By: Jason Yots, President, Preservation Studios
“Money is no object!” likely never
has been uttered by a Buffalo real estate developer, at least within the last
century or so. In fact, due to an
array of economic difficulties, finding enough money to consummate a real
estate development project in Buffalo, NY very much is the objective.
Buffalo is the kind of place that
urban experts call a “legacy city”.
Legacy cities, on one hand, endure deep population losses, concentrated
poverty, lagging household income growth and rampant property vacancy. On the other hand, though, those cities
boast expansive historic building fabric, affordable real estate, economic
productivity and opportunity, and community resiliency and sustainability.[1] Your classic good news, bad news
dichotomy.
Unfortunately, the “bad news” column
of the ledger makes real estate development in legacy cities a tricky
endeavor. Shrinking population,
surplus aging real estate and lower wages mean that citizens can’t afford
top-end rents, that building values appreciate slowly and that developers earn
back less ownership “equity” than their national counterparts.
And yet, real estate development in
Buffalo is booming, at least in relation to its pace during the last few
decades. What accounts for this
seeming anomaly? Two words:
government subsidies. And, in
Buffalo, no government subsidy has been more effective, dollar-for-dollar, than
the historic rehabilitation tax credit (HRTC). Consider any recently renovated building in Buffalo that’s
over 50 years old and there’s a good chance it was financed using HRTCs. Apartments, hotels, offices, retail
outlets, cultural destinations and educational facilities all have been
developed using HRTCs.
The federal tax code offers a tax
credit equal to 20% of the qualified costs incurred in connection with the
rehabilitation of an historic property.
When you add a counterpart state HRTC of another 20%, and then discount
for the market factors and tax considerations inherent in monetizing those
credits, you’re essentially left with a government subsidy at an effective rate
ranging from 20 – 30% of a project’s costs. This effective subsidy rate happens to coincide with the
funding “gap” faced by most adaptive reuse projects in places like
Buffalo. The tax credits plug the gaps,
the developers reinvent the buildings, and the community reaps the benefits.
The federal HRTC program is
administered by the National Park Service (NPS), for the Department of Interior
and the Internal Revenue Service.
Each year, NPS issues a report of the HRTC program’s performance during
the prior fiscal year.[2] The 2015 annual report reflects the
continuation of some programmatic trends of the last few years, both nationally
and locally.
A fly-over of the HRTC program
confirms that it continues to be a strong economic development tool for its
host communities, generating in 2015 about $6.63 billion in development
activity at an average of about $5.168 million per project (median project size
in 2015 was $937,856).
On
the ground, the HRTC program proves again to be a strong job-creator. The historic rehabilitation process is
labor-intensive and, as a result, inherently local. On average in 2015, individual HRTC projects generated 98 local jobs each, totaling just over 85,000 jobs nationwide. With average
annual salaries of about $40,000 industry-wide, HRTC jobs are well-suited to
low-cost legacy cities.
As
mentioned, legacy cities often face an aging housing stock and extensive
building abandonment which negatively impact housing quality standards for
their residents. The HRTC program
provides a tangible boost to the housing inventories of legacy cities. In 2015 alone, the program helped
develop 23,569 new rental housing units, over a third of which were available
to low- to moderate-income tenants.
This affordability factor is key in legacy cities where unemployment
generally is higher - and wages generally are lower - than the national
average.
While
rental housing constituted about half of all HRTC projects in 2015, that’s only
half the story. The program also
catalyzed the creation of new offices (21%) and other commercial activity such
as hotels, retail and educational and cultural facilities (29%). The lack of restrictions on end-use is
one of the HRTC programs strongest assets because it helps to diversify the real
estate offerings to communities that consistently access the program.
And
which communities most consistently tap the HRTC program? The states that are the biggest users
of the HRTC program primarily share two important attributes: they contain a high
concentration of legacy cities and they feature established state HRTC
programs. This latter feature is
not surprising when you consider that state HRTC programs enable developers to nearly
double-down on the capital available to complete their projects. On an approved-project basis, the top
five users of the HRTC program in 2015 were: Louisiana, Ohio, Virginia,
Missouri and New York. From a project-cost standpoint, the top five states were: Ohio, Texas, New
York, Pennsylvania and Missouri. Clearly,
New York, with top-five finishes in both categories, has figured out that the
HRTC program is an important tool for reinventing its many legacy cities. And, when money is the object, and historic
preservation is the result, developers and communities alike can appreciate the
impact of the HRTC program.
Jason Yots is a tax
credit attorney, real estate developer and historic preservation consultant
based in Buffalo, NY.
www.preservationstudios.com, www.commonbondrealestate.com
[2] The last
several years’ reports can be found at: https://www.nps.gov/tps/tax-incentives/reports.htm
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