Novogradac Journal of Tax Credits
April 2016 | Volume VII - Issue IV
By: Albert Rex, MacRostie Historic Advisors, LLC
A little more than a year ago, we outlined the new Texas Historic Preservation Tax Credit (THPTC) in the February 2015 Novogradac Journal of Tax Credits. At that time, the credit was fairly new, having been passed into law in June 2013 and the Texas Historic Commission (THC) issuing regulations in September 2014. The program is a 25 percent credit on eligible costs, mirrors the federal credit with three Parts–A, B and C–but can be taken independent of the federal credit, is a fully transferable certificated credit with a five-year carry forward and is a dollar-for-dollar reduction on Texas franchise tax. The program is uncapped and has no recapture.
In a state known for big things, one might wonder if the state tax credit program might be one of them. With a years worth of data on the books, we can look back and get a sense of the THPTC’s initial impact.
New Opportunity for Smaller Communities
Before the creation of the state program, about 75 percent of federal HTC applications in Texas came from four major urban centers: Dallas, Houston, San Antonio and Fort Worth. Another 12 percent came from next-tier cities such as El Paso, Galveston and Austin. However, state HTCs often have the effect of increasing the geographic spread to diverse communities as well as aiding a broader range of project costs. And smaller projects in smaller markets are greater impacted by the creation of a state credit as they typically have a larger gap in sources on a percentage basis.
Case in point, Part B applications in 2015 reflect a large number of large projects in the major metro areas, but almost 40 percent of these applications were for projects in smaller towns and cities around the state. The median qualified rehabilitation expenses (QREs) for the 73 projects making up the 2015 approved applications was $5.5 million. These statistics show that projects both large and small, and cities and towns of all sizes, benefit from the state credit program.
One measure of success for the new state program may be that many of the applications for the new THPTC program are from smaller communities across the state. While that is a natural effect of state programs, this can also be attributed to the efforts of the THC staff that have worked hard over the past year to promote the program in these smaller communities. “Through our historic tax credit workshops, we are finding that often properties owners in our Main Street communities are very interested in the historic tax credit opportunities,” said Sharon Fleming, division director of architecture at the THC and deputy SHPO for Texas. “Already preservation-minded, they are willing to work closely with our staff and obtain certification for their projects. In a little town like Elgin, population 8,135, we’ve had five applications so far for the state and/federal programs. That’s a nice change.”
A Gateway to More Federal Funding
Little more than a handful of projects under the new THPTC program have applied for their final certification, given the average length of a typical development project. However, since the program began accepting applications in January 2015, the number of projects that have applied for their Part Bs is impressive.
Many projects pursuing the THPTC are also pursuing the federal historic tax credit. In 2013, there were only nine federal HTC applications from Texas. In 2015, 35 applications were submitted. This increase in federal applications serves as a reminder that state HTCs often have a significant impact on the amount of federal dollars coming into that state since strong state programs tend to be the gateway to an increase in HTC projects.
Renee Kuhlman, preservation specialist for the government relations and policy arm of the National Trust for Historic Preservation, sees this cause-and- effect relationship between the state and federal programs time and time again. She pointed to a 2012 study conducted for the National Tax Association’s 105th Annual Conference on Taxation to demonstrate the real numbers. In particular, researchers Jeffrey Oakman and Marvin Ward of the office of the chief financial officer of the District of Columbia found that the presence of an active state tax credit program boosts the use of the federal credit on average between $15 and $35 million in certified expenditures. “That means the states with active tax credit programs are bringing in between $3 million to $7 million [in] federal dollars,” Kuhlman said, “which would not otherwise be available to the state.”
The 2015 applications have the potential of bringing more than $73 million in federal tax credits to Texas development versus $15 million in 2014 according to statistics supplied by the Texas Historical Commission (THC). Findings from the 2015 Economic Impact of Historic Preservation in Texas concluded that the average annual use of the federal credit for the five years before the THPTC was $75 million. In 2015, Texas certified more than $143 million of eligible costs for the state program and more than $139 million in eligible costs for the federal program. Obviously, this is a significant increase over previous years. Based on the Part Bs filed in 2015–which are in excess of $1.2 billion– it would appear that averages in the $150 million to
$200 million range may be the new norm in the short term. Even if the number of applicants declines in the coming years and larger projects are completed, the program will continue to have a positive impact as the increase in sources from the state credit also makes the use of the federal credit more viable. The added expense related to structuring for the federal program can be more easily absorbed due to the additional 25 percent in gross state HTC equity that benefits smaller to medium size projects.
“The creation of a Texas HTC makes historic preservation projects more economically viable and feasible in the state. In addition, the flexibility to sell or assign the Texas HTC will provide opportunities to a broader base of investors,” said Nick Hoehn, a partner in Novogradac & Company LLP’s Austin office. “In fact, since the tax credit was enacted, I’ve been in touch with more than two dozen out of state investors interested in participating in Texas HTC investments.”
Looking back at the economic impact study, one set of figures that stands out is that during the period from 1978 to 2013, projects using the federal credit alone generated 35,746 jobs and added $2.4 billion to the states’ gross domestic product (GDP). With the level of eligible cost investment from the first year of implementation alone, the impact of the new state program is staggering.
Does the Texas economy in general make it a great place to do business? Absolutely. But given the growth in historic rehab from 2013 to today, it is clear the state program is having the desired effect of saving historic buildings, revitalizing downtowns and main streets and, most of all, priming the pump for significant investment and economic returns. In a state that prides itself in doing everything bigger, Texas could easily have one of the most robust state HTC programs in the country.
Albert Rex is a partner of MacRostie Historic Advisors LLC and Direc- tor of MHA Northeast in Boston. With over 20 years of professional experience in historic preservation and economic development, Albert and his team provide services for a wide range of historic rehabilitation projects. Albert can be reached at arex@mac-ha. com or (617) 531-7161. Visit www.macrostiehistoric.com for more information.
This article first appeared in the April 2016 issue of the Novogradac Journal of Tax Credits.
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