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.

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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.