Four Tax Credits Complicate Cumberland

5 min read

Layers of financing complicated the plan to fix up the landmark Cumberland Arms Apartments.

“We’ve got four different tax credits, which adds a whole other level of compliance,” says Greg Gossard, principal with the Hampstead Group, Inc., an affordable housing developer headquartered in San Diego, with an office in Bethesda, Md.

The rehabilitation of Cumberland Arms in Cumberland, Md., mixes housing, historic and energy tax credits. To get the maximum tax credit award, the developers committed to meet tough standards for energy efficiency.

That meant creating significant energy cost savings even though energy costs are now low – a challenge that almost derailed the project.

History and Future

By this June, Hampstead plans to close the construction financing for the Cumberland Arms. Once the financing has closed, workers will rehabilitate the 69 affordable apartments, working around the very-low income elderly residents, many of whom have lived at the community for years. Work should be completed by mid-2016. Hampstead bought the property in 2013.

Seniors in the area seem eager to live at the Cumberland. The property is 100 percent occupied with a long waiting list, according to Gossard.

The Old Fort Cumberland Hotel was first built in 1917. “Cumberland used to be a great shipping town, in the early 1900s,” says Gossard.

The Chesapeake and Ohio Canal passes through town on its way from the Georgetown neighborhood of Washington, D.C., through the Cumberland Gap and on to the Ohio River Valley.

“Cumberland was one of the original corridors to the West,” says Bill MacRostie president of MacRostie Historic Advisors, which consulted on the Cumberland Arms project.

A path for bicycles now runs alongside the old canal. Tourism is a major industry for the town.

The Cumberland Hotel was turned into a community for low-income seniors in the 1980s. The 69 seniors apartments receive federal, project-based Section 8 subsidies from the U.S. Department of Housing and Urban Development (HUD). HUD recently renewed the contract for another 20 years.

The Energy Challenge

The biggest challenge so far in arranging the financing came from an opportunity offered by one of the four tax credit programs used at the property.

The Maryland Historic Rehabilitation Tax Credit provides a basic 20 percent tax credit to projects that preserve historic buildings – and provides a bonus that raises the value of the tax credit value to 25 percent of eligible basis if the renovation meets the tough Leadership in Energy & Environmental Design Gold standard for Existing Buildings: Operations & Maintenance (LEED-EBOM).

Buildings have to show significant savings to their utility bills to meet the standard. The original plan to rehab Cumberland would have replaced an inefficient gas boiler with heat pumps that run on electricity and a system of geothermal wells. The plan would save a great deal of energy, but the price of gas has fallen so much in 2014 that the planned renovation would not cut the building’s utility costs enough to qualify for LEED.

“We would need to show large energy savings to qualify – our plan wasn’t saving enough money,” says Gossard.

Natural gas is especially cheap for the Cumberland property because it is located not far from where hydraulic fracking is producing huge amounts of relatively cheap, natural gas.

Hampstead re-arranged their planned renovation to find significant energy savings for Cumberland – even in a time of cheap energy.

The new plan replaces the inefficient boiler system, rated for 80 percent efficiency, with a more efficient, 90 percent boiler. The plan also adds energy-efficient windows, a green roof and an array of solar panels on the roof.

The solar panels will provide Cumberland Arms with federal energy efficiency tax credits equal to 30 percent of the cost of the panels. The geothermal system also would have provided a federal energy tax credit, but only equal to 10 percent of the cost of the system.

Layers of financing

It will cost a total of $11.5 million to recapitalize the Cumberland and preserve the seniors community as energy-efficient affordable housing.

Of that money, $5 million will come from the sale of four different kinds of tax credits to Stratford Capital, including $3.2 million from 4 percent federal low-income housing tax credits (LIHTCs), $1.0 million from federal historic rehabilitation tax credits, $788,000 from Maryland historic tax credits and $81,000 from federal energy tax credits.

Cumberland’s 4 percent LIHTC came with the property’s tax-exempt bond financing from the Maryland Department of Housing and Community Development (DHCD). Cumberland’s developers considered applying for 9 percent LIHTCs, though the competition for tax credits in Maryland is intense.

The developers did not need to compete at all to get tax-exempt bond financing with 4 percent LIHTCs for Cumberland Arms. State officials were eager to provide tax-exempt financing and even provided Cumberland with $2.5 million in soft financing through its Rental Housing Works program.

Retail condominium

Cumberland Arms also includes seven small retail spaces on the first floor. Five of these are currently rented out to businesses, including a jeweler and a local bank. As part of the renovation, Hampstead will break the ownership of these retail spaces into a separate condominium, owned by Hampstead. That means the cost of utilities, like water and electricity, used in these retail spaces need to carefully be split out so they can be paid separately.

It was worth the hassle to split the ownership of the building because the LIHTC investors bidding to buy a majority ownership stake in the Cumberland seemed unwilling to pay extra for the income from the Cumberland’s mixed-use space. The condominium structure will allow Hampstead to keep the income generated by the retail space.