Rebuilding Place in the Urban Space

"A community’s physical form, rather than its land uses, is its most intrinsic and enduring characteristic." [Katz, EPA] This blog focuses on place and placemaking and all that makes it work--historic preservation, urban design, transportation, asset-based community development, arts & cultural development, commercial district revitalization, tourism & destination development, and quality of life advocacy--along with doses of civic engagement and good governance watchdogging.

Tuesday, June 16, 2015

Historic Preservation Tuesday: Ohio Senate Proposes Ending State Preservation Tax Credit

Using tax credits, Cleveland's former Schofield office building is being renovated and will become a Kimpton Hotel.  Photo from Urban Ohio.

When I first started writing this piece, Ohio's Republican legislators proposed ending the state historic preservation tax credit ("Ohio Senate budget proposal sparks panic over loss of state preservation tax credits," Cleveland Plain Dealer).

Since then, the outcry in response has resulted in an end to that proposal ("Preservation tax-credit moratorium pulled from Ohio Senate budget proposal," P-D), at least for now.

From the second article:
On Monday, a spokesman for the Senate majority caucus confirmed that members pulled language that would have frozen the tax credit program starting July 1. The program, which awards $60 million in credits annually, will remain unchanged - for now. A new amendment coming out of the Senate finance committee calls for a study group to evaluate the pros and cons of replacing the tax credits with grants.
In 2002, I attended the National Trust for Historic Preservation annual meeting for the first time, which happened to be in Cleveland.

 One of the best elements of these conferences is the ability to go on field tours, and see what the most successful practitioners are doing in their communities. Given what I was interested in at the time, figuring out how to "improve" disinvested neighborhoods and commercial districts, in particular the neighborhood I was living in, H Street NE, I ended up attending a number of relevant tours.

I still remember them--renovations of problem properties initiated by the Famicos Foundation, independent developers, the Cleveland Restoration Society; commercial district revitalization in Ohio City, facade improvements and the West Side Market, and adaptive rehabilitation and reuse of "old" buildings into housing and other projects in the Warehouse and Gateway Districts.

And that's where I began to learn in depth about the use of federal historic tax credits, tax easements, and low income housing tax credits as key financing tools for funding these often difficult projects. Many states have complementary historic preservation tax credit programs, at the time Ohio did not. From the first article:
People who own or have long-term leases on historic buildings can seek the state tax credits for preservation projects. The state credit covers up to 25 percent of a project's qualified rehabilitation costs – capped at $5 million in most cases. The credits, which offset a few different taxes or insurance premiums, are awarded before a project starts but don't actually flow to the property owner until the work is done. Developers often obtain short-term financing in anticipation of the credits.

The state awards roughly $60 million in credits each year, split into two rounds. Competition is fierce. Developer demand far exceeds supply. And Ohio, like other states with similar tax-credit programs, has found that the credits more than pay for themselves. The Ohio Development Services Agency, which runs the tax-credit program, reports that $1 million in tax credits spurs $40 million in economic activity, from construction spending to employment after a project is done.
The developers behind a potential apartment conversion of the mostly vacant May Co. department store on downtown Cleveland's Public Square are banking on state tax credits to round out their financing package. They missed out on a rare, large tax-credit award in late 2014. (Michelle Jarboe McFee, The Plain Dealer)

According to an economic impact study of the Ohio state historic preservation tax credit conducted by Cleveland State University, for every dollar of state tax credit, "redevelopment projects will generate $40.58 in total construction and operating impact to the Ohio economy" and almost 1/3 of the tax credit is earned back by the state during the construction process.

At the state level such programs, although wildly successful economic development tools, often end up being controversial for at least two reasons.

The Berwick Street Apartments in Cambridge, Ohio, a rural city with about 10,000 residents, were renovated in part with financing including state preservation tax credits.

First, the nature of the history of the built environment tends to mean that cities, especially the state's major center cities, get the bulk of the credits. That doesn't go over well with legislators from rural districts, who believe that this ends up being yet another program that overly benefits cities, seemingly at the expense of rural areas.  From the article:
Since 2007, Ohio has offered tax credits for property owners and developers who take on challenging historic-preservation projects. The vast majority of those credits support renovations of vacant buildings. Heavily used in downtown Cleveland, the credits also factor into developments scattered across city neighborhoods and are used to revive historic properties in rural communities.
Second, besides being anti-government and selective in their beliefs of how to use government action and funding about how to many Republicans rail at the use of tax credits as a way of "selecting businesses to succeed," not having a good understanding of how economic development works, how to spur revitalization in economically distressed communities, and the economic value of urban revitalization.

In a not dissimilar event, the North Carolina legislature eliminated that state's tax credit program last year, although the Governor, Pat McCrory, formerly Mayor of the state's biggest city, Charlotte, strongly supported continuation of the program ("The Triangle's history of expensive remakes," Triangle Business Journal). From the article:
"There is no justification for compelling state taxpayers to subsidize the preservation of historic properties in particular cities and towns," says Sarah Curry, director of fiscal policy studies for the conservative-leaning John Locke Foundation, in a recent report opposing the historic tax credit renewal. "The purpose of the tax code should be to raise revenue for core government services. It should not be used as a means to redistribute income, favor certain personal behaviors or discourage others, or force taxpayers to be in the economic-development game."
Note that the Foundation is consistent in its opposition to tax credits and other business incentive programs that use government funds.

DC doesn't have a state historic preservation tax credit, with the exception of a special program for residential properties in certain economically distressed neighborhoods.

Generally, I think that's a good thing, because at least in the central business district, buildings would be renovated anyway, because economic circumstances favor improvement without the need for additional incentives beyond those already available.

This building at 406 H Street NE has been vacant for all of the 27+ years I've lived in Washington, DC and probably for more years beyond that.  The cost to renovate such properties is considerable.  

However, it would make sense to have a state credit targeted to neighborhood commercial districts and smaller projects, which tend to be too small to benefit from the federal tax credit, and/or may have extranormal need for funds given multi-decade disinvestment.

Along these lines, provisions within the proposed new NC state preservation tax credit call for a more targeted program, allocating different percentages depending on the size of the project (less credit for bigger projects), a 5% premium for buildings in historic districts, in poorer communities, or if the building has been especially vacant.

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At 9:46 AM, Anonymous Anonymous said...

definitely give tax credits to individuals or those seeking to renovate a structure but not to historic preservation organizations- these poeple often spread their malign influence outside of historic districts and seek to bully others into buying into their corrupt schemes. People who live on the east side of Capitol Hill for instance voted down historic district expansion for absolutely great reasons. People do not want corner stores disappearing and do not want old people with closed minds dictating to them how to renovate their homes or what to alter. People must live here and you cannot turn the enitre city into a museum- much as I am in favor of preservation. We must have design oversight- certainly- but these old people need to be cordoned off and isolated from having too much power and influence.

At 3:34 PM, Blogger Richard Layman said...

people do so much shitty "renovation' that of course, I don't agree with you. Walk a few blocks of the H St. neighborhood north of the Capitol Hill Historic District and you'll see what I mean.

At 8:08 AM, Anonymous charlie said...

I'd agree in a strong market city these programs may not be neccessary.

Might be interesting to speculate on a overlay district that gives these tax credits in exchange for design review. That might be neccessary (as you said, north of H)

For a strong market city, DC has an enourmous amount of vacant property. Not sure in absolute terms. DC also has a lot of underinvested property. IN terms of afforability, what sucks in DC for market rate renters isn't the price -- people with jobs can afford them -- but the shitty quality of the rentals. (The one on Riggs where two people died in a house fire is just a small example).

$1500 for a really crappy 1BR from the 1950s is a lot.

I had a great time walking around the warehouse district in high school after classes. There was sporadic attempts at redevelopment even then -- a condo had been done in 1983 or so, there was a coffee shop -- but the primary money was being dumped into the flats. A jump up in crime and the stupid RTA extension killed the flats, and the party scene moved over to prospect and the new arenas. I had some dreams of buying one of the warehouses and converting it.

At 9:57 AM, Blogger Richard Layman said...

the thing about design review and these programs is "taken for granted," because they are typically paired with the federal tax credit, which has hard core design review.

But it ought to be clarified and specified to protect local interests wrt local/state tax credits.

2. cleveland has another "pathbreaking" program, called the "Business Revitalization District Overlay," it has design review elements, with the recognition that in distressed areas where the govt. is putting in money, errant projects don't contribute to forward progress.

I've been advocating for such a process in DC ever since I learned about that in 2002...

3. what you describe in DC is a classic example of limited supply, high demand. That's a clear sign of a need for more inventory. But that's why crappy places rent for a lot of money.

wrt the issue of vacant property, again, it's tricky.

wrt commercial buildings, in independent commercial districts with "independent" low capitalized property owners, not REITs or national and regional real estate operators, it often has to do with property owners having let buildings languish for decades so they need a lot of money to fix up, and (1) they want tenants to pay for it, (2) with no build out funds from the property owner, and (3) paying rent throughout the renovation process before the business even opens.

The other factor is Douglas Development, for a certain kind of building. Historically, they come up with "an idea" for a property and wait wait wait until it comes to fruition, and won't entertain other proposals (e.g., Uline, IMP wanted to lease/buy it for years and DD wouldn't even talk to them). Or they hold industrial zoned buildings and wait til they can be made over into something more commercial at much higher rents.

The Ivy City stuff is a different example. Not sure how it will work out. In the intermediate term I think a lot of retailers will lose $. But long term that area will redevelop in the way DD is intending for it to happen.

in neighborhoods, it has to do with a lot of things, but partly when houses are held by families for decades, the cost basis for the house is low, and the property tax is comparatively minimal, so while it's wasteful to pay taxes without living there, for whatever reason they don't care.

You get indicators of this with houses where the grass isn't cut and/or no one ever picks the phone book off the porch. (I tossed a couple this week from houses on our block that are currently vacant--I've started cutting the grass of one...

It's frustrating though. E.g. the house at the end of the block, there's no way to contact the owner, but the grass needs to be cut, the shrubbery trimmed, and falling off gutters need to be repaired.

I am shocked the house hasn't been burgled.

At 12:18 PM, Anonymous Anonymous said...

again- the Barney Circle people hands down rejected the dictatorial historic district and they are to be commended for this. Not only is it a bad choice for growth- it constrains new businesses, is not friendly to any new thinking at all, and these people who do not live in the neighborhood will try to enforce their mode of what "historic" means on the people who are actually breaking ground and living in an area that not too long ago was dangerous. Sorry but these old people need to back off or leave the city. They are big problem here.It astonishes me every day to see the Hines demolition / development actually making progress.

At 7:00 PM, Blogger Richard Layman said...

it's about costs and benefits. The benefits you see I believe are outweighed by the costs of diminished architectural quality and aesthetic values in the neighborhood.

individual businesses aren't constrained much by historic preservation. Other rules and regulation burdens, but not preservation, other than somewhat increased costs for renovation of the exterior.

New buildings are impacted sure. But that's the way of the modern city. People with the means will sue. They continue to lose because they don't usually have grounds for success within the law, regulations and procedures in their opposition.

This happens all over, and in areas without preservation protections.

It's more about people with money than preservation per se.

At 6:11 PM, Anonymous Anonymous said...

"For a strong market city, DC has an enourmous amount of vacant property. Not sure in absolute terms."

It would make an interesting "infographic." One colleague, who absolutely despises our current Councilmember, likes to blame all the foot-dragging--particularly around commercial developers and their co-opted legal reps who contribute to his campaigns--and get-out-of-jail-free cards on him.

"DC also has a lot of underinvested property."

Agreed on this also--another potentially interesting visual. As RL would probably say, use of this property would have to ultimately benefit Friends and Family of the Growth Machine.

Speaking of the GM, @RL, don't remember if I ever linked you up with the writing of Catherine Fitts, whom I met when she was Dep. Dir. of HUD under Jack Kemp and quite a straight arrow. A former Dillon Read investment banker, she had some very interesting thoughts, and experience, about this issue:


At 8:09 PM, Blogger Richard Layman said...

you know, I think I came across the Fitts stuff once or twice when I was doing searches. Thanks for the reminder and a good link.

2. Suzanne and I had one of our regular weekend morning "seminar" discussions on this topic this morning, and we were talking specifically about Douglas Development, which holds a lot of the "vacant" and or underinvested property here and there across the city that likely charlie was thinking about (among others, Howard owns a bunch too). Although the recession has caused some of it on the part of other owners.

We were talking about two levels of "innovation" in the urban real estate market.

One is owning the property, the other is doing something with it.

Jemal understood the value of the properties. And he bought them when most people weren't interested, when the locations didn't seem particularly well placed. He was way ahead of the market in that respect. E.g., Uline was an outlying property in 2003 when he bought it. Now it's a slam dunk.

But as far as development is concerned, he has mostly been a follower, with the exception, maybe of the buildings on 7th St. across from Gallery Place (commercial real estate brokers complain about the high rents, more than $100/s.f.).

It's not exactly true, but think it was something like 15-20 years at least for the bakery building next to the T St. Metro to be redeveloped. And about 12 years for Uline. He had a bunch of different plans for Uline over the years (at least two), but refused all along to lease or sell to IMP (operators of the 9:30 Club).

Similarly, a bunch of stuff is happening with his Richmond properties (I think he still owns them), but it's been about 10 years.

OTOH, he is definitely an early mover with the Ivy City properties, even though he follows earlier efforts by Abdo Dev. which failed during the recession. In fact, I think he's too early, if not crazy, but there is no question that over a 10-15 year period, as long as the real estate market is somewhat stable, development will even move over there, as better locations are built out. (But I do really wonder about the rents he's asking.)

More as another later mover example, for years and years and years he's owned property in Takoma, but is only now developing some of it--and under-densely in my opinion--after 6 other projects have moved forward, although his project will beat one of the six to completion by many years.

3. with the ability to build taller buildings downtown, the dynamics of the city's real estate market would be completely different. Maybe downtown would thrive, with lots of tall buildings, and the outer city buildings would be able to be the kind of cool buildings that they are in comparable locations in other cities.

But with the height limit, inexorably the pressure for "highest and best use" and profit converts those buildings to market rate endeavors of various sorts.

e.g. my "anger" in response to the ward 5 industrial lands study, which makes recommendations that I tried to get in the Comp Plan in 2009 (and earlier), which were rejected.

4. wrt the current councilmembers and the GM, I just don't know. I think it's more about being simpatico. They aren't accustomed to pushing back against developers to do better work.

Fortunately, some developers are interested in doing good work while simultaneously making money.


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