When
it comes to having an abundance of historic buildings, few cities
fare better than St. Louis.
A 2005 report released by the Department of the Interior’s National
Park Service who oversees the Missouri State Historic Tax Credit
Program states that Missouri ranked first in the nation in the
number of federal historic rehab tax credit projects successfully
completed, and in the number of federal historic rehab tax credit
projects receiving preliminary approval for 2006.
Thanks to the emerging use of state historic tax credits as
a revitalization tool, these buildings, instead of being torn
down, have found new life as lofts, condos, offices, and retail
stores.
Tax credits have impacted downtowns around America and no where
more than St. Louis. In particular, federal and state historic
tax credits have provided the incentive for developers to take
the plunge to renovate downtown.
In 1976, the Federal Historic Preservation Tax Incentives Program
administered by the National Park Service in conjunction with
the Internal Revenue Service provided a 20 percent tax credit
to those developers interested in rehabilitating historic buildings,
those built before 1934, or historic areas.
Missouri implemented its historic tax credit program in 1998,
giving developers a transferable tax credit equal to 25 percent
of rehabilitation costs.
David
Richardson,
partner,
Husch and Eppenberger LLC |
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“Coupling these two tax credits make downtown redevelopment
much more feasible,” says David Richardson, partner with Husch
and Eppenberger LLC. “My role as an attorney,” he says, ”is
to help the developer structure the transaction to maximize
the amount of tax benefits and amounts that they can leverage
with a tax credit.”
He says that transactions can get complicated with the federal
historic tax credit because the Missouri historic tax credits
are transferable. “The state gives certificates to developers
to build the project and says ‘Here’s a million dollars worth
of tax credit,’ and they can sell it to whoever they want. But
the federal historic tax credit requires that the credit runs
with ownership of the property.
“An investor has to become an owner of the development,” he
explains, “And our role is to structure or maximize the equity
that the investor puts in and, at the same time, maximize the
amount of credit.”
Bill Kuehling, shareholder with Polsinelli Shalton Welte Suelthaus,
says that individuals having tax liability can reduce that liability
by purchasing these credits from the developer and pay the developer
cash for that credit, then utilize that credit to reduce their
liability.
Giving a simplified example, he says “Suppose I owe the state
of Missouri $10,000 in tax, and I have an opportunity to purchase
some historic tax credits. I buy them from a developer who is
developing lofts or some commercial venture downtown.
“I don’t pay $10,000 for those credits,” he says, “I would pay
$9,000 for them, then get a piece of paper saying Missouri gave
me the tax credit, then when I pay my taxes, I attach the tax
credit certification to my tax form and the State of Missouri
says I no longer owe $10,000, I owe zero.
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The
Syndicate Trust Building |
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“The investors are happy, the developers are happy, and the
state of Missouri,” he says, “while they don’t have the tax
money, from their perspective, that money has helped generate
a huge construction project, plus has employed hundreds of contractors
who purchased millions of dollars worth of materials giving
the state sales tax.
“Plus,” Kuehling adds, “the state gets income tax from the construction
people who are working and, at the same time, returning a liability
of a building, a vacant hulk that was dragging down the rest
of the area, into productive use. So, while one part of the
tax revenue may drop off a bit, other parts pick up and the
state gets economic development out of it.”
A Primer on Tax Credits
Besides historic tax credits, there are New Market Tax Credits,
Low–Income Tax Credits, and Brownfield Tax Credits, with developers
using all or a combination to get their projects built.
Begun in 2000 as part of the Community Renewal Tax Relief Act,
New Market Credits are used to spur private investment in low-income
urban and rural communities.
Richardson says that the credit, which is 39 percent, is given
to an investor who makes a contribution or investment in a community
development entity. “That entity can make a loan or equity investment
in the project, and that’s how the developer benefits. An example
would be the Rudman Building on Washington Avenue. New market
credits were used there to provide additional money to create
the Lucas Park Grille.”
The Low-Income Housing Tax Credit program is run by the IRS
and allows companies to invest in low-income housing, while
receiving 10 years of tax credits.
“This allows developers to create affordable housing,” Richardson
says. “The Merchandise Mart has historic tax credits and low
income tax credits. If you were to rent, it would be $900, and
market rate is $1,000 so there’s not too much difference.”
Awarded by the state, the Brownfields Tax Incentive is a discretionary
program used for any real property where redevelopment or re-use
may be complicated by the presence or potential presence of
a contaminant. “These are used for costs incurred for site preparation
and property improvements,” Richardson says. “It’s based on
the economic benefit to the state and it basically allows the
developer to get a dollar for dollar tax credit on their remediation
costs such as removing asbestos or lead-based paint. The Syndicate
Trust and Security Building and Marquette Building used Brownfields.”
Benefits of Historic Tax Credits
However, it is the historic tax credit that has stimulated growth
in downtown St. Louis.
While both rental and for sale properties can get state historic
tax credits, only rental properties are eligible for federal
historic tax credits, because they produce income and are depreciable.
Linda
Martinez,
partner,
Bryan Cave LLP |
|
Linda Martinez with Bryan Cave LLP says they represent client
developers that are interested in doing real estate development
and major projects in the downtown area. “So we’re part of a
team that is looking how to get the project financed and, if
there are incentives available, to support that development.”
One of the challenges, she says, is identifying legal issues
of the investors, lenders and developers and trying to “harmonize
the allocation of risk and responsibilities for transactions.
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The
Marquette Building |
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“If you have a building on the National Historic Register or
in an historic district,” Martinez says, “and you develop a
plan for renovation of a building that is approved by the National
Park Service, then there’s almost an automatic entitlement for
those tax credits, as long as you meet certain IRS guidelines
and tax code requirements. Generally, the State follows the
guidelines of the federal.”
Kathy Bader, chairman of USBancorp Community Development Corporation,
notes they moved their offices downtown over three years ago.
“These tax credits are the key reason, if not the sole reason
why all of the redevelopment downtown has happened.”
Kathy
Bader,
Chairman of Community Development,
USBancorp Corporation |
|
She says, “Real estate developers don’t need tax credits, they
need cash to finish a project. We, as a large corporate tax
payer have huge tax liabilities, so we can benefit from the
credit, so we say to the developer, we’ll take the tax benefits,
the tax credits, and in exchange, we’ll give you cash.
“We give them cash to finish the development,” she explains,
“but you don’t receive the credit until the development is completed,
or leased. So they do trade in discounts because of risk, because
I put out my money early and don’t get my benefit until later.”
Mary Campbell and Dave Purcelli work with the Community Development
Banking Group with Bank of America.
“Tax credits are designed to incent the capital market, to invest
more equity in these deals,” Campbell says, “with either low
income or renovating old buildings or economic development with
a New Market Tax Credit. You figure out what you can support
on a debt platform, how much money can the developer borrow
to get his deal done, and there is always a gap that has to
be filled either equity for tax credits or true subsidy.”
Purcelli says the gap is driven by one or two things, or a combination.
“If you are looking at a low-income transaction, or if it’s
for low to moderate income tenants and the rents are restricted,
then your rent level is less, and therefore less revenue to
support a loan.
“Then,” he says, “you have urban revitalization where you’re
taking an old building, then the cost to convert it is astronomical,
so even if it’s a market rate apartment or condo, there’s a
gap because of high construction costs. In downtown, you run
into both of those.”
Brian Davies, senior vice president of National City, says their
company received an allocation of New Market Credits. “We’ll
be able to start looking at projects where new markets can start.
You need a certain threshold of commercial use in the building
to qualify for that.
“From a risk standpoint,” he says, “before we close on the project,
we make sure that the final plans and specs have been received
and approved by all the necessary government folks, so we know
that the construction we’re financing is within the guidelines
of the program.”
He says that federal and State historic tax credits “mirror
each other, so if you get federal historic approval, your state
approval is pretty certain, but the State can’t go outside what
they call the ‘envelope’ of the building, so things like parking
lots and landscaping are not eligible.
Survey Says
An independent study commissioned by the RCGA with RubinBrown
evaluated the economic and fiscal impacts of the Missouri Historic
Preservation Tax Credit over a 20-year period, and documents
the net positive economic return to the State of the credits:
- The Westin Hotel at Cupples Station has created 1,820 and
will generate 3,380 full time equivalent construction jobs,
with $19.8 million in tax credits. It will also generate $54.4
million in state and local tax revenue.
- The Center for Emerging Technologies was partially financed
by $1.5 million in historic preservation tax credits, and will
generate $14.9 million in state and local tax revenue, 2,840
full-time equivalent jobs, and $246 million in increased personal
income.
- The Chase Park Plaza Hotel, with $20.3 million in tax credits,
will generate 4,660 full time equivalent jobs, $99.1 million
in personal income, and $42.2 million in state and local tax
revenue.
The resurgence of Downtown St. Louis has been noticed around
the country, so much so that Missouri’s expertise with tax credits
is being copied in other cities and states.
“It is a flexible and successful program,” Kuehling says. “There
is a learning curve both in the development community, finance
community and legal community to figure out how to utilize it
and how to put it to good use. Here, in St. Louis, we have reached
that critical mass where we understand it.”
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ABOUT
DOWNTOWN
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The
Ely Walker Lofts is a planned seven-story mixed-use project
located in the historic Washington Avenue loft district.
Co-founder D. D. Walker is a descendant of former President
and current President Bush.
A new trend in downtown weddings can be found at the renovated
Cupples Station. The Westin St. Louis hosts weddings in
the Promenade with it’s combined urban/historical setting.
In the former office headquarters of canned milk maker Pet
Inc., you’ll find Pointe 400’s 118-super luxury apartments
transformed by Brinkmann Constructors. The Pet Building
originally designed by Alfred L. Aydelot of Memphis, Tenn.,
is the only example in Missouri of New Brutalism architecture,
popular in the 1950s and 1960s.
New Brutalism was characterized by the use of rough, heavy
reinforced concrete, chunky angular solids and the creation
of spatial tension used to reflect the harshness and the
confusions of modern life. |
