Federal Historic Tax Credit Achieves Record Increase in Use and Impacts in 2016

By John Leith-Tetrault posted 10-16-2017 16:00

  

The Annual Report on the Economic Impact of the Federal Historic Tax Credit, first published in 2008, has long provided a statistical justification for improving the federal historic tax credit (HTC). More recently, the report has been used to bolster support for retention of the HTC in a reformed tax code. Tax reform bills are expected to advance in both the House and Senate in the coming weeks and all indications are that the HTC, along with most other business credits, are on the chopping block to pay for individual and corporate tax cuts. Forum members are urged to send the 2016 report to their members of Congress or better yet present the report to them at site visits and town hall meetings. Additional details about how to take action are included below. 

Paducah_Coca_Cola_exterior__2_.jpg
Paducah, Kentucky, Coke Bottling Plant. | Credit: Chuck Fisher at the National Park Service

 A strong real estate market supported by continued low interest rates made 2016 a record year for the use of the federal historic tax credit (HTC) and the national economic impacts it generates. Use of the HTC reached $1.2 billion in credits allocated, generated by $5.9 billion in qualified rehabilitation expenditures (QREs). This level of activity exceeded the prerecession high of $914 million in credits allocated in 2009 and represents an astonishing increase of nearly one-third (32 percent) over 2015 program activity. Last year’s increase totaling $1.4 billion in Part 3 certified (i.e., completed) transactions is the largest year-over-year increase since 1986. (These numbers are unadjusted for inflation.)

These encouraging statistics are summarized by the National Park Service (NPS) and Rutgers University’s Center for Urban Policy Research in their recently published Annual Report on the Economic Impact of the Federal Historic Tax Credit for 2016. Rutgers based its analysis on NPS data provided for each HTC transaction during the 2016 fiscal year, October 1, 2015–September 30, 2016.

Perhaps the biggest factor behind the positive trends in developer use of the federal HTC is the real estate market shift that has occurred over the last 10 years, driven by millennials and baby boomers who want to live and work in authentic downtown historic spaces. These market trends are reflected in nearly every major American city from New Orleans, Memphis, and Mobile in the South; to Cleveland, Akron, and Detroit in the Midwest; and Dallas, Tulsa, and Los Angeles in the West. And small town centers, where 40 percent of all HTC transactions in the past 15 years have taken place, are experiencing similar trends, according to the National Trust Community Investment Corporation. The positive impact of these demographic shifts has been documented in Stephanie Meeks’ The Past and Future City as well as in numerous studies by the National Trust’s Preservation Green Lab, both of which shaped the National Trust’s ReUrbanism campaign.

Historic rehabilitation isn’t just a result of these market shifts. Rather, the HTC is facilitating them. Despite these highly favorable demographic and real estate market trends, developers consistently report that the HTC remains necessary to close the significant financing gap between what a bank will lend and what it costs to complete a historic rehabilitation project.

HTC Program Statistics and Impacts: FY15 Versus FY16

There was a dramatic increase in HTC transactions from FY15 to FY16. After climbing for several years, the 2016 results finally surpassed the 2009 prerecession peak of $4.5 billion in Part 3 approvals. Taken together, construction jobs and the indirect and induced employment that ripple through local economies went up 27 percent, and the number of projects (buildings) completed increased by 20 percent. The NPS estimates that 80 percent of all federal HTC projects completed last year also used state HTCs.



HTC Program Outcomes


FY15


FY16


Certified Projects (Buildings)


869


1,039


Qualified Rehabilitation Expenditures


$4.47 billion


$5.9 billion


Certified (Part 3) Credits


$894 million


$1.2 billion


Jobs


86,000


109,000


Federal, State, and Local Taxes Generated


$1.3 billion


$1.7 billion


Gross Domestic Product


$4.8 billion


$6.2 billion


 Among cumulative HTC impacts between 1978 and 2016, the $29.8 billion in federal taxes—generated mostly from federal payroll taxes paid by construction workers and the manufacturing workers that produce construction materials—is noteworthy. The federal revenue is greater than the amount of credits allocated: for every $1 of federal tax expenditures, $1.18 of revenue was generated. So not only is most of the revenue received prior to the allocation of the credits at project completion but also, as these numbers show, the HTC program more than pays for itself.



Cumulative HTC Impacts 1978–2016


Certified Projects (Buildings)


42,293


Total Historic Rehabilitation Expenditures


$131.8 billion


Jobs


2,441,000


Federal Taxes Generated


$29.8 billion


Credits Allocated (Cost to Treasury)


$25.2 billion


Gross Domestic Product


$144.9 billion


 The Rutgers report’s findings are consistent with evidence provided by industry professionals through the Historic Tax Credit Coalition (HTCC). Despite concerns about tax reform and a recent adverse ruling from the Internal Revenue Service that lowers investors’ return on investment, demand for the HTC remains strong for projects that will place in service by the end of 2018. (While investors are reticent to commit to projects that will place in service in 2019 before seeing the outcome of tax reform efforts, a study that the HTCC commissioned from Novogradac and Company shows that, for the most commonly used HTC transaction structures, the lower corporate tax rates proposed by the House of Representatives would actually increase investor yields on HTC investments and result in upward pricing in the 2–4 cent range.)

Case Study: Paducah, Kentucky, Coke Bottling Plant

Paducah’s recently renovated Coke Plant, located in the city’s Midtown neighborhood, has a storied past. It begins with pioneering local entrepreneur, Luther Carson, who established a family-owned Coca-Cola-bottling company in 1903. The bottling plant’s relocation to the building at 3141 Broadway was its third, caused by the great flood of 1937. In fact, one of the building’s current tenants, Dry Ground Brewing Company, takes its name from Carson’s harrowing escape from the flood. Floating out of a second-story window clinging to a soda barrel, he told his business colleague, “If I ever reach dry ground, that’s where we will build our new bottling plant.”

lobby_at_Paducah_Coca_Cola.jpg
Lobby at Paducha Coke Bottling Plant. | Credit: Chuck Fisher at the National Park Service

The building was used for its original purpose until 2005 and stood vacant until 2016. Ed and Meagan Musselman of Musselman Properties spurred its historic redevelopment. Their restoration of the Coke Plant earned the Ida Lee Willis Memorial Foundation Award for excellence in historic preservation. The Musselmans acknowledge the steadfast support of Chris Black of Ray Black & Son, the general contractor, and Paducah Economic Development as key to successfully completing the redevelopment.

Rehabilitation work included a faithful restoration of the Coke Plant’s exterior facade and distinctive copper dome. The interior has been reconfigured to accommodate restaurant, bar, health, and office uses. The building’s lobby was fully restored, including a Coca-Cola logo in its terrazzo floor, a cantilevered terrazzo stairway, and a hemispherical domed ceiling 45 feet in height and 30 feet in diameter.

The federal HTC was critical to the financing of the Coke Plant’s rehabilitation, providing $679,000 in equity. The Kentucky state HTC contributed another $321,000. Without the federal and state HTCs, the developer, who is using the credits himself, would not have received a competitive return on his substantial equity contribution. As the owner claims the credits over time, the federal and state credit value will partially pay down the developer’s “patient capital” to $500,000.

Project Budget


Sources of Funds


Bank Loans


$3,800,000


Federal HTC Equity


$679,000


State HTC Equity


$321,000


Developer Equity


$500,000


Total


$5,300,000


Uses of Funds
Acquisition $400,000
Construction $3,700,000
Equipment $800,000
Soft Costs $400,000
Total $5,300,000

The substantial economic benefits of the restoration of the Coke Plant have included the creation of 64 construction and 160 permanent jobs as well as $630,000 in state and local taxes, $5,570,000 in business income, and $3,600,000 in local salaries.

Today, the building’s tenants include Mellow Mushroom, a regional pizza restaurant that works with artists, civic organizations, and local government to ensure that each of its retail locations reflects local history and culture; Dry Ground Brewing Company; Pipers Tea and Coffee; the Ice Cream Factory; Time on a String, a recording and music lesson studio; True North Yoga, Socially Present, a marketing and website design firm; Ochre, a cooperative of local artists; and Baptist Health Paducah. Ed Musselman explains that the building’s beautiful architecture has been a major driver of tenant interest, allowing him to pick the best ones.

The Coke Plant has become a destination for area residents looking to have a relaxing food, drink, health, or cultural experience and reconnect with a piece of Paducah’s rich history. When asked why he and his wife took on this complex project, Musselman said, “We wanted to eliminate a blighting influence in the Midtown neighborhood. And we wanted to put under one roof the things that had made Paducah great and tenants who would bring new experiences to Paducah residents from outside the city.”

HTC Advocacy

The Republican-controlled Congress is facing significant pressure to deliver a legislative victory ahead of the 2018 mid-term election season. Comprehensive tax reform is now Washington's top domestic policy objective and Republican leadership is determined to send a tax reform plan to the President before the end of the year.  Without frequent and sustained advocacy from constituents over the next several weeks, the HTC is likely to join the many other business tax credits that simply do not make it back into a reformed tax code.  

The HTC Campaign is encouraging advocates to do the following:

    1. Request in-district/in-state meetings and site tours during the upcoming Thanksgiving recess for both Houses the week of November 20-24 with both House and Senate Members of Congress and their staff.
      Showing members of Congress rehabilitated historic buildings is one of the most effective ways to demonstrate the value of the HTC. Contact your congressional representatives, and ask to speak with the scheduler to request in-district/in-state meetings. If you have an opportunity, combine your meeting with a tour of a completed or potential HTC project. If the Members of Congress are unavailable, it is still valuable to meet with staff. It is also beneficial to include local preservationists, developers, architects, mayors, Main Street organizations, and others in order to convey that the HTC impacts many constituent groups. Please send requests ASAP to get on your legislators’ recess schedules! Contact Mike Phillips at mphillips@ntcic.com, Shaw Sprague at ssprague@savingplaces.org or Renee Kuhlman at rkuhlman@savingplaces.org for assistance.
    2. Make a call (better than an email at this late date) to Senate offices. 
      Contact Senate members during office hours between now and October 30, and ask to speak to their tax staff—or ask for their email address. Request that Senators "Contact Chairman Orrin Hatch to ask him to include the HTC in the Senate tax reform bill."
    3. Make a call to House offices.

      Contact House members during office hours between now and October 30, and ask to speak to their tax staff or ask for their email address. Request that your Congressman "Contact Ways and Means Chairman Kevin Brady to ask him to include the HTC in the House tax reform bill."

Advocacy Tools

 John Leith-Tetrault is the public policy advisor at the National Trust Community Investment Corporation (NTCIC) and founding President of NTCIC.


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