I'm Lillian Colson, and I'm pleased to introduce today's webinar, Builders' Risk and Tax Credits, hosted by Inland Marine Underwriters Association. Please be aware of the IMUA statement. Also be aware of the CHUB disclaimer. I'm pleased to introduce today's presenter, Ray Stutzke. Ray serves as Account Engineer for CHUB's Inland Marine Unit, part of CHUB's Property and Specialty Lines Division. In his role, he is responsible for engineering evaluation and construction risk management services for Builders' Risk and Engineered Risk Accounts. Ray received his Bachelor's of Science degree in Civil Engineering from Drexel University, and his Master's degree in Business Administration from Wilkes University, both located in Pennsylvania. He is a licensed professional engineer and holds the Associate in Risk Management Professional Designation from the Insurance Institute of America. Ray has instructed the Builders' Risk Essential Class for IMUA in 2016, and has presented for multiple IMUA regional committees, all to excellent feedback. We are fortunate to have him with us today. Welcome, Ray. The floor is all yours. Thank you, Lillian. It's much more than I deserve for an introduction, but anyway, welcome. The focus today is to discuss Builders' Risk renovation and tax credits, and the underwriting challenges that accompany that unique part of the business. Again, this is from a risk engineering viewpoint, and it's meant to highlight those underwriting challenges, and each underwriter will have to assess where that fits into their own corporate business plan and such. But anyway, we'll start out with an introduction, and kind of just talking about some coverage extensions, soft costs, basically time element related aspects, then kind of get into Builders' Risk renovation, exposures, and the controls associated with tax credits type projects, and then look at some of the unique terms and conditions and the types of tax credits that are out there, specifically focusing on historic tax credits, which is one of the more common ones we see. Then we'll look at a couple of case studies, kind of outlining what types of projects are likely to see, and then go into some questions and answers. From a coverage extension standpoint, everyone is familiar with the term soft costs, commonly used by developers, lenders, and others, just to outline the costs that are not labor materials, not actually the bricks and mortars part of the project that would possibly be required for repair or be remedied after a loss. They can typically be defined in the policy or in an endorsement, and they're not the hard costs. That's the thing to remember. It's really to ensure that economic or financial risk that a project delay may result from a covered peril. The cost of repairing the property and all the project works will be covered under the property insurance part of it, but the cost of removing or cost of financial aspect that might be due to the delay would be a soft cost or other time element related coverage. Just to remember that things like delay, tax credits, loss of rents, they're all time element related, and they can vary significantly by the policy, and it is that financial protection side of it for either the owner, the contractor, the lender, depending upon who has that economic risk, and it's a result of the delay in the completion of the project. One key aspect is that tax credits may be, and I think I'll repeat this several times today, it could be an all or nothing scenario where the delay will result in complete loss of that tax credit. Typically this would be done through, these extensions would be through a formal endorsement language, and in the case of tax credits, they would have to be specific to that particular tax credit. And along those lines, as I said earlier, with the all or nothing scenario, on a tax credit standpoint, the schedule is critical because tax credits require a placed in service date to come into being, so that's one key thing to remember is that placed in service date. So now we'll kind of, that kind of just introduces where we are from a coverage extension standpoint on these types of projects, it's something that is in addition to the normal traditional coverage. And on historic tax credit, obviously, since it's historic tax credit, it has to be on a building that's being restored, being renovated. So they are more common, you know, from an aging infrastructure, even some building green related stuff, but definitely the historic preservation is the emphasis for the tax credits. It's a unique set of risks because it's not as clear and cut as new construction, it's not starting from the foundation building up through the superstructure into the, you know, building envelope and finishing it out. In many cases may require temporary bracing, temporary structure within the building or on the outside of the building. Different types of renovations you might have from a commercial standpoint, office buildings, hospitality, multifamily healthcare, get into civil infrastructure type renovations of bridges and dams, other civil works. Common is higher education, universities, colleges, those kind of things, as well as sports venues and stadiums, each with its own unique aspect as far as renovation goes. So from a renovation construction standpoint, key areas that you need to look at and evaluate as you get a project in to underwrite, first of all, you want to look, is there coverage for the existing building, is it a structural or non-structural type renovation, the valuation, actual cash value or replacement cost, you know, or something in, probably something in between, developer or contractor qualifications, and then is there any of those unique soft costs, tax credits, loss of rent, those kind of time element financial side of the equation. If it is a structural, and structural is kind of a broad term as to what a structural renovation is, but if they're moving load-bearing walls, new elevator shafts, adding stories, doing foundation work, changing the superstructure of the building by adding new superstructure within it, those kind of things I would consider structural. If it's a gut rehab of the mechanical, electrical, plumbing systems and all the interior finishes, that may not be what would be considered structural. So if it is structural, you look at what's being done, is it a vertical addition, facade replacement, facade preservation, which are two of the very most common aspects of a historic reservation, historic renovation, and then, you know, those load-bearing elements. Looking at the construction type, you know, is it a joist and masonry, is it steel with concrete encasement, is it just precast, you know, whatever the building may be, and if they are looking for coverage of that existing structure, you know, the condition of it, what was its prior occupancy, you know, the age of the building, has it been vacant for a significant period, is it occupied, look at the maintenance of it, those types of things. So a lot of things that you want to consider from an existing structure standpoint. So from an occupancy, you know, was it occupied or is it occupied at the time, this would be in a situation where you're renovating a building that may be partially occupied or it may continue to be occupied throughout construction, you know, you might have an issue where that, from an exposure standpoint, does not fit well with the BR policy. If it's vacant, then you have to look at, you know, how long has it been vacant, is it secured, any other issues from a, you know, pipes being drained, site security, those kind of things. And then that duration, which I've seen this on a number of situations where, you know, they want to bind the building coverage so that they have coverage on the building, but work may be delayed for a significant period of time and you end up on a vacant building for an extended period. That's when security and actually, you know, the condition of the building and stuff becomes a significant point. Existing structure values, do they make sense for the structure? Is there an appraisal that's been submitted, something that gives you a dollars per square foot analysis? If there's an appraisal, it might give you a market, it might give you a selling, those kind of things, but you have to realize that, you know, the market and selling value is not the same as actual cash value or the replacement cost. I've seen it on a number of occasions over the years where it is, the market value may be higher or lower depending upon the type of, you know, the economic conditions at the time. So it's just something that you want to make sure that you understand what they are presenting with as far as the value of that existing property. From a, how do you decide to cover ACV or replacement costs, I think that's an underwriting decision for the company that you work for and how it fits into your business plan. And as I said, it is definitely a range where, you know, the replacement cost, there's multiple calculators out there that can give you a replacement cost. But it's up to the individual underwriting companies to make that decision. The other thing you have to remember is if the building is historic or has very unique features or neat architectural features to it, in a loss scenario, the replacement cost or the mitigation would be escalated compared to traditional building construction values. So that's something you want to look at if you're, you know, insuring a historic building or a building that has many unique features. In the event of a loss, a smaller portion of that may result into a higher value than a traditional building, say, on a square foot basis. You have to look at the name insured financials. One of the key aspects is, you know, is it the developer's name insured? That's pretty typical in a renovation building construction type project, you know, looking at what they've done prior, how do they hire and qualify their subs and their contractors and their subcontractors. And if there is a general contractor, do they have experience and qualifications and are they financially secure? The basic thing that you would probably do on most things, but on a renovation, the expertise and prior experience, I think, is key because they are unique types of projects. Then you get into the, you know, the financial side of it, you know, those soft costs and delay-related items that might come into play, tax credits, loss of rents, loss of sales. And again, loss of sales is kind of its own unique thing because that is more on the developer side or on the final owner side. Really those things come out. You have to make sure you know how to measure those and that they're being measured accurately. Tax credits, understanding how they work, that's definite. As I said earlier, you know, are they lose it all at a certain time or are they spread over time? Some of them, the historic tax credit specifically is a loss at all at one time. Typically, state and other local may be spread over time, over a 10-year period, those kind of things. But the key thing is in most delay, soft cost scenarios, you don't expect to pay them all at once. So that's what kind of makes that historic tax credit a rather unique animal. So when it comes to historic structures, there's some things that are unique and pose challenge, you know, significant challenges. The materials that, you know, a building built in the 1900s that they were built with are generally not the same as you would build it today. They often don't meet code. Steel may not be up to the current design requirements, those kind of things. And then, you know, if you're in any type of seismic or wind, you know, the modern seismic codes and modern detailing of the superstructure might not be there as well. So it's just something that from a building standpoint, again, is a unique challenge as far as a historic structure goes. So now we'll look at kind of some of the types of renovations, some types that you might encounter. On a rehab, it could be, as I mentioned earlier, structural, a cosmetic, systems update, gut, historic preservation. The gut rehab is where they would basically remove all of the internal mechanical electrical plumbing as well as all the interior finishes, and basically you're left with a structural shell. Systems update may just be new, like MEP systems, and cosmetic may just be limited, very, very limited to, you know, painting and those types of upgrades. And then you might have a conversion, maybe a change of use, an old warehouse building that is now being converted into condominium-type occupancy, and you may have an addition-type project where there is either a vertical addition or other, you know, adjacent additions to the structure. Vertical additions may include other new structural elements incorporated into the existing building, depending upon how it was designed previously. So there's a lot of variability as far as the type of rehabilitation that you'll see out there in renovation projects. This is a picture showing a historic stadium that was rehabilitated about ten years ago, I guess, well, six years ago on the slide there, 11, and it required some significant bracing and support of the façade. There's some larger scale renovation building projects, again, with a large façade bracing plan, as you can see in the... I'm trying to pull an arrow down here, so bear with me one second. In this area here, you have an extensive façade bracing system that has been installed throughout the building here. So that's a rather large and extensive bracing system, so you need to know what type of scope you have involved and what that entails. So you may have a situation where you're adding a vertical addition above an existing building as well as adjacent to it. Again, you need challenges to both the existing and the new as far as foundations and those kind of things go. This is an example of an exterior scaffolding system used for both repointing and in locations possibly for lateral and support of the structure. So when you look at the existing structure, some key areas that you want to understand is the year that it was built, if that should be available, any major renovations that might have been done to that structure over its history, the dates of occupancy and what types of occupancy were in the building, the understanding of the major building materials, you know, is it a steel frame, is it joisted masonry, you know, whatever the major building elements may be, and understanding if there's unique architectural or structural features. And one of the key things, if you can get them, a lot of times a structural condition assessment or environmental assessment may provide a lot of information on all of the above. So those reports typically are available, it's just a matter of trying to get them and understand them. Another shot of that same thing that has the, you know, very unique architectural element wrapped up on top in the scaffolding, and you can see it's an extensive temporary scaffolding and containment system for this structure, which brings out some unique issues in and of itself. So from a renovation detail standpoint, you know, understanding the extent of demolition, are there floors being removed, are there walls that are being temporarily supported, other structural and exterior details, renovation, if they're adding floors and then plan building use and if they're changing materials, a lot of times they'll add a, it's a lot easier maybe in a load-bearing masonry building if they want to do a vertical addition, they can go in and install new columns down to new footings and come up through the building to support the upper vertical addition. So basically you're building a superstructure of the new vertical portion within the existing. So those types of things, understanding how they do that and the extent of that is important in evaluating the renovation-related exposures. You can just see a mix of construction types in an older building, you know, with some wood members as well as some steel columns, so it's definitely not what it would be built of in this current time period. Another key aspect is bidding and contractor selection, you know, renovation experience, as I mentioned earlier, is important. House contractors, that's more kind of dedicated to like medical facilities and universities and those kind of places where they have an ongoing capital program to do work. They will actually have contractors that, you know, work within their facility all the time. If, you know, on a renovation project, having access to that prior to the preparing a bid is important for a contractor, and then also just, you know, the local code-related information is important as well. And that's where that, you know, prior experience, not only in renovation, but also in the jurisdiction and in the location, is an important consideration. Next, you want to have a decent handle on the budget, which would include the, if it is, you know, the building is being purchased, what the acquisition cost and the appraisal value and how they work together along with the replacement cost. You know, a breakdown of that, and whether it be an appraisal or whatever, is important. One other thing that is important, I would say, is that, you know, one other thing that is important on renovation projects, and it should show up on the budget, that they have a contingency fund established to allow for those unforeseen situations that develop. And then also a, you know, a good hard cost breakdown by the major trade packages so that you have an understanding of where the concentrations of values are in the project and have an understanding of the type of elements that are included in the renovation. Next. So a project that had an existing perimeter wall that needed to be maintained for zoning and other purposes, so they had to come in and brace that wall while they built the new foundations within the existing building and then went up from there, so. So relatively unique aspect that, you know, would not be present in a new construction. You might have a perimeter or supportive excavation system, but it would be a new, newly installed and not, you know, temporarily supporting a wall that might be 80 years old. Some of the common things that we see on renovation projects specifically, too, that are somewhat technical, one is underpinning. A lot of times when a building, you know, might be undergoing a renovation, the original foundation, if they want to do a vertical addition or whatever, the original foundation might not be strong enough or the usage of the structure is changed or going from some occupancy that has a less of a loading than what was proposed. There might be problems with the soil where there is settlement or other things going on, or there might be where they have to actually undermine and go below the existing foundation level to support those additional stories or other adjacent work. And as well, you might have a situation where there might have been seismic or flood or drought, you know, ground conditions changing, so they might need to underpin. And we'll quickly go through these. There's just, you know, four main, there's various ways of doing it, but we'll look at four quickly. Pit undermining, where you're basically undermining the existing and you have a mass concrete fill. Pile and beam, basically putting a beam through the foundation to transfer the load to outer new foundation elements. Mini-piles, basically creating a new foundation within the footprint. And then jacking ports, which can be utilized to compensate for planned settlement. Because as you underpin, as you change and excavate around existing foundations, they will change as well, the load transfer of that. So, that staggered pit method, basically you do one, skip one, do one, skip one, that kind of thing, there's a graphic associated with this. And you can just kind of see you excavate down and backfill it with concrete and move through that. And a pile and beam, basically take the existing footing, you're going to intercept it at the upper level of the vertical, or the column, and then put two temporary or new concrete footings. And you can then underpin that or enlarge that existing foundation. Jacking ports allows you to adjust the existing bottom of footing elevation. And there's just a shot of what those jacking ports would look like. You can see a vertical column in the upper part of the photo. And those jacking ports could be adjusted as, you know, if they need to. Because as they underpin, they can change the elevation if there is some settlement or differential movement in that. Those are the areas where the jacking ports. Key things about underpinning, obviously, it's an engineered, highly engineered activity. It has to be planned with good survey control. Geotech report is important to understand the capabilities of the existing soils. And then, you know, obviously expect changes. Because as you excavate, as you go down, you may find things that you were not expecting. The other very common thing that you'll see in renovation projects is facade bracing. It may be bracing the entire facade of the building or just a front elevation that is historic. Very common where that is a situation. We definitely require some very detailed engineering analysis up front to find out where the bracing should be placed, how many, those kind of things. And then it should be monitored regularly through either survey or most of it is done with instrumentation these days, GPS and those types of things. There's typically a couple of different types. And we'll see a few photos of these as we follow up here. But, you know, in most situations, be it steel truss or steel kickers, and then they can use a full height scaffolding, which is both for access as well as some support. And the key thing with any of these facade bracing schemes is, you know, what they're structurally tied into. And as the building structure goes up, typically the facade would be tied back into the new structure and the bracing would be removed in an incremental fashion as they move throughout the vertical construction. So that allows the facade to then become incorporated in, you know, a component part of the new structure. Here's a close-up of that facade bracing that was shown earlier. You can see in the, apologize for my, you can see these diagonal bracing here that tie back into that facade and then back into the existing structure that remains. And as I said, as the new structure gets incorporated into this opening all the way up, those braces would be removed on an incremental basis as the structure progresses upward. This is the opposite front side of that particular facade with a full height scaffolding, again, used for both access as well as, you know, debris, containment, and some support as well. Another shot of that stadium renovation, the facade was braced extensively around the perimeter with large knee bracing tied back into large footings as well. So that, you know, these are all engineered and designed for the loading and the specific location of that. And you can see some detail of the bracing, you know, they penetrate through the openings and so basically what you're doing is building a structural frame that is both on the inside and outside in situations and it is tied back into the substructure of those braces to stabilize that wall until the new interior structure can be incorporated in that wall tied back into the structure. So from an exposure standpoint, you know, that period of time during the installation of the bracing and the time that it gets tied back into the new structure of that facade is definitely more exposed to, you know, damage, whether it be from wind or other elements. So looking at it from a building standpoint, you know, if you have an existing structure that's being renovated, there could be a lot of materials, equipment, those kind of things at risk, whether it's existing or new systems. But within interior finish type stuff, you know, some of the things that remain in these renovation projects, a lot of times there might be wood floors that remain, other types of wood paneling, plaster ceilings, ornate fixtures, those kind of things that definitely can be subject to damage. I recall a number of years ago where, you know, the school renovation of the Joyce and Masonry building had wood floors that were intended to be covered with new flooring and VCT basically. What happened, the wood over time during the renovation after demolition changed and warped and everything, and so they really couldn't just install a new subfloor over the old wood floor. They had to actually rip out and increase the demolition and those kind of things. So those kind of things would happen as well as, you know, in a courtroom or a courthouse renovation, in the past I've heard of things with wood walls and chambers and courtrooms and like that that, you know, have to be protected extensively from damage. So those are things you want to make sure you understand what those interior finishes are that might remain and how they are protecting them. From an electrical and air handlers, fire pumps, all those kind of things, you know, they may be partially removed, they may be fully removed. Understanding that is important. And then if you have occupied spaces within the building, you know, sometimes you'll see a renovation where it's a 14-story building, they're renovating 10 stories, but four are going to remain occupied. You know, that's more of a GL issue, but it's something that you have to consider from an exposure standpoint. And with any construction project, vibration, dust, moisture, extreme temperatures, typically they are present, excuse me, and most of the building systems and finishes don't really like those items. So just another thing that a, you know, contractor has to be aware of to manage during that renovation. So from a mitigation control standpoint, you know, the pre-planning, the vibration monitoring, temporary protection, you know, whether they're common things or plywood, poly sheathing, might use rigid insulation, but all those things now bring into possible fire exposures, limiting access so that, you know, people only work in areas that are necessary. Things can be done, especially in like hospital environments and sensitive areas where you're doing renovations, reduce the air returns if the air handling systems are still operational in other parts of the building, maintain the positive pressure, you know, get the people that in the building engineering and facilities involved in that. So, and then you may have an offsite storage issue as well. A lot of times they'll actually take some components of buildings, remove them, and then reinstall them later. So, you know, where they're being stored, how they're being stored is an important consideration. We will get to the tax credit part. We're just trying to get through the renovation aspects of it first and how that ties into the tax credit. So that's coming up. So don't think we're not getting there. One of the things about renovation is you might have a, you know, you have a front-loaded value situation where your building is all sitting there. So that particular amount is not traditional in a normal build-at-risk building where you have a, you know, build-up of values. Commonly you have demolition where they might be utilizing cutting and hot work, torching, and the structural modifications. And in frame and JN type buildings, you know, those type of hot works and could be an issue. So just fire and control of that is obviously an issue. You might have a situation where you may have a temporary, you might be able to have a dry pipe system that remains for a certain period of time, those kind of things. You definitely a lot of times have, you know, a mix of construction types. You might have some existing steel framing within a JM or other wood frame type building. You might have some existing steel frame areas. Just renovation lends itself to being a really a mix of stuff. The other thing a lot of times you'll have in a renovation, especially where you might be doing masonry pointing or other facade type work, you'll have a, you know, a containment system, a total wrapping of the building or some type of an enclosure system. And in an area where you have winter type conditions, you might have temporary heating. And again, you know, that's a whole other subject is that type of situation. But, you know, the fire protection and those kind of becomes key. And you can see it says flame retardant tarp. I'm not sure that flame retardant is 100% reliable in situations like this. But, you know, it's just something that is better than, should have something along those lines so that it is a rated product. And then access to the fire standpipe system is key as well. So that gives you kind of a summary, a brief summary of the type of issues that renovation projects in general bring from a builder's risk exposure standpoint. Now we'll kind of switch gears a little bit and get into that financial aspect of the tax credits and specifically what a historic tax credit involves. The HTC as it's known, somebody raised their hand. Okay, we'll get to you shortly. The federal program that created it was the Tax Reform Act of 1976 and it was intended to encourage rehabilitation of certified historic buildings. It is a 20% federal tax credit and that is the 20% of the qualified renovation expenditures. And as with any federal program, that QRE as it's known has specific requirements, you know, what it is, it's not landscaping, it's not, you know, there's a lot of information out there that can help you understand these more. But key thing is that it's a 20% credit and it's 20% of the, and that's 20% of the qualified RNE or QRE, excuse me. It's administered by the National Park Service and the State Historic Preservation Officers. Three-part application, basically part one and part two, gives you the property significance and then the description of the rehab work. That's a pre-rehab type or pre-renovation part of it. And then once the renovation is completed, then the certification of the completed work. One thing is obviously you want to consult with tax counsel for any legal advice on how this actually applies to your situation. So that's something you want to, these have very specific rules and regulations associated with them. The one thing is HTC applies to buildings only and they have to be for commercial use. It can't be a personal residence or those kind of things. The designation, it has to be a certified rehabilitation of a certified historic structure. That's the designation you're going for. A certified rehabilitation means that the National Park Service determines it's consistent with the historic character of the property and where applicable, the historic district. Because it could be a historic property, but it doesn't necessarily have to be in a historic district or it could not be a historic property and be in a historic district. So there's, you know, that's where the certified historic structure comes in. It's either on the National Register of Historic Places or it's a contributing building in a National Register Historic District. So again, there's a lot of rules and regulations as to how this all works. Typically, the legal authority is like a national bank or a federal savings association where they, the bank, the lender, acquires a financial interest in the entity that holds the property. Typically, these are LLCs or LPs. The bank provides the funding for the project in return for those associated tax credits. Some situations, the, it may also, you know, qualify as part of a community reinvestment act. And in those, you know, to get that, the key issue would be it'd have to be a low, moderate income, promote public welfare, revitalize it or stabilize community development. So it can both qualify for historic tax credit, but then it also might have some other benefits and some other additional tax credits, maybe a low and moderate income, those kind of things, if it meets some other community reinvestment act standards. So again, a lot of regulation, a lot of specific things that have to be met. Again, just going, it's the economic risk to the banks or the lenders for these HTC projects. It gives them, the HTC provides the opportunity to claim the full amount of federal tax credits in the year the building is placed in service. They best maintain ownership of that property for five years, that's what they consider a compliance period. After that, then the IRS cannot recapture the tax credit after those five years, but so they have to keep that project for five years, can't go and sell it immediately upon completion. Since 1976, there's been like $100 billion and over 39,000 preserved, rehabilitated historic properties. There's also, in addition to the 20%, there's a 10% for any free 1936 building, that doesn't have to be historic, but we're not going to really talk much on that. The key thing to remember about the HTC is that you lose the tax credits on the building not placed in service in tax year. So the key is that if it's supposed to be in place in a certain tax year, if it doesn't, then that tax credit does go away. There can be other tax credits out there, we're not going to really talk about these too much other than they might kind of come in in some of our case studies. They can be combined, you can use multiple ones, you could have both federal, state, local, and they may be more on that incremental annual type basis. States could have their own historic, there could be local historic, there's what in Pennsylvania we have Keystone Improvement Zones and other type of opportunity zones. Down in I think the Carolina, there's some textile tax credits that are available. The other side, there's low income tax credits mostly for housing related stuff, and there's some green, and there's a lot more out there, these are just a few that are out there. So do we want to do our poll now? We have a poll, two conditions that must be met for historic tax credit. So if everybody wants to take a second and vote. We have a 90% correct, very good, so the correct answer is 20% of QRE and placed in service year. Thank you everyone for paying attention. One thing that's actually pending right now, there is a bill that was introduced to Congress, Historic Tax Credit Improvement Act of 2017. It's the first potential change, it's primarily focused on small, medium, and rural communities, and it makes rehabilitation of community projects like theaters, libraries, those things easier. Again, if it's passed, it would amend the Internal Revenue Code and expand it to a little bit more, increase the credit up 30%, up to a certain amount for projects not exceeding $3.75 million, allow tax credit transfer on smaller projects. Again, it has some other things, it would be substantially rehabilitated if expenditures exceed 50% of the building or $5,000, and then basically, it just allows more projects to possibly access the tax credit. This I just put together, this is the type of, in my experience over the years, the type of information we would see on a tax renovation project, historic tax credit renovation type project, where they're asking for this coverage, this might be, again, one of their investors that is looking for this coverage, it's a $6 million tax credit was granted in exchange for a low-income housing portion of a project, total values are like $350 million, a hard cost value for that particular building, that is the low-income housing portion, was $35 million, so it's a smaller part of a larger project. I guess, you know, the key thing here is that coverage is effective for a year, year plus, with the tax credit building scheduled earlier in the project. All the buildings are adjacent, you know, share the same substructure, basement, might be firewalls between each building, but the tax credit is not earned over time, it's all at once. In my mind, when you look at this, two things jump out, you see it's December 2017, and it's not earned over time, but it's all at once, so a delay would definitely probably impact that tax credit, so if there's a loss that impacts that project, the tax credit was, is probably likely to be impacted. So in general, a summary from a historic tax credit standpoint, the underwriting challenges is, you know, the key is understanding how they're structured, you know, what the contract terms are, what the issues are, and it's specifically in this, in, as regards to the historic tax credit, the place and service date is key, because it is an all-or-none scenario, and on the other one, it's an incremental valuation, you know, whether they be monthly or annually, and understanding how will any claims be made, paid, you know, deductibles, monthly limit, overall limit, force majeure relief, those kind of things, again, those are underwriting evaluations that every company has to make for themselves. Now, let's go quickly through a couple of case studies, and then have a couple minutes for questions. This first one includes both historic tax credit and state tax credits. Again, these are all just made up, kind of in my mind, I guess. 11-story masonry building and steel, existing, downtown Milwaukee, so you don't have anything unusual. It is a complete gut rehab, the façade is historic, and there's extensive bracing of the façade. Existing value is $1.5 million, 92,000 square feet, gives us a $16 per square foot value. It's been vacant since 1994, there's been two fires and some theft and vandalism issues. The construction values that they're proposing, the QRE, is $21.5 million, 27 months, October 17 to December of 2020. So there's tax credits, historic tax credit of that 20% QRE, and a $4 million state, which is $400,000 per year for 10 years. So if you look at this from an underwriting standpoint, there's some key things you want to take away. Construction type, is it truly masonry and steel? Confirm that COPE information. Valuation, $16 a square foot, can't build much for that, so you've got to look at, are you going to go and base your analysis on ACV, or how you're going to look at that from an underwriting standpoint. Structural condition and integrity, it's been vacant for 20 plus years, you've got to make sure you fully understand the facade conditions, and how those bracing plans, and how that ties into the new renovation aspect. Security controls, obviously, there's been two fires, and theft and vandalism issues, neighborhood, that kind of thing, you've got to look at what kind of security, and any natural perils. The other thing, you have a place in service date of December 2020, so there's no float on that tax placed in service year, so even a small delay may create that loss of tax credits, and that HTC is the all or nothing, the state is $400,000 per year, so you really want to confirm how those things will be paid if there's a loss, and that's where the endorsement with the specific terms and conditions would be appropriate. Number two, it's kind of a little bit different, it has both the HTC and then the low and moderate income, it's a former historic base being converted to housing in Brooklyn, New York, one six, one story, 12,000 square foot buildings, JM construction, so you get an existing value of $83 a square foot, which is not, I made a mistake there, let's see, no, that's right, I'm sorry, it's been vacant since 2015, and the QRE value is $18 million, it's an 18 month project from August of 17 to January of 2019, so you have tax credits, the historic, $3.6 million, $2 million for low and moderate, and both are all or nothing based on placed in service year. From an underwriting standpoint, when you look at this job, obviously it has some kind of lesser issue, it's joist and masonry, so your fire exposure is a little higher, but you do have structures that are separated, six individual buildings, structural condition integrity was active prior to vacancy, so there's not, you know, it's been recently occupied, security controls, it's on a former military base, so your access controls are probably better than any other one, natural perils, whatever that is for the location, the big thing I would say is that in this situation, the place and service date is that January of 2019, which gives you a lot more float on that particular tax credit, and both of them are all or nothing, so it's even becomes more important, but again, you know, obviously endorsement with specific terms and conditions is necessary, so that's it, so we're open to any questions, please submit online. Thank you, Ray, to ask a question, you'll type it in the Q&A pod that we're bringing up now, and then once you've typed your question, you'll click the balloon icon, so that we'll receive it, you should see the Q&A pod now, we'll wait a few moments for questions to come in, and we have our first question, what type of projects are eligible to apply for historical tax credits? At this point, the, according to the regulations, they are limited to a building, historic building, at least this is for the federal program, that is going to be for commercial use, so basically a normal building that is not private or, it has to be in commercial use, so that's the description. Exactly, what does it mean all or nothing for historical tax credit? The tax credit is based on being placed in service at a given point in time, if that particular time that is prearranged as part of the tax credit application process, that tax credit basically expires if it doesn't happen on the date, the service year that it was proposed, so if it was proposed to be November of 2017, and to get the tax credit, you have to confirm that that certified rehabilitation was achieved, that third part of that process, so if that cannot be confirmed, then that tax credit cannot be officially received, and then if it's not officially received in that year that it's designated, then it essentially becomes worthless, you can't get it, so that's the unique aspect of that historic tax credit, it can't, it's just an all or nothing scenario, so this is related and it may be, so how, are the tax credits typically paid out, are they mostly, are they paid over time, or is it all or nothing, there are tax credits that, a lot of the state tax credits are an annual over a 10-year period, as we saw in some of the examples, but the majority of the HTC, the federal historic tax credits, that is an all or nothing scenario. Okay, is there a specific document that can be requested to show if a tax credit is all or nothing? That gets back to understanding the type of tax credit it is, if it's a federal historic tax credit, and that is your, would be your key to say that this is an all or nothing, but obviously that's something you would want to confirm, say is this tax credit payable, and when is it payable, how much, those are the, you know, getting back to some of the points on the underwriting challenges, is understanding what the terms and conditions are for that particular tax credit. Does the place in service date change if project schedule estimated completion date changes? The, you know, the key you have to remember is you, that application for the tax credit is three parts, so you get part one and part two before, part three is at the end, and that establishes the timeline and establishes when that place in service year would be, so if the schedule changes, there may, they can, there may be ways to apply for relief, you know, if there's some type of delay, but if it's not a physical damage, then it wouldn't be an insurance issue, that would be outside of the insurance side of it, so, but if there is a delay due to an insurance issue and they have, as part of that coverage, have insured those tax credits, then it might definitely come into play. Thank you, and we have another question. Are there other ways to lose the tax credits other than just delay, in other words, if the historical integrity of the building is not maintained during construction? I would say yes, but I would, you know, say that with, that's just an opinion, because I don't know what the specific rules are as to, you know, the percent of change or whatever of the historic structure, but there, as you, when they apply for the actual credit, it outlines, you know, that certified historic structure and designation, and that's all determines what, what it, you know, what the limitations are, but I would think that there's probably, it can happen, but again, you'd have to consult your expert for that one. Another question, why would a developer go with a 12-2017 service date instead of January 2018 to allow for more flow? Well, the sooner they can get the tax credit is probably the reason why they do it. I don't think it's, you know, again, I, that's up to the developer and to make that decision, but yeah, I would think if, to allow some flexibility, you would not necessarily want to do that, put it in service at the very end of the tax year. Are there state tax credits that apply to new construction to get companies to build in the state that could also be lost due to a builder's risk, loss, or delay in completion? We didn't really talk about that, but then I, and again, I, you know, was not specifically prepared to, to answer that type of question, but I, you know, there are similar type, and I mentioned them briefly, you know, these opportunity zones or other type of things that can be for new construction. Again, they would have their own unique aspect as well as, you know, what the requirements are as far as getting it in service, and those kind of things would be unique to that particular thing, and once again, it's just understanding if they are asking for tax credit coverage and know what those terms and conditions are that the tax credit requires. Okay. Do most historic tax credit agreements have a clause that extends the placed in service date if there is an accidental loss? I do not believe so. There may be some scenarios where that is, you know, built into it, but if they're asking for coverage for it, it'd be nice to know that ahead of time. When do we need specific endorsements addressing HTC? Again, I'm not an underwriter, so that's up to each individual underwriting company and underwriter, but in my mind, if you are writing tax credits, you should have a specific endorsement that outlines what the credit is, how it's achieved, and then in the event, you know, of a loss, it's pretty clear as to how it'd be adjusted. And we'll take one last question. How do you justify providing coverage for historically, for historic tax credits when the certification is not approved until completion of the project and they may not get approval? That's risk, right? So, that's an example of why underwriting these things and ensuring these things is a difficult and, in my mind, you know, really something you have to fully understand if you want to do it, so. And that, it is, because they can't get approval until they get that third step, so. Thank you very much for an informative presentation, Ray. You're welcome. Thank you, everyone, for participating. Thank you also to our attendees, as Ray said, for your participation and for your interesting questions. All attendees will receive an email with a link to an electronic survey. Please take a moment to respond to the survey and provide feedback to IMUA. This ends today's webinar. Enjoy the rest of your day.

Inland Marine Underwriters Association

Builders' Risk

Tax Credits

Ray Stutzke

CHUB's Inland Marine Unit

Underwriting Challenges

Engineered Risk Accounts

Historic Tax Credit Program

Coverage Extensions

Risk Management Strategies