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PROGRESSIVE PRESERVATION |
Missouri’s Historic Preservation Tax Credit Program is the nation’s
most flexible, taxpayer-friendly state historic tax credit program
and among the most successful.
By
Janette Lohman
Over the past several years, some legendary, formerly grand
old historic St. Louis landmarks have been getting a complete
makeover. Just look at the Chase! Not so long ago, it was a very
sad day in the Central West End when the formerly elegant Chase
Hotel closed its door. When this famous St. Louis institution
was originally built in 1922, it had the reputation of being one
of the leading luxury hotels in the country, situated just across
the street from the world-renown Forest Park. In its day, the
Chase hosted fabulous parties, fundraisers and debutante balls
and became the favorite St. Louis overnight residence for countless
celebrities like Jackie Onasis, Frank Sinatra, Sammy Davis, Jr.
and Tony Bennett. In recent years, however, many thought that
the Chase was lost. Just last year, however, this magnificent
old hotel reopened its doors as a brilliant and glittering new
multi-use facility that now houses luxury apartments, lavishly
restored ballrooms, a cinema, a health club and numerous shops
and restaurants.
And that’s not all. Almost every week, another great news story
appears about a new historic renovation project that a civic-minded
real estate developer proposes to complete. Examples of such projects
include the historic renovation of some of the former Cupples
Station Warehouses into the fabulous new Westin Hotel and the
conversion of the formerly grand Statler and Lenox Hotels into
the spectacular new Convention Center Hotel. There also seems
to be a lot more residential rehabilitation going on in some of
St. Louis’ famous neighborhoods, such as in Soulard, South St.
Louis and the Central West End.
The most exciting part of all is that the St. Louis renaissance
happening before our very eyes is part of a trend that is rapidly
gaining momentum, not only throughout the rest of Missouri, but
also in many other states. And one of the main reasons why it
is becoming more popular for the private sector to restore beautiful,
historic treasures like the Chase, rather than raze them and put
new structures in their places, is because the federal government
and many far-sighted state governments like Missouri have been
forming very valuable public/private partnerships to make these
projects more economically feasible by providing federal and state
income tax credits as incentives for such historic rehabilitation.
The concept of using income tax credits as an incentive for promoting
historic renovation was first introduced by the federal government
with the adoption of the first federal investment tax credit for
rehabilitating certified historic structures during the 1970s.
Although Congress severely restricted many federal tax benefits
associated with real estate development during the 1980s, it modified
but chose not to eliminate the federal income tax credits awarded
for the substantial rehabilitation of certified historic structures
and certain older buildings. In its current form, the federal
rehabilitation tax credit is equal to 20 percent of the “qualified
expenditures” that real estate developers incur to substantially
rehabilitate certified historic buildings. There is also a 10
percent credit for certain older structures.
As with almost all tax incentives, there are numerous restrictions,
rules and regulations with which taxpayers must comply in order
to ensure that the government is getting the result for which
it has provided the tax benefit. Accordingly, it should be no
surprise that, in order to qualify for the 20 percent federal
rehabilitation credit, the building must actually be historic.
That is, the building must be either listed on the National Register
or located in a registered historic state or local district that
has been approved by the Secretary of the Interior. At the risk
of oversimplifying these very complicated rules, some of the other
basic requirements are that the rehabilitation must be “substantial,”
that is, the costs must exceed the greater of $5,000 or the pre-rehabilitated
basis of the property; only certain “qualified” expenditures are
eligible for the percentage-based credit (i.e., costs to expand
the building are not eligible) and the rehabilitation must comply
with the restoration guidelines provided by the Secretary of the
Interior, as administered by the National Park Service and its
State Historic Preservation Offices; and the restoration must
take place within either a 24- or 60-month time period. Only proposals
that will result in commercial, income-producing properties are
eligible; owner-occupied residences are not included in the program.
In order to prove that a building meets or has met these requirements,
the developer must complete a lengthy and detailed three-part
application that is submitted in stages as the rehabilitation
is completed. Taxpayers may claim the federal credit by filing
the relevant tax form with their tax returns for the year in which
the property is first placed in service. There is also a five-year
holding requirement; if the owner disposes of the property in
less than five years, the federal government will require the
owner to pay back (or recapture) all or an allocable portion of
the federal credit claimed. Taxpayers may carry unused credits
back one year to offset their most recent prior year’s tax liability
and forward for 20 years to offset future years’ tax liabilities.
The federal rehabilitation credit has been around in some form
for more than 30 years and tens of thousands of historical renovations
probably could not have occurred, but for the supplemental project
financing it provides. Despite the success and popularity of the
federal program, however, the various states have been slow to
provide their own complimentary state income tax credits as additional
incentives to similarly encourage the preservation of their historic
landmarks. As of April 2000, at least 15 states have adopted similar
state income tax credits for the rehabilitation of historic structures,
but the large majority of these laws are quite recent. New Mexico
was the first state to adopt such a credit in 1984. It was joined
by Rhode Island in 1989; Colorado in 1991; Wisconsin and Utah
in 1993; Indiana in 1994; Virginia in 1997; Missouri, Maryland,
and North Carolina in 1998; Connecticut, Michigan and Vermont
in 1999; and West Virginia and Maine just this year. (click
here for a state by state comparsion)
Although each of the 15 states that provides a rehabilitation
tax credit has its own unique set of rules and regulations that
govern what qualifies for credit, how much credit is allowable
and how the credit must be claimed, all of them contain the following
characteristics. All of the credit programs are at least partially
based on the federal historic renovation rules and guidelines;
the most notable exception is that some states, like Missouri,
will award state tax credits for otherwise qualified owner-occupied
residences. All states compute the amount of the credit based
on a percentage of a project’s “qualified expenditures,” although
most states have modified the federal definition of what is included
in this category. Also, some states have limited their funding
available for this purpose by establishing either per-project
or statewide annual limitations on the credit. All states permit
taxpayers that cannot use their state credits immediately to carry
the unused credit forward to future years, generally ranging from
four years to an indefinite period. And the best news of all is
that all 15 states report that their programs have been successful
in increasing the amount of historic restoration activity in their
states.
Although Missouri’s Historic Preservation Tax Credit Program is
less than three years old, it is, by far, the most flexible, taxpayer-friendly
state historic tax credit program and certainly among the most
successful. The Missouri Departments of Economic Development and
Natural Resources jointly administer Missouri’s program. As of
April 30, 2000, the Department of Economic Development had received
207 applications and issued more than $29 million in tax credits
to help fund 43 projects located in Jefferson City, Excelsior
Springs, Kansas City, Fulton, Edina, Sedalia, Lexington, Springfield,
St. Joseph, St. Charles, and, of course, St. Louis (including
qualified projects in the suburbs of University City and Chesterfield).
These restorations include 14 commercial projects, 13 homes and
16 mixed use or multi-unit residential complexes. To date, 19
St. Louis renovations were made possible by this fabulous economic
development tool, including The Chase, 224 Washington Building,
the Mark Twain Hotel and several lovely old residences in Soulard,
South St. Louis and the Central West End (including the home of
the author).
What has probably contributed the most to the immediate success
of Missouri’s program is that developers and homeowners can actually
use the benefits that Missouri has promised. For instance, Missouri’s
program awards a 25 percent credit with no cumbersome or difficult
to administer per-project or annual statewide funding ceilings.
In addition, Missouri’s program is the only one that provides
a three-year carryback period. This actually permits owners to
obtain refunds of prior years’ tax liabilities! The Missouri program
is also the only state historic tax credit program that permits
the free transferability of credits. That is, to the extent that
the developers or owners cannot immediately use the tax credits,
they can sell them to other taxpayers that can use them. To facilitate
this process, financial institutions like Firstar’s Missouri Tax
Credit Clearinghouse will purchase unused credits from developers
who need the cash immediately to facilitate the project’s financing
and resell them to other taxpayers that have tax liabilities significant
enough to absorb the credits. Owners also have the option of carrying
the credits forward for a 10-year period. Finally, unlike the
federal credit, Missouri’s historic tax credit is not subject
to recapture; once the credit is issued, it is vested.
A brief summary of the historic tax credit programs of the other
14 states follows:
Colorado’s 20 percent State Historic Income Tax Credit
was first enacted in 1991, and was later re-authorized for an
additional 10 years in 1999. Colorado’s credit only applies to
residential local landmarks or contributing buildings. Although
there is a $50,000 program cap, it has not generally been reached
because more than half of the 248 tax credit awards that have
been made since the program’s inception have been for less than
$10,000 per project. Pass-through organizations may allocate all
of the state tax credits in accordance with a separate agreement,
rather than on a pro-rata basis. Recapture provisions do apply.
Colorado is also one of the few states that requires applicants
to pay application fees.
Enacted July 1, 1999, Connecticut’s 30 percent Historic
Homes Rehabilitation Tax Credit Program is designed to rehabilitate
historically significant residential neighborhoods, but the credit
will not be awarded for businesses in those neighborhoods. The
Connecticut Historical Commission has already designated 29 eligible
towns. Per the Program Administrator, Connecticut wants to use
the tax credits to help clean up previously drug infested and
blighted communities. For instance, the proposed Frog Hollow development
will save 16 houses in this formerly blighted and abandoned Hartford
neighborhood. The Connecticut program provides an annual $3,000,000
program ceiling and there is a $30,000 per project cap. For-profit
developers or non-profit housing corporations can apply for the
credits, but pass-through entities are ineligible. The most unusual
aspect of Connecticut’s program is that the credits can only be
used to offset the corporation income tax. Thus, because an individual
owner cannot use the credits, he or she must request permission
to transfer the credits to a corporation that can use them to
offset its own liability.
The Indiana State Historic Rehabilitation Investment Tax
Program was initiated in 1994, and basically piggyback’s the federal
tax credit program in most respects. That is, acceptance into
the federal program almost guarantees acceptance into the Indiana
program (assuming that the project meets the minimum qualified
expenditures of $10,000), and residences do not qualify. The largest
problem affecting the use of Indiana’s program is that Indiana’s
General Assembly has only allocated between $450,000 (1995, 1996
and 1999) and $750,000 (1997 and 1998) per year for the entire
program, and imposes a per project ceiling of $100,000. Although
some credits were approved to fund the Bloomington City Hall,
the per-project ceiling makes the Indiana credit much more attractive
to the small businessman. As a result, it is no surprise that
most of the funding has been awarded to help fund or support multiple
housing conversions or small commercial buildings. Despite these
rather severe funding restrictions, the Historic Architect administering
the program reports that the demand for the credits is snowballing,
and as a result, there is a rather large backlog of approved applications
in line to receive the credits. The Indiana Division of Historic
Preservation and Architecture has certified 87 projects since
the inception of the program and reported that the average credit
award was right around the $100,000 per project ceiling.
Maine’s 20 percent Credit for Rehabilitation of Historic
Properties just became effective on January 1, 2000, and essentially
piggybacks the federal historic tax credit in most respects. There
is, however, a $100,000 cap per taxpayer, but the state does consider
each partner or member of a flow-through entity to be a separate
taxpayer.
Maryland’s 25 percent Heritage Preservation Tax Credit
Program for both commercial and residential properties closely
follows the federal rehabilitation standards and was part of Governor
Parris N. Glendening’s “Smart Growth” policy to help slow down
urban sprawl. Maryland’s program is definitely one of the most
taxpayer-friendly and generous programs. This credit has no per
project or annul statewide funding ceilings. Although the Maryland
credit rules do not permit owners or developers to freely transfer
their credits like Missouri, Maryland’s laws were recently amended
to provide a mortgage credit certificate option for both residential
and commercial properties that was modeled after the Historic
Homeownership Assistance Act currently being considered by Congress.
Rather than force the owner or developer to have to carry unused
credits forward to the next 10 years, the owners or developers
can now use their tax credits to buy down the interest rates on
their mortgages, pay closing costs or reduce the principal amounts
due. Maryland permits developers to pass the credits through to
the buyers, who are also entitled to use the mortgage credit option.
The financial institutions accepting the certificates may use
them to offset their Maryland tax liabilities but do not have
to pay par value for the credits. Maryland permits the lenders
to reduce the amount paid for the credits by the amount of the
reduction of their federal tax deduction that will be caused by
the reduction in their state income taxes. If the property is
sold, unused tax credits may be transferred to the purchaser.
Partnerships must allocate credits pro-rata. To date, over $25
million in Maryland tax credits have been issued.
Michigan’s Historic Preservation Tax Credits Program, effective
January 1, 1999, also closely follows the federal historic tax
credit guidelines. To date, the Michigan Historical Society has
received 47 applications of which 10 have been approved. Most
of the applications are for owner-occupied residences, probably
because the 25 percent Michigan credit is reduced to only 5 percent
if the project also qualifies for the federal credit. Unfortunately,
this credit program sunsets at the end of 2002. Although taxpayers
cannot transfer credits, Michigan does permit partnerships to
specially allocate them.
New Mexico’s Income Tax Credit Program for Historic Preservation
is the oldest state historic tax credit program. It became effective
on January 1, 1984 to replace New Mexico’s former property tax
credit for historic restoration. Although this program is not
harnessed with minimum expenditures or annual state funding ceilings,
qualifying projects can only receive a maximum of $25,000 of tax
credits for qualifying homes or residences. As with most programs,
New Mexico’s closely follows the federal regulations.
Effective January 1, 1998, North Carolina now provides
two historic tax credit programs for both income-producing properties
and residences, respectively. Under prior law, non-income producing
projects did not qualify. The Historic Rehabilitation Tax Credit
for income producing properties essentially piggybacks the federal
credit—if a project qualifies for the 20 percent federal credit,
it also qualifies for North Carolina’s 20 percent state credit.
The new law provides an extremely generous 30 percent credit for
non-income producing properties, including private residences.
There are no per-project or annual program funding ceilings and
pass-through entities have some flexibility in allocating the
credits among their members. Unlike most other states, however,
North Carolina will not permit taxpayers to use the entire credit
in the first available year; instead, taxpayers may claim the
credits in five equal installments commencing with the year in
which the property was first placed in service.
The State Historic Preservation Office has reported that both
programs have been extremely successful. For instance, for income
producing properties, in 1998, the North Carolina State Historic
Preservation Office received 67 new applications and awarded $7
million of credits to 27 completed programs. In 1999, those numbers
increased. The Office received 73 new applications and awarded
approximately $25 million to 36 completed programs. The credit
program for non-income producing properties has also been successful.
In 1998, the Office received 134 new applications and awarded
approximately $400,000 to three completed projects and, in 1999,
the Office received 123 new applications and awarded approximately
$2.4 million of credits to 26 completed projects. To date, the
largest completed project is the Liggett & Meyers Tobacco Company
warehouses that were converted into the glamorous new West Village
in Durham, N.C. This project closely resembles the planned renovation
of the Cupples Station Warehouses in St. Louis.
Rhode Island’s Historic Preservation Residential Tax Credit
Program is much older than most, having originally been enacted
in 1989. It is, however, a very specific credit that only applies
to the external facades of owner-occupied historic residences.
The Credit is equal to 10 percent of qualified costs within a
12-month period. Taxpayers that qualify for this credit must spend
at least $2,000 and can only use up to $1,000 of tax credits per,
although they can carry forward this credit indefinitely. Since
1989, 270 applications have been filed, and the annual credits
awarded have ranged from $15,000 to $37,000. The credits are also
subject to recapture if the property is sold prior to its utilization.
Utah’s tax credit program began in 1993 and only applies
to residential property (either private homes or rental properties)
and whoever spends the dollars gets the credits. The program administrators
indicated that the program has been averaging about 50 applications
per year and they have about 100 projects ongoing at any given
time. Utah’s program has already received 113 applications since
January and the program administrators expect this amount to double
by the end of this year. There are no per-project or annual state
funding limitations. The program is a direct piggyback to the
federal program (so residences do not apply) but there is a minimum
spending amount of $10,000 per project.
Although Vermont has the second smallest population in
the U.S., in recent years, the state has enjoyed more federally
approved historic preservation projects than any other state.
In efforts to revitalize “dead downtown” districts, as part of
the 1998 Downtown Development Act, Vermont added two state tax
credit programs, the 5 percent Vermont Income Tax Credit for Substantial
Rehabilitation of Historic Buildings and the 25 percent Vermont
Income Tax Credit for Rehabilitation of Older or Historic Buildings.
The “5 percent Credit” piggybacks the federal credit; to the extent
that a project qualifies for the 20 percent federal credit, it
will receive a 5 percent Vermont credit. The “25 percent Credit”
has a $25,000 credit ceiling and applies to qualified buildings
that do not otherwise meet all of the federal criteria. The 25
percent credit program, however, does feature the mortgage credit
certificate option recently made popular by Maryland. Vermont’s
officials actually seek out qualified projects and act as an advocate
for their developers with the federal authorities. To date, nine
downtown areas have been certified and a wide variety of structures,
including taverns, shacks and barns, have qualified for Vermont’s
programs. Like Indiana, Vermont has a modest state funding ceiling
of only $300,000, which the state did not fully use in its first
year of operation. These two programs are also apparently more
difficult to administer because projects are not awarded on a
first-come, first serve basis, but rather, based on competitive
criteria.
Effective January 1, 1997, Virginia enacted its Historic
Rehabilitation Tax Credit. The amount of the credit increased
from 10 percent of qualified expenditures for calendar year 1997
up to the current level of 25 percent of qualified expenditures
for calendar year 2000 and thereafter. There are no top limits.
Residences and income-producing properties both qualify and Virginia
permits special allocations of credits in accordance with partnership
agreements.
West Virginia’s 20 percent Credit for Qualified Rehabilitated
Residential Buildings Investment just became effective this year.
Under the provisions of the new law, the credit only applies to
residences, although the state will follow the federal guidelines
in determining what expenses are qualified. There are apparently
no per project caps or overall state funding limitations.
Effective in 1998, Wisconsin provides a 25 percent tax
credit for certified owner-occupied residences and some farm buildings.
There is a per-project cap of $10,000 and the qualified expenditures
must exceed the project’s pre-rehabilitation basis in order to
qualify. Wisconsin also provides a 5 percent piggyback credit
for income-producing projects that qualify for the federal credit.
All of these states (and their legislatures and governors) should
be highly commended for their genuine interest in helping the
private sector finance historic restoration. Having carefully
reviewed all existing state tax credit programs, however, it is
clear that some of them are significantly more successful than
others. Unfortunately, accurate historic restoration is not cheap
and few would disagree that most of the current historic restoration
projects in all of these states would not be economically feasible
without the financial assistance provided by the federal and state
tax credit programs.
It is clear that the most successful state programs provide much
more flexibility and very few restrictions in regard to the funding
available. Accordingly, if a state legislature really wants to
maximize the number of its successful historic renovation projects,
it should closely pattern its program to resemble the programs
offered by states like Maryland and Missouri that have enjoyed
great success. For instance, both Maryland and Missouri provide,
not only very generous credit percentages (25% of qualified expenditures
in addition to the federal 20%) with no project or state funding
ceilings, but also creative transfer options that enable owners
and developers to sell the tax credits that they cannot otherwise
use. If a Maryland developer cannot use the credits to offset
its tax liability, it can take advantage of the mortgage credit
certificate option to use the credits to pay down its mortgage.
Even better, in Missouri taxpayers may sell their excess historic
tax credits to any other taxpayers that can use them. Maryland
and Missouri are proving that the absence of the rather crippling
annual and/or per project funding limitations provided by the
majority of the state programs, coupled with either a limited
or an unlimited transferability feature will ensure that a state’s
taxpayers actually receive the benefits the state has promised,
and thereby ensure that the state receives its benefit — that
the maximum number of its fabulous historic landmarks will be
preserved for the education and enjoyment of its future generations.
Janette Lohman is a partner with Blackwell Sanders Peper Martin
LLP and an assistant adjunct professor of state and local taxation
at Saint Louis University School of Law.
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