More than thirty states across the nation continue to reap a bonanza of surging economic activity by providing state historic tax credits to taxpayers undertaking qualified renovations of historic structures. The most successful state programs have been intentionally designed to compliment the existing federal historic tax credit program, creating significant efficiencies for already overburdened developers and spurring more private/public investment than would otherwise occur.

Recognizing this economic upside and the “green” nature of historic preservation, New York State just amended its state historic tax credit program. The previous incarnation had several limitations, especially related to transferring the credit and its modest dollar ceiling of $100,000, which had negligible real world impact on projects costing tens of millions. While the amended legislation is to be cheered as a step in the right direction – greater symmetry with the federal tax credit program and raising the credit ceiling to $5 million per project – the practical effects are not quite so rosy.

As a result of income and other regulations in the U.S. Internal Revenue Code, the majority of owners and developers of historic structures find that they cannot efficiently utilize the earned historic tax credits. Under the federal program, this problem is solved by taking on an investment partner and/or long term lessee for the project who can use the credits in accordance with law. This investment partner and/or long term lessee will provide equity funds to the deal in return for the credits and other financial benefits. In effect, a transfer of the credit occurs to optimize the value of the credits and to stimulate projects that might have otherwise had a gap in their financing sources. Herein lies the Achilles’ Heel of New York’s amended historic tax credit legislation.

The NY drafters provided that for any qualifying project in New York, the taxpayer who recognizes the federal historic tax credit will also be the entity that recognizes the state historic tax credit. This approach sounds fine on its face. However, very few (if any) of the traditional institutional investors who have participated on prior New York historic tax credit projects, currently have any significant New York state tax liability. Without state tax liability to offset, the state tax credits are worthless to the investor. Thus, for any renovations facing this quandary, the state historic tax credits have effectively added nothing to the capital structure.

One might ask why can’t new investors be located that have both federal tax liability and New York State tax liability? This is harder than you think. You need entities with tens of millions of annual state and federal tax liability, and who are familiar with the complex tax credit investment programs. If not familiar, then someone has to spend months, possibly years, educating them in order to gain the necessary internal authorization to invest. The wheels of progress are slow. Often, the administrative headaches associated with learning about the program, balancing the investment risks of real estate, obtaining signoff from legal and accounting, and moving up the corporate chain of command to a decision maker, can prove painfully daunting. In a final ironic twist, entities that have business operations large enough (billions of dollars, not millions) to be candidates, cannot be bothered with tasking internal resources and costs to a program that involves investing mere millions – economies of scale are modest at these levels.

So, in short, the amended NY state historic tax credit that may have been enacted with the best of intentions (or not?) is effectively worthless to most New York property owners and developers. I sincerely commend the lawmakers for their progress to date, but I strongly urge them to immediately revisit the tax credit transfer rules within the legislation to make this tax credit practically function as the magnificent economic driver that it has proven to be across the country.

Well, another neighboring state has ramped up its historic rehabilitation tax credit, leaving New Jersey still further in the dust!  Recent changes to New York’s historic preservation tax credit program increases the availability of incentives to spur community revitalization, historic preservation and job creation.

According to the Preservation League of New York State, “An economic impact study recently conducted by HR&A Advisors of New York predicts that the enhanced rehabilitation tax credit will spur over $500 million dollars of economic activity in New York State and create some 2,000 jobs over its initial five-year lifespan.”

And Commissioner Deborah VanAmerongen of the New York Division of Housing and Community Renewal said, “The Rehabilitation Tax Credits will foster new private and federal investment where it is most needed: our economically distressed downtowns and commercial districts, main streets, and older residential neighborhoods. Further, these incentives will encourage the use or reuse of existing affordable housing resources. I’m delighted that we now have a more powerful tool for revitalizing communities across New York State.”

The act takes effect on January 1, 2010.  There’s still time to keep those investment dollars in New Jersey.  Attention Governor, Treasurer, NJ Economic Development Authority, et al!

In the early hours of  May 15th, the Missouri Senate crafted a compromise bill that struck middle ground among  Senators who had spent months gridlocked over the historic tax credit issue and economic development. Missouri’s historic rehab tax credit has had immense economic benefits.  According to the Missouri Department of Economic Development, the credit generated nearly 5,000 jobs in fiscal year 2007 and, as stated by Donovan Rypkema, leading preservation economist, has produced over 40,000 jobs throughout the life of the program.

Senator Brad Lager , who pushed for a cap and other limitations on the historic tax credit, agrees that the compromise language achieves the necessary budget certainty which he sought throughout session. According to Senator Jeff Smith, a persistent tax credit advocate from St. Louis, “now that the critics have gotten the ‘budget certainty’ they sought, the program will have the stability to flourish in the years ahead.”

Provisions of the bill include:

• A per-project residential cap of $1,000,000 in qualified rehabilitation expenditures (QREs) for owner occupied single family homes;
• A small project exemption for projects with $1.1 million in qualified rehabilitation expenditures (QREs) (these do not count toward a cap);
• $140 million cap on historic tax credits (existing projects do not fall under the cap); and
• An effective date of January 1, 2010.

The small project exemption will allow smaller-scale projects to continue redevelopment without the cap. Based on historical data, it will allow around 75 percent of all deals to be unaffected by the cap, toward which their dollars will not count. Jacob Sanders, a Springfield, Missouri CPA, believes that “the small deal exemption is key. It’s those small developers right now that are having such a hard time. Plus, the large percentage of projects we have, especially outside of Saint Louis and Kansas City, will fall into that category.” And, the $140 million cap allows room for large projects while providing the restriction sought by some lawmakers.

See the Missouri Coalition for Historic Preservation & Economic Development for more.

The Assembly Environment Committee passed the proposed New Jersey historic rehabilitation tax incentive bill, the Historic Property Reinvestment Act (A791) this afternoon.  The vote was unanimous; many thanks to prime sponsor and committee vice-chair Asm. Reed Gusciora.

Compelling testimony and/or support from PNJ president and preservation architect John Hatch, Trenton developer and Trenton Downtown Association president David Henderson, Joe Simonetta representing NJ-AIA and City Scape Capital Group CEO Bill Hoffman outlined the importance of the tax credit to the stimulation of NJ’s nearly dormant development market.

Philip Fierro, Executive Vice President of Manhattan developer Metrovest Equities, the firm currently developing the nation’s largest federal tax credit-driven paroject, The Beacon (former Jersey City Medical Center), also provided persuasive testimony about the value of the proposed historic preservation stimulus bill.  We thank him for his remarks, herewith in full:

“The benefits to commercial redevelopment in this current economic climate are in line with the stated governmental role to stimulate the economy, with the desired effect of creating job opportunities, both permanent and construction.  One of the key benefits to this legislation would be to create revenue streams to the state and local bodies through employment and future tax revenues.

The current turmoil in the capital markets, specifically the Bank Credit and Mezzanine tranches, make the capitalization of large commercial developments very challenging, if possibleat all.  The scarcity of money in the subordinate tranches is causing market participants to charge higher rates of interest in order to fund.  This has the effect of making the underwriting of these projects marginal at best.

New Jersey’s enactment of a tax credit, which could be syndicated for purposes of raising additional equity to replace the mezzanine tranche, would enable projects that are currently not moving ahead to come online quicker and generate much needed construction jobs, permanent jobs and local recurring property tax revenue. Numerous projects that are not being done would become viable.

By the restoration of historic structures that would be kick started by a 25% state historic tax credit the state would recapture the credit cost in numerous ways:

1)    Construction Jobs – Approximately 60% of all construction hard costs are labor related and the labor payroll generates approximately 6%, to be returned to the state in the form of employer contributions to unemployment insurance and disability as well as the workers payments to state withholding, unemployment and disability.
2)    Permanent Jobs – At the completion of the project permanent jobs will generate 6% recurring revenue to the state as outlined above.
3)    The local municipality will generate reoccurring real estate tax revenue significantly higher than in a non-commercial or unimproved property.
4)    Multiplier effects based upon the revenue streams and construction spending to other areas of the local economy.
5)    State corporate and sales tax revenue from corporations and retail establishments that occupy the renovated spaces.

The economic benefits to the state of New Jersey would be numerous as discussed.  It is also important to note that typically, tax credits are not able to be claimed until the project has been put into service, thus achieving the upfront construction job and service multipliers benefits and ensuring that the permanent job and real estate tax revenues are in place.”

Next steps:  advocacy to encouage hearings at Assembly Appropriations Committee  (Aswm Nellie Pou, D- Paterson, chair) and Senate Wagering, Tourism & Historic Preservation Committee (Sen. Jim Whelan, D-Atlantic City, chair).

In March 2009, Arkansas became the 30th state to offer a rehabilitation tax credit (25% for income-producing and owner-occupied properties) when Governor Mike Beebe signed Act 498. Introduced by Representative Robert Moore from Arkansas City, HB1953 received support from the Historic Preservation Alliance of Arkansas, the Arkansas Rural Heritage Development Initiative, and other preservation-minded individuals and organizations.

The Beacon, former Jersey City Medical Center, while a terrific adaptive use preservation project creating hundreds of new housing units, is one of only two federal historic tax credits-driven projects approved in NJ last year. Missouri, which offers a companion state tax credit program, approved more than 150 projects in 2008!

Meanwhile, we learn of recent studies that show that state tax credits increase the use of the federal rehabilitation tax credit. During the 5-year period preceding enactment of the state historic tax credit program (1996-2001), researchers found that Rhode Island attracted less than $10 million in federal historic tax credit investment. For the 5-year period since enactment (2002-2007), more than $78 million dollars in federal historic tax credits have been awarded to Rhode Island projects – an increase of more than 700 percent. This echoes Missouri’s experience when the number of projects using federal rehabilitation tax credits doubled after the introduction of the state credit. The Iowa State Historic Preservation Office found that the amount of federal tax credits issued increased by $3.7 million after the introduction of a state tax credit.  In 2008, New Jersey ranked 27th in the nation in the number of completed preservation projects leveraged with federal historic tax credits.

A recent report by the Abell Foundation examines the environmental impacts of Maryland’s Heritage Structure Rehabilitation Tax Credit and shows that there’s a $8.53 return on every state dollar invested.

News just in that the New York State Assembly and Senate have introduced new legislation to expand the existing NYS Rehabilitation Tax Credit programs for historic commercial properties.

A partnership of economic development, banking, municipal leaders and other organizations have formed the Reinvest NY Partnership to secure this rehabilitation stimulus program in the 2009-2010 NYS final budget agreement.

Existing Commercial Program
6% credit rate, $100,000 cap, no transferability (credit only allocated to entity claiming federal credit).
Proposed new Commercial Program
20% credit rate, $5 million cap; transferability within business partnerships, available in census tracts at or below 100% State Median Family Income, implementation date of 1/1/2010.

For further details, contact Daniel Mackay, Director of Public Policy, Preservation League of NYS @ dmackay@ preservenys.org

Join New Jersey’s Coalition seeking to enact a state rehabilitation tax credit:  info@njheritagedevelopment.org

The National Park Service’s 2008 annual report on the use and impact of the federal historic rehabilitation tax credit on real estate investment shows, once again, a direct correlation between existence of a companion state historic tax credit and the level of investment in historic rehab projects.

The national highlights  :

• $5.64 billion in leveraged investment in historic rehabilitation projects linked to federal tax credits
• 17,051 housing units created, 5,220 of them low/moderate income
• 67,700 (estimated) jobs created

Now for the New Jersey perspective:

• New Jersey was #27 in the number of “new” (Part 2) projects approved, sharing the spot with Montana & New Mexico.  NJ’s two approved projects compares to Missouri’s 153, Virginia’s 119, Ohio’s 85, Maryland’s 39 and Rhode Island’s 31.  (The latter 5 states all have companion state credits, NJ does not.)
• NJ is #25 in finished federal tax credit-driven projects: three (3) completed projects.  Missouri = 134, Virginia = 73, Maryland = 61
• NJ moved up to 9th place in the value of completed projects in 2008, at $137 million.  Missouri = $376 m, Massachusetts = $324 (that state, too, has a state tax credit), Virginia = $242 m

Perhaps the reader sees a pattern?

Read the report”  nps-2008taxcredit_report2

from PreservatioNation:

About Missouri’s Rehabilitation Tax Credit

In total, 29 states offer some form of tax credit for rehabilitating older buildings, and for good reason – these incentives are absolutely critical to preserving local heritage. However, not all state credits are created equally and, as a result, overall effectiveness varies considerably.

As one of the first states to enact such a program, Missouri continues to lead the way with its rehabilitation policy, which currently offers a 25% credit for qualified expenses in rehabilitating commercial and owner-occupied properties listed on the National Register or located in a certified historic district.

Former church, now the Ivory Theatre, rehabbed with state tax credits

Unlike the federal-level rehabilitation tax credit, the Missouri state-level credit includes residential properties – although they comprise only about 3% of all historic tax credit projects in Missouri – into the mix. For commercial projects, the state-level credit can be “stacked” or combined with other federal incentives.

Another important component of Missouri’s exemplary credit is that it permits transferability, or the ability to make an outright transfer of the tax credit to another person or entity. This provision allows the party that earns a credit – which may not have substantial tax liability – to sell the credit to a third party with greater tax liability.

Above all, the most crucial aspect of Missouri’s highly successful historic tax credit is the absence of either an annual aggregate or a per-project cap. These types of restrictions typically lead to a high degree of uncertainty for developers, lenders and investors, therefore resulting in a sharp decline in usage.

Missouri’s Rehabilitation Tax Credit By the Numbers

St. Louis residence rehabbed with state tax credits help

In just ten years, over 900 rehabilitation projects in 37 counties and 55 communities across the state of Missouri have been completed thanks to the historic tax credit. This translates into over $2 billion that has been invested in the rehabilitation of historic buildings.

The program works for small as well as large projects. Only 11% of the projects completed were those with over $5 million in expenditures. The majority are smaller preservation projects. In fact, over 45% had less than $250,000 in expenditures, and nearly 15% were below the $100,000 mark.

Not surprisingly, Missouri leads the nation in use of the federal-level rehabilitation tax credit. Statistics from Missouri show that having a productive state historic preservation tax credit program increases the use of the federal tax credit. According to state officials, the number of projects using federal rehabilitation tax credits doubled after the introduction of the state credit.

Visible Impact of Missouri’s Rehabilitation Tax Credit

From the rehabilitation of Main Streets and residences to the transformation of major urban centers, the impact of Missouri’s policy can be seen across the state. One of the biggest success stories comes from St. Louis, where the credit was used to help rehabilitate nearly 100 vacant and abandoned buildings in the core of the city.

However, the impact of the policy goes far beyond just the restoration of historic structures and the preservation of heritage; it has had major economic, environmental and social implications as well.

To quote John Williams, the president of the St. Louis Association of Realtors, “Economically, restoration projects have created well-paying jobs and increased tourism dollars. Property vales have increased, as well as revenue to local municipalities. Environmentally, restoring versus demolishing old buildings has helped reduce construction debris and conserve energy. Psychologically, more people are considering downtown as a viable place to work, play and live.

See recent press: “St. Louis Mayor Francis Slay says the program has been the single most important factor in reversing the city’s population decline and stabilizing its pool of jobs.”

Citing evidence that developers who specialize in historic rehab projects have focused their work in states that have more generous historic rehab tax credits,  Maryland Governor Martin O’Malley recently proposed reauthorization of the state’s historic tax credit as part of his “green, smart and growing” legislative agenda, according to an article in the Baltimore Sun. He called it “one of our state’s strongest and most valuable tools” for redeveloping existing communities and one that benefited Baltimore greatly while he was mayor.

Accompanied by members of the Task Force on the Future for Growth and Development in Maryland, Gov. Martin O'Malley announces the completion of their report during a news conference at the State House. (Baltimore Sun photo by Elizabeth Malby / January 12, 2009)

O’Malley’s proposed legislation would reestablish the Historic Tax Credit as a true credit and provide up to $100 million in credits over a five year period.  Seeing the value in spurring redevelopment with a credit that only “costs” the state when projects are built and occupied, officials proposed to increase the credit in a tight budget year by changing the way it is financed. Instead of appropriating funds for the credits as they are awarded, the administration wants to account for the credits as the projects are finished, usually a couple of years later.

Maryland’s historic rehab tax credit program – one of 29 nationwide – has been one of the most successful and powerful in the country.  Read more.