Tax Law Erodes Historic-Building Credit, Threatening Some Projects
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.