New York State Historic Tax Credit a Success, But Still Evolving

Novogradac Journal of Tax Credits
October 2017 | Volume VIII - Issue X

By: Albert Rex, MacRostie Historic Advisors, LLC

The New York State (NYS) Commercial Rehabilitation Tax Credit Program was established in 2006. The program included a per-project cap of $100,000 and, like many other state historic tax credits (HTCs), piggybacked on the federal program. While taking the state credit did not entail a lot of additional application work for those pursuing the federal HTC, the small per-project cap and the fact that the program was not certificated meant it went largely unused.

The program received a serious and welcomed overhaul in 2009. Most significantly, the per-project cap was raised to $5 million and the sunset date was extended to 2014. The increased cap immediately had a significant impact on the number of projects using the program.

Another improvement involved the census tract requirement. The NYS HTC is one of the few programs that has a qualified census tract requirement, similar to the New Markets Tax Credit program. The requirement was originally set at 90 percent of state median income and was aimed at assuring the credit was used in areas that needed it the most. The 2009 revisions provided that the census tract requirement be increased to 100 percent of state median income, allowing  for  a  greater  number  of  census  tracts    to qualify for the credit, while still targeting the communities that the economy supports.

The new rules from the 2009 legislation went into effect Jan. 1, 2010, but did not address one of the major issues of the program–the ability to bifurcate the state HTC from the federal. Many of the traditional federal investors do not have a lot of New York tax liability, limiting the number of potential investors and depressing the value of the state credit. Bifurcating the credits would allow different investors for each program and would increase the value of the state credit.

Public School 60 in the Riverside neighborhood of Buffalo is a good example of the impact of the revised state credit program. After nearly a decade of neglect, the building, built in 1897 with a 1920 addition, was in serious need of rehabilitation. DePaul Properties chose to take a chance on the still-sound masonry, concrete and steel structure as the site for 68 apartments serving a mix of affordable housing tenants and tenants receiving supportive care from the New York State Office of Mental Health. The NYS HTC provided more than $3.6 million to the capital stack that included the federal HTC, federal low-income housing tax credit (LIHTC), HOME Funds and several other sources. The building was placed in service as Riverside Apartments in March 2014.

The success of the state HTC program led Gov. Andrew Cuomo to introduce an amendment to the New York budget for 2013-2014, making the state HTC refundable and extending the program through 2019. The change followed a similar structure that was already  in  use and allowed for the state film credit to be refundable,  so there was some precedent for this path at the state level. A developer can now partner with investors that do not have New York  state tax liability and received     a refund for the credit. Although it did not directly address the bifurcation issue, it was an improvement that broadened the universe of possible investors, but  is still less effective than a certificated credit. With refundable credits, there is a time gap at the end of the project waiting for the refund to happen and requiring a bridge of those funds. The refund can take some time to be processed, creating additional cost to the developer in the form of interest on the bridge loan.

This April, Gov. Cuomo announced that the HTC improvements made in 2009 and again in the 2013-2014 budget had the desired effect: New York led the nation in the number of completed historic rehabilitation projects in 2016. “Rehabilitation tax credits provide a valuable incentive to invest in underutilized historic buildings and transform them into cornerstone landmarks for communities across New York,” said Cuomo. “These numbers prove that this program is an effective economic development tool and we will continue our efforts to preserve this state’s historic properties and drive growth throughout the process.”

The numbers the governor referenced revealed that the combination of the state and federal HTC programs generated more than $3 billion of investment in commercial  properties,  with  $748  million  invested in 2016 alone. According to information presented by the state at the 2017 New York Statewide Preservation Conference, the census tract requirement was having the desired affect with 200 of the 300 Part 2 applications reviewed by the SHPO since 2013 representing projects located upstate. Additionally, HTC projects around the state created more then 5,500 units of new housing, of which 1,900 are for low- or moderate-income residents.

“What the New York State Rehabilitation Tax Credit program has done is it has helped us to take what was once considered our white elephants–the remnants of former industry and former success, and transform them from liabilities in to community assets– stimulating private investment, creating local jobs, and building the places that New Yorkers want to live and work and invest in,” said Jay DiLorenzo, president of the  Preservation  League  of  New  York   State. “These places are often found in struggling communities; places that have suffered from population decline, and a feeling among some residents that the past is better off forgotten and the old reminders of that time should be torn down. Instead, what we have here is the kind of building-by-building economic development incentive that capitalizes on what is unique in a neighborhood and revitalizes it into an engine for the local economy.”

Improvements that make the state HTC competitive and desirable created  the  economic  success  touted  by state leaders. However, there are still even more improvements to be made. With the governor’s strong support and the program sunsetting in 2019, the question becomes: what’s next? Advocates have already begun meeting to discuss next steps, including an extension of the program and legislation that would address the bifurcation issue and potentially look at creating a certificated credit program. At a recent meeting, several ideas were discussed to make the program more affective, from a bonus credit for small projects and expanding the census tracts that qualify  to creating a transferable credit and address the bifurcation issue. Given the tract record of the program in its current form and the support of the governor, it seems that positive things lie ahead for the program and for the historic assets of the Empire State.

Novogradac Oct 2017 Pic.jpg

This article first appeared in the August 2017 issue of the Novogradac Journal of Tax Credits.

© Novogradac & Company LLP 2017 - All Rights Reserved

Notice pursuant to IRS regulations: Any U.S. federal tax advice contained in this article is not intended to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties under the Internal Revenue Code; nor is any such advice intended to be used to support the promotion or marketing of a transaction. Any advice expressed in this article is limited to the federal tax issues addressed in it. Additional issues may exist outside the limited scope of any advice provided – any such advice does not consider or provide a conclusion with respect to any additional issues. Taxpayers contemplating undertaking a transaction should seek advice based on their particular circumstances.

This editorial material is for informational purposes only and should not be construed otherwise. Advice and interpretation regarding property compliance or any other material covered in this article can only be obtained from your tax advisor. For further information visit www.novoco.com.