The Lofts at NoDa Mills | Charlotte, NC The Community Builders
As 2016 comes to an end, we are turning our attention to the new year ahead. It is also a time to reflect on the changes that came with a year of political uncertainty. In our December Novogradac Journal of Tax Creditsarticle, we invite you to review some of the headlines of the year and insight into what to watch for in 2017.
Tomorrow, twelve state will be voting for new governors: Deleware, Indiana, Missouri, Montana, New Hampshire, North Carolina, North Dakota, Oregon, Utah, Vermont, Washington, and West Virginia. All but four of these states - Indiana, New Hampshire, Oregon, and Washington - have state historic tax credit programs. Just as the tax reform preferences of the to-be-determined president will shape federal programs like the Historic Rehabilitation Tax Credit, these governors will be the influential in the shaping of state historic tax credits whether they are already in place or proposed. And it seems governors are not always a friend to programs that may have overwhelming bi-partisan support for reasons that range from personal to budgetary.
In the October edition of the Novogradac Journal of Tax Credits, we examined efforts for historic tax credit programs in California and New Jersey that fell short of a governor's signature after passing in other state legislative branches.
You have probably noticed the deluge of articles the last few weeks about New Orleans, the aftermath and the recovery following Hurricane Katrina. It still seems hard to fully comprehend the tragedy of it a decade later; so much destruction of architecturally significant communities and, most overwhelmingly, of the tapestry of people that called these history-rich districts home.
I had the opportunity to visit the area in December of 2005, just a few months after the storm, to help families sort through the muck. As our volunteer group was carefully clearing out kitchen cabinets - being vigilant of snakes or other creepy crawlies that still lived in water-filled Tupperware, or taping refrigerators shut to drag to the street with rotting shrimp inside that had been ready for a family meal before the storm hit - one of the families we were helping showed up and stood for a long time in the living spaces just taking it all in. Slowly, they began digging through the muck in their bedrooms. (This was the Lower Ninth Ward and the water line had almost reached the ceiling.) Then came the shouts of joy as they found precious and irreplaceable family pictures that were water damaged, but salvageable.
The truth was, however, that this family had come to say goodbye to the home that they had decided that they would never return to after that day. They weren’t sure where they would end up, but it wouldn’t be the Ninth Ward and most likely not New Orleans. Too much damage was done; emotionally and physically.
It is that family I think about when I read the articles of the last few weeks and take a look back at those images. The landscape of New Orleans is forever changed; scarred in many ways, but stronger in others.
Building rehabilitations have played a major role in the strength of the city over the last decade. They are representative of the resourcefulness that is necessary after destruction, and in the case of the GO Zone incentives, the importance of public policy to help rebuild. Stories like those of the New Orleans Healing Center are a testament to how the reinvention of a building can play a part in healing a community.
One can’t think of New Orleans without conjuring visions of shotgun houses or French Quarter balconies. Their architecture – along with a great deal of diverse architecture in the city – reveals the special kind of culture in the “Big Easy.” When Hurricane Katrina hit, it was uncertain how much of this fabric could be retained, but most agreed that it was important to rebuild.
For nearly 40 years, the federal historic rehabilitation tax credit (HTC) program has incentivized preservation across the country; from blighted to bustling communities. In the case of natural disasters where there is widespread, catastrophic and costly damage, this type of incentive is essential.
Katrina presented an overwhelming burden for those looking to revitalize buildings of significance in New Orleans and throughout the Gulf Coast. Swift action by Congress and President Bush established the Gulf Opportunities Zone Act of 2005 (GO Zone), a bill that among other things increased the federal historic rehabilitation tax credit to 26% from the normal 20% for Gulf Coast regions affected by Katrina as well as Hurricanes Rita and Wilma that hit only a few months later.
Originally scheduled to sunset in 2008, the bill was extended several times and eventually ended in 2011 when the rate reverted to the regular 20%. Nearly 150 projects, with total development costs in excess of $460 million, benefitted from the program in New Orleans and Baton Rouge alone.
The GO Zone initiative was integral in these projects, but also important was the robust Louisiana State Commercial TaxCredit. This 25% tax credit incentive was implemented in 2002 to benefit income-producing historic buildings in Louisiana’s Downtown Development Districts. In 2007, historic buildings in certified Cultural Districts were made program-eligible.
Other Gulf Coast states have HTC programs, such as Mississippi and Alabama, also offering the tax incentive at a rate of 25%, but came after Katrina; Mississippi began their tax credit program in 2006 and Alabama in 2013. Unfortunately, the Alabama Historic Rehabilitation Tax Credit Program is set to sunset this year unless legislation can be passed to extend it. Rounding out the Gulf Coast states, Texas implemented their 25% HTC in 2015, and Florida has yet to pass HTC legislation.
Katrina Case Study: New Orleans Healing Center
The Universal Furniture Building at the corner of St. Claude and St. Roch dates back to 1887. Its storied history includes time as a bakery and a bargain furniture store. In 2005, the building survived Hurricane Katrina relatively intact while the communities around it suffered.
The building is located in the Faubourg Marigny National Register Historic District, but is a neighbor to the St. Roche, St. Claude and Bywater Districts as well. Purchased by New Orleans commercial developer, Pres Kabacoff, and his wife Sallie Ann Glassman, the building found new life as the New Orleans Healing Center in the fall of 2011. The duo rehabilitated the building to house a grocery co-op, yoga studio, coffee shop, performance areas, restaurant, and community meeting spaces.
The rehabilitation itself included removing a non-historic aluminum screen and brick veneer on the St. Claude and St. Roch elevations in order to restore original facades. With MacRostie Historic Advisors help, the project generated $2.36 in federal GO Zone HTCs, which was nearly doubled when coupled with the 25% Louisiana State HTC. And for a community that was rebuilding, it provided much needed jobs.
Four years since opening its doors, the Healing Center is growing in popularity and continuing to offerservices to the community.
Preparing for the next Katrina
Hurricane Katrina gets top billing for natural disasters in the United State’s recent history, but FEMAreports over 600 major disaster declarations in U.S. territories since the storm in 2005. These disasters include fire, flooding, earthquakes, tornadoes, and more; none of which are discriminating in their destruction.
Steps are being taken by Congress to provide relief to disaster areas declared from 2012 through 2015 with the introduction of the National Disaster Tax Relief Act of 2015 in July. The bill largely follows the guidelines set forth by the GO Zone legislation, increasing the federal HTC rate to 26% in affected areas. No doubt that similar bills will be introduced in the future to account for disasters yet to come.
The passing of legislation of this nature signals confidence in our leaders that HTC programs are instrumental in economic development, as well as an important tool to save our historic resources for future generations. And when reflecting on the devastation of Katrina and the brutal power of natural disasters on our built and human landscape, we look to the places that are familiar to find home again.
Historic Lincoln School Apartments | Shawano, WI Completed in October 2014, this former high school was converted to a 24-unit affordable housing apartment building.
State tax credit programs come in many shapes and sizes, but one commonality is the economic impact they have of bringing investment to historic cities throughout a state. Many of these cities have historic resources related to a period of industry that certainly once shaped the community but now sit abandoned. Repurposing these buildings is a viable and important path to reinvestment.
Another commonality is that state historic tax credit programs are often threatened from the beginning, as there is inevitably a debate between the dollars coming in as investment versus the dollars going out as tax credits.
Just such a debate has been ongoing in Wisconsin for the past year. Governor Walker proposed to cap the state tax credit program, which was just raised to an uncapped 20% program in January 2014, while the legislature has been working to preserve it in its current form. Since the program change, just 18 months ago, 25 projects have utilized the 20% credit resulting in an estimate of $480 million in construction spending and $88.7 million in annual operations according to a study done by Baker Tilly.
As consultants on historic rehabilitation projects, we often see immediate results on these state programs once they are signed into law. “Our Midwest Office noticed a surge in the volume of Wisconsin rehabilitation projects in 2014 and 2015 due to the new state credit, including more small and medium sized projects which may not have been viable without the added bump from the increased state credit,” notes MHA partner and Midwest director, Allen Johnson. “We are also seeing projects being undertaken in small towns and cities where previously our work was wholly in Milwaukee.”
Meanwhile another scenario is playing out in North Carolina where several tax credit programs, mostly targeted at the state’s large resource pool of historic mills, have been allowed to sunset despite showing a strong economic impact since their creation in the late ‘90s. Myrick Howard, President of Preservation North Carolina, noted in his recent op-ed piece for the News & Observer that “the revival of downtown Durham, Raleigh, Winston-Salem, Asheville, Salisbury, Mount Airy, New Bern and Edenton, to name a few, hasn’t been coincidental. Nearly $2 billion have been spent by the private sector, stimulated by this statewide incentive.”
NODA Mills | Charlotte, NC
Wisconsin is fortunate to have preserved its credit and will certainly have a competitive advantage when it comes to attracting developers, especially from another state in its region, Michigan, which lost its state historic credit several years ago. Developers that are experienced in using the historic tax credit programs are expanding beyond their home states in order to take advantage of these benefits elsewhere.
In a time of shrinking state budgets and less federal support, legislatures often look to “grow” their state budgets by eliminating historic tax credit programs despite several studies that show there is a positive return on investment from these programs. In addition to the construction dollars and jobs generated by rehabilitation projects, there is a long-term affect at the local level of taking a building that may have been completely off the tax roles and returning it to use, which generates increased real estate taxes that often funds schools or other local infrastructure.
Hopefully North Carolina and other states will follow Wisconsin’s lead in supporting programs that can have a significant economic at the local level while knitting back together the architectural fabric that makes these cities and towns whole.
Written by Albert Rex, Partner and Director of MHANortheast
On June 9, South Carolina Governor Nikki Haley signed legislation that improves the state historic tax credit for rehabilitated income-producing properties and abandoned buildings. The most notable change is the new election for a 25 percent tax credit on rehabilitation costs for income-producing preservation projects.
Benefits of Historic Rehabilitation Tax Credit Increase
The 25 percent tax credit is an improvement for those projects that have rehabilitation costs up to $10 million. With a project cap of $1 million, rehabilitations over $10 million should seek the uncapped 10 percent tax credit.
One provision of the legislation that remains the same is that the credit must be taken in installments starting in the year in which the property is placed in service. However, the term for those installments has been reduced from five years to three years, which is good news for investors.
The final adjustment made to this tax credit legislation enables an ownership group to assign the tax credit to another entity through a pass-through tenant structure.
Changes to Abandoned Building Rehabilitation Tax Credit
South Carolina’s Abandoned Building Tax Credit also received changes in the 2015 round of amendments that includes a new definition for a ‘state-owned abandoned building’, the inclusion of insurance premium taxes as one of the taxes against which a credit can be claimed, the reduction of the credit term from five to three years, and the removal of a limitation related to the amount a taxpayer’s tax liability may be reduced. An additional section was added to outline the manner in which a taxpayer can receive certification of an abandoned building site.
These revisions, that were effective immediately on the governor’s signing, signify an acknowledgement by state lawmakers that the rehabilitation of historic buildings is a powerful economic development tool in historic communities across the Palmetto state.