By John Leith-Tetrault
The 2017 Preservation Advocacy Week, which took place March 14–16, resulted in a significant increase in cosponsors for the Historic Tax Credit Improvement Act (HTCIA). As of April 11, the bill has 10 Senate and 47 House supporters. That’s worth celebrating!
Several challenging questions emerged from those congressional members who still need convincing. This has led to new research by the Historic Tax Credit Coalition and a new set of talking points for advocates. The talking points are a bit “technical,” but they are increasingly valuable. As we get closer to the introduction of the tax reform bill, Republican tax staffers are beginning to focus on whether the federal Historic Tax Credit (HTC) will be necessary to incentivize historic property rehabilitation within a reformed tax code.
Q: Won’t lower corporate tax rates give developers the extra cash they need to do historic rehabilitation without the HTC?
A: Dave Vos, development project manager for Alexander Company, an HTC developer based in Madison, Wisconsin, provided the following response in a recent meeting:
Lower taxes won’t allow our company to take on a project that isn’t economically feasible and won’t provide an acceptable return on investment. If the HTC is eliminated, we will lose a critical piece of the financing that closes the gap between what a bank will lend and what it costs to do the transaction. Additional debt will be required to fill the gap, demanding higher rents than the market can bear or squeezing property cash flow to a level that is unacceptable. None of this is good.
Talking point: Lower taxes won’t induce developers to take on rehab projects, which, without the credit, are not economically feasible and do not provide a competitive return on investment compared to new construction.
Won’t we lose the HTC investor market after tax reform because corporations with lower tax rates won’t need tax credits?
Leigh Ann Smith, senior vice president and tax credit originations manager at Bank of America, has provided the following perspective on the bank’s post–tax reform appetite for the HTC:
We expect Bank of America Merrill Lynch to continue to be a leading investor in historic tax credits even in a potential environment of lower corporate tax rates. In some cases, investor returns from historic credits may actually improve with lower tax rates. Additionally, restoring historic buildings and building stronger communities is a key pillar of our corporate social responsibility investment program. Many historic tax credit investments contribute toward our Community Reinvestment Act requirements, making this an important part of our overall community investment strategy.
Talking point: HTC investors have told us that they expect to maintain an interest in the HTC even under a reformed tax code that includes lower rates.
Don’t we need to eliminate all tax preferences like the HTC to achieve a revenue-neutral bill?
Patrick Robertson of FTI Consulting, a public policy advisor to the Historic Tax Credit Coalition, has provided an analysis of what the impact of HTC elimination would be on corporate tax rates:
While the HTC is an enormously valuable development tool that more than pays for itself—and has leveraged tens of billions of dollars in private capital for communities across the country—eliminating it would lower the corporate tax rate by less than .1 percent. Without any other changes to the code, repeal of the HTC would change the current 35 percent corporate rate to 34.9 percent.
The impact would be so minimal due to the relatively low cost of the HTC. HTC volume has averaged $843 million over the past five years (2012–16), according to National Park Service data. In the context of overall federal tax revenues, this is a drop in the bucket.
Talking point: The HTC is such a small tax expenditure that elimination would not provide much help in achieving lower tax rates.
Given the additional benefits to the real estate industry under the House’s Tax Reform Blueprint, doesn’t the HTC becomes a “double dip”?
Novogradac and Company, a leading tax credit accounting firm based in San Francisco has recently completed an analysis of how historic property developers will fare if the blueprint becomes law and the HTC is retained. Mike Novogradac, the company’s CEO, said,
The House Republican Tax Reform Blueprint would allow developers of all types of real estate assets to immediately deduct or “expense” the acquisition and development costs of a building, rather than taking depreciation over the life of the asset. While this is a large tax benefit for buyers and developers, the blueprint also has a detrimental aspect, in that it severely limits deductions for interest expense. Financially speaking, even with a 20 percent tax credit, historic rehabilitations would remain at a significant disadvantage to nonhistoric rehabilitations and new developments.
Talking point: Even with new, favorable real estate industry incentives being discussed in the context of tax reform, historic property developers will have trouble financing historic building rehabilitations without the HTC. The purpose of the HTC, as outlined by the Reagan administration, is to level the playing field between investment in new and old buildings, and it will still be necessary to accomplish that same end after tax reform.
Also use our toolkit to defend the HTC at Hill or in-district meetings. For more, contact
John Leith-Tetrault is a public policy advisor at the National Trust Community Investment Corporation and chairman of the Historic Tax Credit Coalition.