Jun 12, 2022
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
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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.
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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.