Why We Need the Federal Historic Tax Credit – Next City

Why We Need the Federal Historic Tax Credit

Credit: AP Photo/David Mercer

Something is visibly afoot in downtown Rockford, Ill. For years in this smaller city with a 13.4 percent unemployment rate, businesses fled to the outskirts and left the downtown quiet and neglected. Yet vacant commercial buildings have sprung back to life with street-level retail and new apartments. The historic Peacock Brewery is set to serve beer once again, its imposing redbrick exterior cleaned and tuckpointed.

Downtown Rockford is changing quickly, with some $40 million in renovations underway and $15 million in the works. All of this work involves historic buildings, and all of it uses the federal historic rehabilitation tax credit, which returns 20 percent of the cost of building restoration to developers.

“Rockford would never have had a chance without it,” says local architect Gary Anderson. “The appetite of banks is not to take a risk here, and the tax credits are a motivator to get them to lend.”

“The program is so easy,” Anderson continues. “It’s the least amount of bureaucracy for the greatest gain.” When he first started working to bring economic activity back to downtown Rockford, Anderson examined many incentive programs, including New Markets Tax Credits. Few, however, put so much of their cost back into the buildings themselves, so Anderson and his partners turned to the federal historic tax credit.

A similar message echoed across Washington, D.C. in early March, when lobbying organization Preservation Action held its annual Advocacy Week. Preservationists from around the nation converged in the halls of the Capitol, where days earlier Rep. Dave Camp (R-MI), chair of the House Ways & Means Committee, had proposed eliminating the federal historic tax credit as part of his Tax Reform Act of 2014.

Camp’s proposal, the first direct challenge to the federal historic tax credit, would end a program that has helped rehabilitate 39,000 buildings since President Ronald Reagan authorized it in 1981. Although the idea is simply Camp’s own and has not been endorsed by the Republican Party, it could cast a shadow on future tax reform. Indeed, the Ways & Means committees in the House and Senate could become the center for marking up any bills involving historic tax credits.

“The Camp draft is a marker for future discussions and, particularly on the House side, may be the beginning point of future proposals,” says John Leith-Tetrault, president of the National Trust Community Investment Corporation. “Historic credit advocates are taking it very seriously and will be providing feedback to the tax writing committees.”

Leith-Tetrault and preservationists can take solace in the fact that Camp’s term as chair of the Ways & Means Committee ends this year. Rep. Paul Ryan (R-WI), who has different ideas for tax reform, will replace him. On the Senate side, Ways & Means Chair Max Baucus (D-MT) is departing, with Sen. Ron Wyden (D-OR) taking over.

“The elimination of the federal historic tax credit would virtually end preservation efforts in Illinois,” says Lisa DiChiera, director of advocacy for Landmarks Illinois. The preservationist group is pushing for the creation of a statewide historic tax credit, but concedes that it would be more useful in combination with the federal program.

Thirty-four states have some kind of historic tax credit, though the programs vary in percentage and availability. Illinois’ River Edge Historic Tax Credit is only available in five cities and sunsets in 2016, putting it out of reach for most cities. Developers throughout the state rely on the federal historic tax credit to tackle projects. In fiscal year 2013, 40 percent of approved federal historic tax credit projects also obtained state historic tax credit approvals.

“State credits alone do not close the financing gap of historic properties,” Leith-Tetrault says. “Developers who might ordinarily apply for state credits will not do so if the project is not feasible without the federal historic tax credit.” Developers “stack” the federal and state incentives to close often-large gaps between rehabilitation costs and post-rehabilitation market value. In distressed cities and neighborhoods, this stacking — which usually includes additional tax credit programs — is crucial to making redevelopment possible.

Developers are still reeling from recent uncertainty caused by the IRS. In the case of Historic Boardwalk Hall, LLC, New Jersey Sports and Exposition Authority, Tax Matters Partner v. Commissioner of Internal Revenue, the IRS successfully challenged an investor’s status as a partner in a project, causing that investor to lose all tax credits.

Federal historic tax credits cannot be sold, and many developers don’t have tax liabilities large enough to use them. In projects that use them, developers often have to create complex ownership structures in which an investor becomes part of an ownership syndicate in order to receive the credits. The investor offers capital up front and takes the tax credits upon project completion — a situation that caused the IRS to question whether the investor in the Boardwalk case shared enough risk to meet the definition of “owner.”

The semantically subtle Boardwalk decision reverberated across the world of historic preservation because it effectively ended this common structure for months. Anderson’s Rockford projects struggled as the IRS “took too much time” to issue a new ruling clarifying the definitions for historic tax credit projects.

Before the end of last year, the IRS issued Revenue Procedure 2014-12, which created a “safe harbor” definition for investors. “Revenue Procedure 2014-12 has had a positive impact on the historic tax credit marketplace,” Leith-Tetrault says, noting that the ruling provides certain rules for developers to follow. Still, Anderson sees the Boardwalk case having a lasting impact despite the new “safe harbor” ruling.

“The case did cut out a lot of investors,” Anderson says. “We should have had a more open market, but we didn’t.” According to the National Park Service, there were 1,155 proposed historic tax credit projects in fiscal year 2013, representing $6.73 billion in investment.

The “safe harbor” ruling numbers among the changes that developers and preservationists have sought to make the federal program a more reliable redevelopment tool. Phil Estep, principal of St. Louis-based Historic Equity, Inc., advocates for changes to make the tax credit more useful for smaller developers. The inability to sell federal historic tax credits leads to syndication of project ownership, the legal fees for which can be expensive.

Estep proposes an optional certificated credit for projects with rehabilitation expenses under $5 million. Under this proposal, an applicant could opt to either receive the conventional tax credit or accept a certificate like those issued by most state programs. The certificate could be sold to investors, allowing small developers to avoid the legal costs of setting up complex real estate deals — and getting cash to pay down debt instead.

The complexity of the federal historic tax credit leads to the perception that it serves big developers and fee-seeking professionals. “What happens is the little people can’t use the program, so [elected officials] try to get rid of the program,” Estep says. “We need to open up the historic tax credit to Main Street.”

Developer William Liebermann agrees with Estep. Through WJL Companies, Liebermann has rehabilitated dozens of smaller residential and commercial buildings in historic neighborhoods across south St. Louis. His main street is the commercial district on Cherokee Street, where Latino businesses, artists and entrepreneurs rent spaces in brick buildings Liebermann rehabilitates using federal and Missouri tax credits.

“I would like to see the federal program be more like the state program,” Liebermann says. “My projects are too small to syndicate, and it’s hard to monetize the federal credits.” Liebermann can monetize Missouri’s program, created in 1998 and considered one of the nation’s most effective. The state legislature is now debating lowering the program’s $140 million cap to $90 million, which could push some projects to rely only on the federal program.

Liebermann’s projects in St. Louis, like Anderson’s in Rockford, have led to new business, tax revenue and jobs that might not otherwise have existed. Both developers say the risk of rehabilitation in their respective cities would be too high without tax credits, and that without credits they would work elsewhere — or not at all.

It bears remembering that the federal historic tax credit exists precisely to help older cities and towns retain economic vitality. “The historic tax credit was enacted in its current form in 1981 by the Reagan administration to level the playing field between rehabilitation of existing buildings in downtown locations and new construction in the suburbs,” Leith-Tetrault says.

Fiscally minded policy-makers might not care about the credit’s social benefits, but they might be swayed by measured economic impact. The Edward J. Bloustein School of Planning and Public Policy at Rutgers University has measured the federal historic tax credit’s output in successive annual studies. The most recent, for fiscal year 2012, finds that the program produced 57,800 jobs and $600 million in federal tax revenue. The same study shows that the tax credit produced $25.9 billion in revenue since its creation in 1981.

Michael R. Allen is the founder and director of the Preservation Research Office and a lecturer in American Culture Studies at Washington University in St. Louis. His writing on historic preservation, architectural history and public art has appeared in the St. Louis Post-Dispatch, Temporary Art Review, PreservationNation, nextSTL and other outlets.

Follow Michael R.

Tags: economic developmentreal estatetaxeshistoric preservationpaul ryan