Novogradac Journal of Tax Credits | October 2018 | Volume IX - Issue X
By: Albert Rex
Federal and state historic tax credits (HTCs) have been a staple of equity for rehabilitation projects throughout the country for more than two decades. Although both help to preserve historic buildings, the motivations behind their creation are slightly different.
While the federal program grew out of cultural heritage legislation that began with the Historic Preservation Act of 1966, many state historic credits arose out of the need for economic development–not just in the historic cores of their inner cities, but in smaller towns and less-affluent communities that lost economic vitality, resulting in a lessened sense of place.
The Louisiana State commercial tax credit is one such example. Although Louisiana passed its own historic preservation act in 1974, supporting its, “historical, architectural and cultural heritage,” it is clear that the HTC program was expressly intended to spur economic development. Created in 2002, the Louisiana HTC follows the application process of the federal program but differs slightly in that it is also available to buildings in districts that are not listed in the National Register but have a local Downtown Development District or Certified Cultural District designation. The inclusion of these properties outside of the National Register helps to benefit smaller rehabilitation projects and reduce barriers to the incentive in order for it to have the largest possible economic impact. Another economic consideration of the Louisiana program is that it can be used by nonprofits outright, unlike the federal program, which requires deal structuring when a nonprofit sponsor is involved. The credit is also freely transferable. Originally a 25 percent credit, it was reduced to 20 percent as of Jan. 1, 2018.
A recent study commissioned by the state, “The Historic Tax Credit: Building the Future in Louisiana,” by PlaceEconomics, noted that the provisions of the state credit “made possible a transaction that could not otherwise have taken place.” The intent of the study, based on a stakeholder letter from Lieutenant Gov. Billy Nungesser, was to answer these questions:
“We know that the tax credit spurs the reinvestment in a historic building, but what happens next door or across the street? What is the catalytic impact that the historic tax credit has?
“It’s not just about the numbers. Who are the people who are using the credit and changing their communities?”
In order to address these questions, the study looked at six communities across the state: Baton Rouge, Monroe, New Iberia, New Orleans, Shreveport and Slidell. These communities are diverse in size, location and economic wherewithal, but the outcome was the same–the use of HTCs in these communities had an economic impact that was catalytic in nature and drove additional investment in the surrounding neighborhoods, reduced vacancy and crime rates, and increased property values and job creation.
To better understand the answers to these where and who questions, however, the study outlined the reinvestment impact of historic rehabilitations. The report highlighted the results of the state and/or federal tax credit programs from 2007 to 2016, including the following:
24 of Louisiana’s 64 parishes saw buildings rehabilitated through tax credits;
821 rehabilitation projects were completed using the state commercial tax credit;
Nearly $2.7 billion was invested in Louisiana’s historic buildings because of these tax credit programs;
Every $1 that Louisiana provides in commercial HTCs spurred $8.76 in additional economic activity;
The tax credit is only awarded after the project is complete, but taxes are collected as the work progresses. As a result, for every $1 of tax credit awarded, the Louisiana Treasury received 42 cents back before a developer or property owner can even use the credit.
The report also referenced two earlier studies, one in 2011 by Dr. Timothy Ryan that looked at the period from 2003 to 2010 and the second in 2015 from Novogradac that looked at 367 commercial projects from 2003 to 2014. Both found the state HTC program to have a positive economic impact and leverage substantial private investment.
“The flexibility of the Louisiana tax credit has made it an obvious choice for real estate developers, investors, nonprofit entities, small businesses and others rehabilitating historic buildings throughout the state,” said Gabrielle Begue, senior associate in MacRostie Historic Advisors’ (MHA) New Orleans office. “We have several clients, in communities ranging from small-town Main Streets to New Orleans’ Central Business District, who have been readily able to utilize the state credit but not necessarily the federal credit. As a result, Louisiana is still able to reap the benefits of incentivized economic development and quality historic rehabilitations which might not have been possible without the state program.”
In a chart showing the expected rate of use of the federal HTC in Louisiana based on historic data from pre- 2002 versus the actual rate of use, the PlaceEcomomics study shows a spike in credit growth between 2008 and 2011. What it does not overtly account for are the special provisions made following Hurricane Katrina in 2005. The rebuilding and rehabilitation of damaged properties after this catastrophic disaster was further helped by an increase in the federal HTC to 25 percent in the Gulf Opportunity Zones Act that covered almost half of Louisiana’s 64 parishes. In addition to the 5 percent bump in the federal credit rate, it also allowed for 50 percent bonus depreciation, which spurred economic development and certainly increased rehabilitations in a state with so much social and architectural heritage.
Throughout the report, the PlaceEconomics study answers the question of who uses the credits through project spotlights of small-business owners, seasoned developers, citizens and local community advocates, to name a few. It also gets at who is consuming the benefits of the state HTC. The most interesting conclusion from the study may be the social impact of reinvestment:
“And maybe most significant is that young people are returning to and staying in Louisiana. They aren’t looking to recreate the past or seek something that was. Instead, they are creating and working for the future of Louisiana, and this report lays bare that these young people see the character and quality of historic buildings as a central part of that future.”
“In addition to experienced developers, our clients include young entrepreneurs acquiring and rehabilitating properties in urban neighborhoods, and nonprofit entities large and small interested in maintaining their historic buildings,” said Beth Jacob, also a senior associate in MHA’s New Orleans office. “The common thread is a desire to invest in communities throughout Louisiana and preserve our unique architectural heritage.”
Results like those of the Louisiana study, which show positive economic impact by state HTC programs, are replicated repeatedly in similar reports in other states. Perhaps the intangible and immeasurable outcome of pride and placemaking is in fact the biggest driver of economic prosperity for any state HTC, including Louisiana. ;
This article first appeared in the October 2018 issue of the Novogradac Journal of Tax Credits.
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