By Scott Calvert and Jon Kamp
The new U.S. tax law has eroded the value of an incentive that
developers have long used to help finance renovations of historic
buildings around the country, raising worries about the prospects
for future projects.
The law, signed by President Donald Trump last month, changed
the federal historic tax credit, which provides reimbursement for
20% of certain costs on such rehabilitations. That payback is now
spread over five years instead of one, which developers,
preservationists and banks say reduces its value.
Property developers use the credits to attract investors like
big banks and other corporations, and the credit is used as
repayment. The program has helped turn old factories, department
stores and banks into apartments, hotels and offices, while helping
inject life into sagging main streets.
Boston-based Trinity Financial sped up its purchase of an
abandoned courthouse in Worcester, Mass., to qualify under the old
tax-credit rules that lapsed on Dec. 31. In Dayton, Ohio, developer
Cross Street Partners rushed to complete long-term leases on a
major downtown project, said David Williams, a senior development
director there.
In both cases, the initial impetus was fear that Congress might
eliminate the credit altogether. But Mr. Williams said the weakened
version could have threatened a carefully constructed financing
plan that includes multiple tax incentives.
"A hiccup like that can be pretty devastating," said Mr.
Williams, who is working to overhaul a long-vacant collection of
buildings known as the Dayton Arcade, using a collection of state
and federal credits.
Some states are pushing efforts to offset the federal changes.
In Maryland, state Sen. Bill Ferguson, a Baltimore Democrat, said
he plans to introduce legislation bolstering a state-level historic
credit program. Preservationists in New York are also hoping to
shore up the state's historic credit, and in Michigan, the state
House is considering a Senate-passed bill to revive a credit
program there.
Certain rehab projects "simply won't get done" now without a
state historic credit to help make up for the weakened federal
incentive, said Nancy Finegood, executive director of the Michigan
Historic Preservation Network. Michigan is one of 15 states without
its own historic credit program.
The federal credit dates back four decades and was set at 20%
under President Ronald Reagan, who hailed the program as a tool to
revive old buildings and boost economic growth. The credit, often
layered with state historic credits and tax incentives for
affordable housing, can be key in cities where rents aren't high
enough to cover costs to renovate empty and decaying relics,
preservationists say.
The credit has helped revive more than 42,000 buildings since
its inception in 1976, according to the National Park Service,
which oversees the program. Through 2016, credits exceeded $25
billion and projects yielded about $30 billion in federal tax
receipts, according to the Center for Urban Policy Research at
Rutgers University.
John Buhl, spokesman for the conservative-leaning Tax
Foundation, said it would be better for states and cities to decide
whether to subsidize historic preservation through direct spending,
rather than using federal taxes to provide assistance. "Really it's
not a good use of the tax code, " he said. "It just complicates
things."
Earlier iterations of the tax bill had eliminated the credit or
cut it in half, but the incentive survived after a lobbying push by
preservationists and developers and intervention by Republican
senators.
The change relieved some preservationists. Shaw Sprague, senior
director of government relations at the nonprofit National Trust
for Historic Preservation, said spreading the tax credit out over
five years "seems like a small price to pay."
Still, Michael Novogradac, a San Francisco accountant who
specializes in tax-credit deals, estimates the federal credit's
value could fall by 7% to 15%. Based on that projection, a credit
that was formerly worth $10 million to investors could instead be
worth as little as $8.5 million.
Pete Noonan, a senior vice president at Kansas City, Mo.-based
Commerce Bank, which has invested in the credits, said the tax-law
change could make historic restorations more difficult by reducing
the credits' value.
"We will work hard with our legislators to find a good solution
so that these smaller communities continue their important
redevelopment projects," Mr. Noonan said.
Developer Don Peebles, who plans to turn a 77-year-old former
court building in Philadelphia into a boutique hotel, says the
tax-code changes threaten his estimated $110-million project
because the credit value was weakened. Mr. Peebles said he is now
looking for ways to cut the project's cost. The city, the
building's owner, said it plans to evaluate the project at the end
of the month.
"It's a 50-50 chance that we would end up having to abandon the
project, " said Mr. Peebles, founder of Florida-based Peebles
Corp.
(END) Dow Jones Newswires
January 19, 2018 05:44 ET (10:44 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.