Tax credits & downtown revitalization
Jarrett, Linda F
When it comes to having an abundance of historic buildings, few cities fare better than St. Louis.
A 2005 report released by the Department of the Interior’s National Park Service who oversees the Missouri State Historic Tax Credit Program states that Missouri ranked first in the nation in the number of federal historic rehab tax credit projects successfully completed, and in the number of federal historic rehab tax credit projects receiving preliminary approval for 2006.
Thanks to the emerging use of state historic tax credits as a revitalization tool, these buildings, instead of being torn down, have found new life as lofts, condos, offices, and retail stores.
Tax credits have impacted downtowns around America and no where more than St. Louis. In particular, federal and state historic tax credits have provided the incentive for developers to take the plunge to renovate downtown.
In 1976, the Federal Historic Preservation Tax Incentives Program administered by the National Park Service in conjunction with the Internal Revenue Service provided a 20 percent tax credit to those developers interested in rehabilitating historic buildings, those built before 1934, or historic areas.
Missouri implemented its historic tax credit program in 1998, giving developers a transferable tax credit equal to 25 percent of rehabilitation costs.
“Coupling these two tax credits make downtown redevelopment much more feasible,” says David Richardson, partner with Husch and Eppenberger LLC. “My role as an attorney,” he says, “is to help the developer structure the transaction to maximize the amount of tax benefits and amounts that they can leverage with a tax credit.”
He says that transactions can get complicated with the federal historic tax credit because the Missouri historic tax credits are transferable. “The state gives certificates to developers to build the project and says ‘Here’s a million dollars worth of tax credit,’ and they can sell it to whoever they want But the federal historic tax credit requires that the credit runs with ownership of the property.
“An investor has to become an owner of the development,” he explains, “And our role is to structure or maximize the equity that the investor puts in and, at the same time, maximize the amount of credit.”
Bill Kuehling, shareholder with Polsinelli Shatton Wette Suelthaus, says that individuals having tax liability can reduce that liability by purchasing these credits from the developer and pay the developer cash for that credit, then utilize that credit to reduce their liability.
Giving a simplified example, he says “Suppose I owe the state of Missouri $10,000 in tax, and I have an opportunity to purchase some historic tax credits. I buy them from a developer who is developing lofts or some commercial venture downtown.
“I don’t pay $10,000 for those credits,” he says, “I would pay $9,000 for them, then get a piece of paper saying Missouri gave me the tax credit, then when I pay my taxes, I attach the tax credit certification to my tax form and the State of Missouri says I no longer owe $10,000, I owe zero.
“The investors are happy, the developers are happy, and the state of Missouri,” he says, “white they don’t have the tax money, from their perspective, that money has helped generate a huge construction project, plus has employed hundreds of contractors who purchased millions of dollars worth of materials giving the state sales tax.
“Plus,” Kuehling adds, “the state gets income tax from the construction people who are working and, at the same time, returning a liability of a building, a vacant hulk that was dragging down the rest of the area, into productive use. So, while one part of the tax revenue may drop off a bit, other parts pick up and the state gets economic development out of it.”
A Primer on Tax Credits
Besides historic tax credits, there are New Market Tax Credits, Low-income Tax Credits, and Brownfield Tax Credits, with developers using all or a combination to get their projects built.
Begun in 2000 as part of the Community Renewal Tax Relief Act, New Market Credits are used to spur private investment in lowincome urban and rural communities.
Richardson says that the credit, which is 39 percent, is given to an investor who makes a contribution or investment in a community development entity. “That entity can make a loan or equity investment in the project, and that’s how the developer benefits. An example would be the Rudman Building on Washington Avenue. New market credits were used there to provide additional money to create the Lucas Park Grille.”
The Low-Income Housing Tax Credit program is run by the IRS and allows companies to invest in low-income housing, while receiving 10 years of tax credits.
“This allows developers to create affordable housing,” Richardson says. “The Merchandise Mart has historic tax credits and low income tax credits. If you were to rent, it would be $900, and market rate is $1,000 so there’s not too much difference.”
Awarded by the state, the Brownfields Tax Incentive is a discretionary program used for any real property where redevelopment or re-use may be complicated by the presence or potential presence of a contaminant. “These are used for costs incurred for site preparation and property improvements,” Richardson says. “It’s based on the economic benefit to the state and it basically allows the developer to get a dollar for dollar tax credit on their remediation costs such as removing asbestos or lead-based paint. The Syndicate Trust and Security Building and Marquette Building used Brownfields.”
Benefits of Historic Tax Credits
However, it is the historic tax credit that has stimulated growth in downtown St. Louis.
While both rental and for sale properties can get state historic tax credits, only rental properties are eligible for federal historic tax credits, because they produce income and are depreciable.
Linda Martinez with Bryan Cave LLP says they represent ciient developers that are interested in doing real estate development and major projects in the downtown area. “So we’re part of a team that is looking how to get the project financed and, if there are incentives available, to support that development.”
One of the challenges, she says, is identifying legal issues of the investors, lenders and developers and trying to “harmonize the allocation of risk and responsibilities for transactions.
“If you have a building on the National Historic Register or in an historic district,” Martinez says, “and you develop a plan for renovation of a building that is approved by the National Park Service, then there’s almost an automatic entitlement for those tax credits, as long as you meet certain IRS guidelines and tax code requirements. Generally, the State follows the guidelines of the federal.”
Kathy Bader, chairman of USBancorp Community Development Corporation, notes they moved their offices downtown over three years ago. “These tax credits are the key reason, if not the sole reason why all of the redevelopment downtown has happened.”
She says, “Real estate developers don’t need tax credits, they need cash to finish a project. We, as a large corporate tax payer have huge tax liabilities, so we can benefit from the credit, so we say to the developer, we’ll take the tax benefits, the tax credits, and in exchange, we’ll give you cash.
“We give them cash to finish the development,” she explains, “but you don’t receive the credit until the development is completed, or leased. So they do trade in discounts because of risk, because I put out my money early and don’t get my benefit until later.”
Mary Campbell and Dave Purcelli work with the Community Development Banking Group with Bank of America.
“Tax credits are designed to incent the capital market, to invest more equity in these deals,” Campbell says, “with either low income or renovating old buildings or economic development with a New Market Tax Credit. You figure out what you can support on a debt platform, how much money can the developer borrow to get his deal done, and there is always a gap that has to be filled either equity for tax credits or true subsidy.”
Purcelli says the gap is driven by one or two things, or a combination. “If you are looking at a low-income transaction, or if it’s for low to moderate income tenants and the rents are restricted, then your rent level is less, and therefore less revenue to support a loan.
“Then,” he says, “you have urban revitalization where you’re taking an old building, then the cost to convert it is astronomical, so even if it’s a market rate apartment or condo, there’s a gap because of high construction costs. In downtown, you run into both of those.”
Brian Davies, senior vice president of National. City, says their company received an allocation of New Market Credits. “We’ll be able to start looking at projects where new markets can start. You need a certain threshold of commercial use in the building to qualify for that.
“From a risk standpoint,” he says, “before we close on the project, we make sure that the final plans and specs have been received and approved by all the necessary government folks, so we know that the construction we’re financing is within the guidelines of the program.”
He says that federal and State historic tax credits “mirror each other, so if you get federal historic approval, your state approval is pretty certain, but the State can’t go outside what they call the ‘envelope’ of the building, so things like parking lots and landscaping are not eligible.
An independent study commissioned by the RCGA with RubinBrown evaluated the economic and fiscal impacts of the Missouri Historic Preservation Tax Credit over a 20-year period, and documents the net positive economic return to the State of the credits:
* The Westin Hotel at Cupples Station has created 1,820 and will generate 3,380 full time equivalent construction jobs, with $19.8 million in tax credits. It will also generate $54.4 million in state and local tax revenue.
* The Center for Emerging Technologies was partially financed by $1.5 million in historic preservation tax credits, and wit[ generate $14.9 million in state and local tax revenue, 2,840 full-time equivalent jobs, and $246 million in increased personal income.
* The Chase Park Plaza Hotel, with $20.3 million in tax credits, will generate 4,660 full time equivalent jobs, $99.1 million in personal income, and $42.2 million in state and local tax revenue.
The resurgence of Downtown St. Louis has been noticed around the country, so much so that Missouri’s expertise with tax credits is being copied in other cities and states.
“It is a flexible and successful program,” Kuehling says. “There is a learning curve both in the development community, finance community and legal community to figure out how to utilize it and how to put it to good use. Here, in St. Louis, we have reached that critical mass where we understand it.”
The Ely Walker Lofts is a planned sevenstory mixed-use project located in the historic Washington Avenue loft district. Co-founder D. D. Walker is a descendant of former President and current President Bush.
A new trend in downtown weddings can be found at the renovated Cupples Station. The Westin St. Louis hosts weddings in the Promenade with it’s combined urban/historical setting.
In the former office headquarters of canned milk maker Pet Inc., you’ll find Pointe 400’s 118-super luxury apartments transformed by Brinkmann Constructors. The Pet Building originally designed by Alfred L. Aydelot of Memphis, Tenn., is the only example in Missouri of New Brutalism architecture, popular in the 1950s and 1960s.
New Brutalism was characterized by the use of rough, heavy reinforced concrete, chunky angular solids and the creation of spatial tension used to reflect the harshness and the confusions of modern life.
Copyright St. Louis Region Commerce and Growth Association Sep 01, 2006
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