It didn't make the front page or the lead television story. In fact, it made page B15 of the April 2nd New York Times with two pictures set under a "National/Obituaries" masthead.

The "obituary" was for the Hartford Aetna Building, at 78 years old, the "first skyscraper" to grace Connecticut`s capital city skyline. Within a few seconds, carefully placed explosives imploded the handsome old structure into a twisted mass of rubble. Preservationists had lost another hard fought battle to vested interests in new construction. The media saturated national and local news with the event that was clearing the way for a splashy new multistoried bank.

The high media visibility of this recent demolition serves as a chilling reminder that the historic and architectural fabric of our past continues to be threatened in every city and state. Rose-colored glasses cannot conceal that preservation has not been embraced as a national ethic nor has it been integrated into urban planning and growth management in many localities, especially cities. And, probably most telling, preservationists find themselves facing increased growth and economic pressures without financial incentives to underwrite preservation as a reasonable solution.

Historically, we can look back to better times, years when there were bricks and mortar grants distributed through state preservation offices and significant federal investment tax credits to encourage rehab. Unfortunately, the funding policies of the Reagan Administration in the `80s and the 1986 Tax Reform Act did not serve our cause well, and we now face the difficult task of repair.

This article is about one tax incentive, one that has proven itself a success in towns and cities of all sizes. During its heyday, the rehab investment tax credits brought investors and developers together to reverse the fortunes of blighted and forgotten commercial historic buildings. The Lit Brothers building, the Willard Hotel, and the St. Louis Union Railroad Station joined buildings on main streets of smaller communities in bringing historic fabric back to life.

The pluses were many and make good political fodder: rehab is labor-intensive, creating many jobs; reused buildings pump money into local government coffers through sales tax, property tax, and business taxes; historic downtowns attract tourists and give the out-of-town shopping malls a run for their money; housing has emerged as the front-running rehab use (of the 110,000 units created since 1976, 19,000 are for people with low- and moderate-incomes).

According to literal readers of tax law, the credits were "saved" in 1986. Our worst fears, however, about the passive loss restrictions have proven to be correct. The National Park Service reported that in FY 1985, the 3,117 historic rehab projects represented private investment of $2.4 billion. Just four years later in FY 1989, the "tax reformed" credits have declined over 60 percent, producing only 994 projects and $926 million of investment. The ravaged tax credits have dramatically decreased the investor pool, sent developers fleeing to suburban projects, and left preservationists without the ability to compete in the downtown marketplace.

The Community Revitalization Tax Act was introduced in both houses of the U.S. Congress last year to correct the passive loss restrictions of the 1986 Tax Act. In both houses, the act lacked adequate support to pass. The preservation lobbying strategy of coupling the rehab and low-income housing credits for change, however, had the ironic outcome of removing the income caps for low income housing while leaving the rehab credits unchanged.

Three years of watching a proven preservation incentive wither on the vine portends that more important city landmarks will bite the dust. It may invite large corporations to force a city to back the obliteration of a great page of its own history, as was witnessed when the entire Jobber`s Canyon 43-building National Register warehouse district was demolished in Omaha last year.

Now is the time for the preservation community to stop lamenting our losses, get off our apathy, and move resolutely to correct the strangulation of current rehab tax policy. Now is the time to bring new allies to the cause since developers have long since moved from the high-risk, low-incentive downtown rehab industry to safer havens. This is the time to awaken legislators and city officials--mayors, councilors, aldermen---to the beauty, stability, and economic generator that downtown rehab brings to their communities.

The preservation community must lead the charge to complete the work begun in the mid-`80s on hundreds of under-utilized structures that are draining the tax base rather than contributing to it.

Lobbying leadership is currently provided by Preservation Action and the National Trust. Preservation Action members lobbied Capitol Hill on March 27 and found strong receptivity to their call for a return to tax policy that put historic buildings into a competitive arena for private investment and development. "City Leaders," a project run by Preservation Action, has already collected over 90 resolutions from 27 states directed to members of Congress to confirm strong local support for change as written into the Community Revitalization Tax Act.

More voices, however, need to speak out (and, yes, I am speaking to you, Forum reader!). Look around your own community. Decide what buildings would benefit from a return to favorable rehab policy. Write or phone your members of Congress to take affirmative action on this issue. Get your "city leaders" to put their muscle behind our effort to liberate the rehab tax credits.

The Hartford-Aetna building demise ends one dramatic debate between the vested interests in new construction and preservationists. The battle to save the landmark was never a real battle, because preservationists had little in the way of economic alternatives to place on the table. We must wipe away the shame of the Hartford-Aetna by moving quickly to reform federal tax policy to support historic preservation--once and for all.

Ms. Longsworth is president of Preservation Action in Washington, D.C.

F R E D   H .    C O P E M A N

These are not the best of times for those of us in the capital formation industry. Our national tax policy encourages consumption rather than providing incentives for saving and investment. The "information age" allows us to track investment yields on a daily basis and enforces a trend toward short-term investments. Worse yet, investor confidence has been shaken by failed savings and loan institutions, slumping real estate markets, and "junky" junk bonds. All of this effects in very profound ways the process of raising capital for historic preservation. Yet, even in this environment there are ways to raise capital for historic preservation.

During the last decade, the private financing of historic property development grew tremendously. The Tax Reform Act of 1976 introduced for the first time a tax credit for qualified rehabilitation expenditures. In 1981 the amount of the credit was expanded from 10 to 25 percent, and certain other benefits--including more rapid depreciation--were made available to the real estate community. The rehabilitation tax credit quickly became a favorite of syndicators and investors alike, because the credits could be realized in one to two tax years, which maximized their value as a tax shelter. As a result, the syndication of private partnerships became an extraordinarily successful means of raising capital for historic preservation. By 1984 over $2 billion of development activity was being directed at historic properties.

There were several advantages to this form of raising capital. Private partnerships financed the rehabilitation of large properties, such as Union Station in St. Louis, as well as small projects along the main streets of our smaller cities and towns. By raising large amounts of investment capital from small groups of investors, the cost of raising that capital was kept relatively low. Perhaps most importantly, the development community was willing to risk its own capital to undertake such projects, because the likelihood of raising additional equity capital was so high.

Unfortunately, many of the rehabilitation projects financed during the "go-go years" of 1981 through 1985 were either poorly conceived from a development perspective and/or inadequately capitalized. The great maxim of real estate development--takes longer, costs more--is doubly true in the case of historic rehabilitation. The relative ease of rising capital for preservation brought developers, syndicators, and others into the business who lacked development expertise.

Worse yet, the tax benefits of leveraging these projects drove the industry as a whole to overborrow at a time when deregulated savings and loan institutions were eager to loan. As a result, these partnerships were strapped with so much debt that they were ill equipped for the cost overruns, construction delays, and slow lease up that are common to historic preservation projects.

In some cases, the passage of time and a little inflation have solved the underlying problems. In others, investors have contributed additional capital and/or lenders have restructured their loans. Unfortunately, in a few instances the properties have been lost to foreclosure or bankruptcy.

There is much to learn from all of this. First, the private placement syndication is an efficient and reliable capital formation tool for historic projects of all sizes. Second, the rehabilitation of historic properties must be undertaken by experienced developers and with realistic amounts of debt financing. And, it seems obvious that historic rehabilitation investments should be made only by sophisticated investors--those with no need for liquidity in their investment but who possess the ability to weigh the relative risks and rewards of historic rehabilitation.

This brings us to 1990 and the prospects of attracting new capital to preservation. One of the great ironies of this moment is that there has never been a better time to invest in historic properties than the present. The Tax Reform Act of 1986, with its passive activity rules, has all but eliminated the flow of private capital to preservation. This has driven down the price of properties, as well as the fees to developers, syndicators, and others. As a result, the potential investment yields from such properties are now higher than ever. In addition, we have proven that people like to live and work in historic properties that have been rehabilitated as apartments and office space. In short, there is a substantial body of evidence to support the proposition that investors can make money by investing in historic preservation outside of the tax benefits.

In order to bring private capital back to historic preservation we have to do two things (1) deliver the message that rehabilitating historic properties makes fundamental economic sense and (2) change the tax rules to allow high-income investors to utilize rehabilitation tax credits again.

Overall, the message that preservation can still be profitable is beginning to take hold. The tax rules can be modified with the passage by Congress of the Community Revitalization Tax Act of 1989 (CRTA). CRTA will enable us to bring back the private placement partnership by raising capital from those investors best suited to understand and ultimately benefit from investing in historic preservation.

Mr. Copeman is executive vice president and general counsel of Boston Bay Capital, Inc., which sponsors public/private partnerships for preservation.

T H O M A S   M O R I A R I T Y

Most people define real estate as a piece of land or a property including both land and improvements (buildings). In fact, real estate is more than just a physical place. The concept of real estate must be considered to understand how development rights can be valued, transferred, or sold.

In its broadest definition, real estate is both a physical place and a bundle of rights that determine what can be done on the site. The physical characteristics of the parcel (including its dimensions, proximity to other real estate, and general characteristics such as flat, sloping, wooded, open, etc.) are combined with rights and regulatory controls (e.g., zoning, allowable density and uses, circulation, access through easements, mineral rights, riparian rights, etc.), and market conditions to establish value.

Regulatory controls can have a profound effect on that value. For example, an one-acre parcel of land could be developed as a toxic-waste dump, a park, a single-family house, a small suburban office building, or a 50-story office tower. How much of the parcel`s density the developer can use depends on regulatory controls and market conditions. It is the difference between a property`s current use and density and the amount of development allowed for that site under specific regulatory controls that constitutes a transfer of development rights.

The transfer of development rights (TDR) system shifts development potential from one site and allocates it elsewhere. TDRs are typically measured in square feet, as they relate to overall floor area ratio (FAR). The FAR of a particular site measures the development potential by multiplying the area of the property`s lot by the number of allowable floors.

In historic districts, TDRs are often used to balance the economic potential between historically significant but low-density buildings--say, ones with an FAR of 2.0--with the potential increased value of higher-density buildings that could be developed on the same site. In effect, TDRs involve selling the rights to develop the unbuilt air space above a historic structure to someone who will add those FARs to another building location.

What`s necessary for a TDR to work?

Motivation not to develop full allowable density of a particular site. If a property owner chooses to maintain a low-density historic structure rather than demolishing it for one of a higher-density allowable on the site, the sale of the unbuilt density can help recoup some of the "cost of preservation."

A buyer and a seller. In order to be "sent" from one site, the unused density must have a place to be held or received; otherwise, the TDRs have no value. In an ideal situation, an owner wishing to sell unused development rights finds a developer in another location wanting to buy those development rights. A TDR "bank" can be established to hold unused development rights until a suitable receiving site and buyer can be located.

Receiving zones or sites must be identified, designated, and approved by regulatory agencies before the transaction. Receiving zones can dramatically increase in density as more TDRs are transferred there. What the environmental impacts will be on the receiving zones should be discussed in public hearings.

Agreement on the value of TDRs. Since the only value is what someone else is willing to pay, negotiation of purchase price varies according to overall market conditions, the number of TDRs for sale, and the demand to purchase development rights in identified receiving zones. A framework for negotiating and equalizing the differential between "sending" and "receiving" sites can include increasing the transfer ratio (e.g., one TDR from the sending site may be "worth" two or more TDRs in the receiving zone), by limiting the sending/receiving capacity to maintain value, or by discounting the price of the less valuable TDR.

A final note: TDRs have been discussed more often than they have been used as preservation tools. Although implementing a TDR program can be complicated, it does offer a financial incentive to property owners to relocate unbuilt density to other sites; in essence, it gives the historic property owners economic benefits for not demolishing historic structures.

Mr. Moriarity is senior associate of Halcyon Ltd. in Washington, D.C.

D O N O V A N   R Y P K E M A

There is a simple reason why preservation that "ought to happen" through the actions of the private sector is not taking place: The anticipated returns on investment are insufficient to justify the anticipated costs at the perceived level of risk. If private capital is to be attracted to historic preservation, a more appropriate relationship between risk and reward and the equalization of "cost" and "value" are necessary.

Preservationists need to acknowledge that every private dollar spent for rehabilitation has to come from an alternative investment: savings account, stocks, other real estate, CDs, bonds, U.S. Treasury Bills, among others. It is only when an investment in preservation can compete favorably with those alternatives that private capital will move from where it is now to where preservationists wish it would be.

Virtually every effective development incentive tool must do at least one of the following: lower the risk, increase the return, or reduce the cost. Prior to the Tax Reform Act of 1986, federal tax incentives were widely used, because they effectively reduced the cost of rehabilitation by 25 percent. Land writedowns, rehabilitation and acquisition grants, low-interest loans, tax abatements, and [pro bono] design assistance can reduce costs. Tax abatements, third-party loan guarantees, and public occupancy lower the risk involved with the investment. Easement donations, occupancy guarantees, and rent subsidies all increase the return on the property. These development tools and others--and there are literally hundreds of them--must be used and more need to be invented if historic rehabilitation is to be a competitive alternative to the wide range of investment choices.

In the past, useful public and nonprofit incentives were created by first asking the question, "What will have to be provided for a developer to proceed with an appropriate historic rehabilitation of a property?" In many cases today that is still the logical first step in attempting to facilitate development.

Perhaps the time has come for local preservation groups to become more involved. Perhaps they should ask the question in a slightly altered manner. Instead of asking, "What does the developer need?" the question should be "What does the preservation organization need?" Certainly "to save historic buildings" is an appropriate answer. And to the extent that certain incentives cause private developers to save old buildings, preservationists initial needs have been met. But preservation organizations also need to insure their own survival. How many of them are on sufficiently sound financial footings that their survival is assured? Precious few, I suspect.

If historic rehabilitation projects can be structured to provide long-term financial returns--and they must be if private capital is to be attracted--why shouldn`t preservation organizations participate in those long-term returns? In doing so they could meet both of their needs--saving historic buildings and providing resources for their own survival.

Certainly a few preservation organizations have done this. The North Carolina Revolving Fund, Historic Landmarks Foundation of Indiana, the Historic Savannah Foundation, and the Connecticut Trust for Historic Preservation have all acquired, held, packaged, and resold historic properties. In most instances, however, these organizations have done so as purchasers of last resort to save a building from destruction rather than as investors with dollar signs in their eyes.

The first need of preservationists--saving properties--is being met by the actions of those excellent organizations, but the second--increasing their own coffers--largely is not. Preservation organizations or local development corporations in Shelbyville, Ky.; Fort Madison, Iowa; Lima, Ohio; Rock Hill, S.C.; and elsewhere have acquired historic properties with at least the hope of long-term returns.

Local government and preservation organizations often provide incentives to create an economic situation in which historic rehabilitation will take place. They rarely use such incentives themselves. For many communities it may be time for that to change. Housing is being created by nonprofits and local governments alike; environmentally sensitive lands are being acquired (and sometimes appropriately developed) by conservation groups like the Nature Conservancy and the Trust for Public Lands. Preservation groups and local government committed to preservation should be doing the same thing with historic buildings.

One long-term result of the 1986 Tax Reform Act is that real estate has largely moved from being a tax-driven investment to one that is driven by economic common sense. With the "tax premium" nearly eliminated, if a rehabilitation project can make sense for a private developer, it can make sense for a preservation organization.

There is a whole range of participation in real estate development that the local organization can consider, each with its own threshold of risk and reward. From the relatively passive role of long-term lessor to the most active role as outright developer, an organization can choose the type of participation most appropriate to its financial and human resources, needs, and opportunities. Joint ventures, general partnerships, limited partnerships, participation loans, long-term tenancy, and dozens of other configurations are available.

The as-of-yet most under recognized trend for the 1990s is the community empowerment movement and what has been referred to as the municipalization of the economy. For political, sociological, economic, and historic reasons the preservation community should be at the forefront of that movement. Becoming activists in, as well as advocates for, the rehabilitation of historic properties is an opportunity to do just that.

Mr. Rypkema is principal partner of the Real Estate Group, Washington, D.C.

T H O M A S   J .   K U B E R

In 1982, I began the development of the historic district of Menominee, Mich. Menominee is a city of 11,000 people and the historic district consists of approximately 30 buildings on a sixblock-long street, ideally located on the waterfront. These buildings constituted the commercial center of activity at the turn of the century, when Menominee was a major lumber port. In recent years, the area had become a virtual slum, with over 50 percent of the buildings vacant. I

We began the redevelopment of the downtown with a burst of enthusiasm and energy, basing our assumptions on the then current tax law that provided a 25 percent tax credit on the dollars spent on rehabilitation. Because the property was inexpensive to purchase, it was not uncommon for us to have 90 percent of the finished project price in rehabilitation dollars, so investors had a sound economic justification for putting dollars in buildings that would not have been financially viable.

We were was aggressive in securing a grant for infrastructure improvement and development. A tax increment financing district was developed for future infrastructure to complete the historic district.

In the midst of all this wonderful enthusiasm and substantial dollars in improvements, the federal government saw fit to change the tax code, which has resulted in no activity since Jan. 1, 1987. We now have a partially completed historic district with some shining pearls of architectural splendor amidst vacant buildings that still look like a slum.

I don`t see any motivation for private investment in our small town. It is a losing economic situation. I strongly believe that preservation should be supported by private investment and that should be encouraged by the federal tax code. I believe the strongest medicine to cure downtown blight is private investment, not federal programs. We had a program that was working. Historic preservation work was successfully being accomplished throughout our country, including sleepy small towns of 11,000 people.

It has come to a screeching halt as a result of the 1986 Tax Reform Act, and I do not see any practical way to get historic preservation development back on track without the federal tax incentives.

Mr. Kuber is president of T/K & Associates, Menominee, Mich.