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PPS Revolving Fund project, Providence, Rhode Island

Revolving Fund —Draft

 

Terms

Revolving Fund

For historic preservation, a revolving fund is a pool of capital created and used to buy properties and resell them at fair market value to a sympathetic, qualified buyer, with the restriction that the monies are returned to the fund to be reused for similar activities. In many casses the subject property is in an area that conventional lending institutions (banks) will not be willing to risk lending the prospective buyer the full amount of acquisition (minus the down paymnt and closing costs). The organization operating the revolving fund may lend the prospective buyer the monies representing the difference between acquisition costs and the bank's loan. The organization will assume second position to the bank holding the mortgage. The property/owner assuming a protective covenant or easement.

Easement

A preservation easement is a voluntary legal agreement that establishes perpetual protection (protection in perpetuity) of a significant historic, archaeological, landscape or other cultural resource. Owners of an easement property are legally obligated to honor the terms of the easement, while retaining private ownership of the property.

A preservation easement is a legal agreement that gives the easement holder a responsibility to protect the visual and structural integrity of a particular historic structure, even though that structure is actually owned by another person.  The intent of the preservation easement is to prevent anyone from demolishing the building or diminishing its historic character.

While easements are tailored to the site they are to protect, they normally consist of provisions guaranteeing that the property owner will not alter the architectural character of the structures on the site, will not change the use or density of the property, will not construct new buildings or disturb archaeological features, and will not subdivide the property without approval of the easement holder.

The owner retains all the usual private property rights, but not the rights to demolish or alter the property in ways that detract from its historic character. Alterations, improvements, and even additions to the structure may be allowed, providing they do not compromise the historic character of the property. 

When an easement donor makes a “qualified contribution” of an easement, the donor is entitled to an income tax deduction.

Planned architectural improvements can be submitted for consideration before the donation is completed. Individual donors may wish to add special easement provisions to protect specific interior or landscape features.

Congress has recognized the public benefits of the donation of preservation and conservation easements. Consequently, an easement donation may qualify for income, gift and estate tax deductions through Internal Revenue Code Section 170(h) and other sections. Treasury regulations and tax court decisions have upheld easement valuations for certain family properties, historic land areas, and historic commercial rehabilitations. In the 1990s, many states have enacted comprehensive easement legislation, thus settling a number of issues regarding this mechanism for property stewardship. Tax law requires that preservation easements be held by qualified non-profit organizations or governmental units.

 

Appraisal

 

Syndicate

 

Tax Credits

 

Rehabilitation Tax Credits

 

Covenant

 

Home Equity

The current market value of a home minus the outstanding mortgage balance. Home equity is essentially the amount of ownership that has been built up by the holder of the mortgage through payments and appreciation. Typically, residential property is bought through a mortgage, which is then paid off over a number of years, often 15 or 30. After the mortgage has been fully repaid, the property then belongs to the mortgagor, namely the buyer. In the interim, however, the buyer simply builds up equity in the home. This is what a home equity loan borrows against. Although that equity cannot be sold, banks will lend money against it. Home equity loans offer significant tax savings due to the fact that the interest paid on a home equity loan is tax-deductible.

The first type is the traditional home equity loan, also known as the second mortgage, which lends out a lump sum of money that must be repaid over a fixed period. The second type is the home equity line of credit, which provides the borrower with a checkbook or a credit card that is used to borrow funds against the home equity.

Second Mortgage

A mortgage taken out on property that already has one mortgage, with priority in settlement of claims given to the earlier mortgage. Liek others, a second mortgage is a loan that is secured by the equity in your home.

A secured loan (or mortgage) that is subordinate to another loan against the same property. More specifically, the second loan in sequence.

In real estate, a property can have multiple loans against it. The loan which is registered with county or city registry first is called the first mortgage. The loan registered second is called the second mortgage. A property can have a third or even fourth mortgage, but those are rarer.

Second mortgages are called subordinate because, if the loan goes into default, the first mortgage gets paid off first before the second mortgage gets any money. Thus, second mortgages are riskier and generally have a higher interest rate.

Second mortgages enable borrowers to access their home equity without actually tapping the first mortgage. Borrowers frequently take out second mortgages to pay for the college education of their kids, consolidate debt or in case of urgent bills. By doing so, they avoid a worsening of the interest rate on the first mortgage whilst gaining liquidity for their financial needs.