are helping to address the needs of community such as affordable housing with existing built resources.

VCU Study

The benefit of having a well-documented program that is entering its third decade is the ability to really look back and understand the actual impact the program has had, especially long-term and through several real estate cycles.

Some of the interesting findings of the report included that the 2008-09 Great Recession had a “significant effect on the construction industry overall, but the historic rehabilitation activity suffered only a moderate decline.” Additionally, the report identified that most projects were in the largest metropolitan statistical areas (MSAs) but that 13 percent were in areas that are not a part of any MSA. Both of these points indicate the importance of the HTC as part of the capital stack in regions, or during periods, where sources of funds are not easy to come by.

Other facts in the report that are of note include the creation of 31,000 jobs during the 17 years the report covers and that despite the fact that the program is open to a broader set of buildings and users then the federal program, 30 percent of the developments were multifamily apartments. The report also estimated increased tax revenue to be $133 million.

None of the above findings are astounding to those who are active in historic rehab projects, but to have them based on such a broad and deep amount of data is unusual. Virginia is not unique in having a state HTC program or for the use of creative ways to list buildings on the National Register. What is unique is having a program survive and thrive for such a long period of time. However, it appears that some Virginia legislators are growing concerned about the cost of an uncapped program. The Historic Tax Credit Coalition in concert with the National Trust for Historic Preservation and supportive legislators are already mobilizing to champion the facts that support this program as a necessary economic stimulator. It is difficult to read the VCU study and not recognize the positive impact the program has had on the Commonwealth.

Bill MacRostie is the senior partner of MacRostie Historic Advisors LLC and is located in Washington, D.C. In private practice for more than 30 years, Bill has advised clients nationwide on historic rehabilitation projects of many sizes and types. He can be reached at bmacrostie@ mac-ha.com or 202.567.6055. Visit www.macrostiehistoric.com for more information about MHA and our expert team.


This article first appeared in the August 2016 issue of the Novogradac Journal of Tax Credits.

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