Monday, December 22, 2008

Give Me A (Tax) Break

By Jason Yots

For many years, I practiced as an affordable housing attorney, primarily helping folks structure and close low-income housing tax credit financings. Those deals generally involve multiple sources of financing, including numerous subsidies that incentivize the development of housing for poor people. Creative affordable housing developers regularly cobble together a half-dozen subsidies to balance their project budgets.

When I began focusing a few years ago on historic rehabilitation projects, I was immediately struck by the relatively few subsidies that are available for that type of development, particularly smaller deals. Yes, we have the federal historic rehabilitation tax credit (and, in New York, a fairly lame state counterpart), but not much beyond that. Of course, the devil's advocate might argue that, without income and rent restrictions, the market should permit you to charge the amount of rent necessary to pay for the cost of your rehab. And, in many parts of the country, that may indeed be true, but not in Western New York. In this area, rents are "naturally" capped by the real estate market at amounts that aren't that far above (and, in some peculiar cases, may even be below) "subsidized" rents. So, developers are unable to borrow as much as they need to complete their historic rehab projects because the market won't bear the rents necessary to pay the financing costs. In the absence of additional subsidies, tax credits alone can't always bridge the gap.

Some municipalities offer grant or low-interest loan programs to help make rehab projects more financially feasible. Buffalo-area municipalities lacked any meaningful incentives of that sort until the Erie County Industrial Development Agency recently approved an Adaptive Reuse Policy to encourage "the redevelopment of old structures or sites for new purposes." Chartered by New York State to financially assist certain commercial development, an industrial development agency (more commonly known as an "IDA") is empowered to, among other things, issue tax-exempt bonds and provide property tax exemptions (more commonly known as "PILOT" arrangements) for eligible projects.

Acknowledging that certain vacant structures “present unique challenges to development and adversely impact the economic viability of the neighborhoods and districts surrounding them,” the ECIDA Adaptive Reuse Policy authorizes the ECIDA to assist owners and developers pursuing rehabilitation projects. ECIDA representatives recently told me that its assistance can include a PILOT arrangement and sales and mortgage tax relief. So, for a $3,000,000 rehab project, typical benefits under this program could include six-figure combined up-front mortgage and sales tax savings and five-figure annual property tax savings for the first decade following completion of the rehab (depending on the difference between the as-is and as-built assessments of the property). In other words, for eligible projects, the program provides relief to both the construction and operations budgets of the developer.

Regarding eligibility, the Policy directs the ECIDA staff to create a scoring system based on several criteria, including these notables:

1. The structure must be at least 20 years old. I presume this relatively low 20-year threshold is a nod to the suburban jurisdictions served by the ECIDA that are grappling with grayfields issues (eg, mid-1980s shopping plazas).

2. The structure has been vacant or underutilized for at least 3 years. Its seems that ECIDA officials perhaps were prioritizing potential projects here (ie, the longer the vacancy, the bigger the problem), which is understandable. However, on its face, this factor could eliminate certain worthy projects simply because they are not vacant or underperforming.

3. The project satisfies the “but for” test. The developer needs to demonstrate that, but for the ECIDA’s financial assistance, it faces a “financial obstacle to development” of the project.

4. Evidence of local government support is required.

Although some of these criteria (and some of those I haven’t cited) seem bright-line, it appears that ECIDA officials will enjoy some flexibility in their application to ensure that otherwise worthy projects are not disqualified on technicalities.

Of course, the proof will be in the projects, but, at first glance, the ECIDA has taken a critical first step toward expanding economic incentives for market-rate historic rehabilitation projects in Western New York. Preservationists and development officials should now focus on the promotion of additional economic initiatives, such as the expansion of the New York State historic tax credit, the establishment of a local pool tax credit investors and the creation of sources of concessionary gap financing.

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