The uncertainty of the looming federal tax reform is causing chaos, some might go so far as to say panic, for historic building owners, commercial bank lenders, and developers throughout RVA. The proposed changes are causing various stakeholders to scramble as they try to get their projects started before the rules potentially change. And that is leading to a lot of year-end headaches and stress.
As we reported earlier in our article Federal Tax Reform Big Trouble for Richmond, the proposed elimination of the federal historic tax credit will disproportionately hurt Richmond given the large number of old buildings in the city. For Manchester, the loss of the program would be nothing less than a punch in the gut.
Manchester is in the midst of the early stages of a redevelopment boom which has largely been fueled by the historic tax credit program. That redevelopment would essentially stop, or at least be massively curtailed, if the federal tax credits are lost. Tax credits are what make the renovation of these old buildings financially viable. Between state and federal historic tax credits, 45 cents of every dollar spent on qualified renovation expenses are paid for by tax credits (20 cents for Federal and 25 cents for state).
Given its voluminous old building stock, Virginia is one of the largest benefactors of the historic tax credit program. According to the National park service, a total of 1,286 Federal Historic Tax Credit projects in Virginia received certifications from the National Park Service between fiscal year 2002 through 2016, resulting in over $3 billion in total development. More than half of all those Virginia projects (692 to be precise) were located in Richmond.
Simply put, the single largest contributor to the revitalization of Richmond over the last 15 years has been the historic tax credit program. It’s difficult to overstate the significance of the program which bears no equal, other than perhaps VCU, to the resurgence of the urban core of our city.
So What Happens to All the Projects in Mid-Stream?
The federal historic tax credit was recently eliminated in the tax reform bill passed by the House of Representatives. The Senate Finance Committee approved a version of tax reform that keeps the federal historic tax credit program, but limits its use to 20% of the credit per year for 5 years (thereby greatly reducing its value). The million dollar question is what happens to the hundreds of projects that are about to start that have been in planning for many months, and in some cases many years?
Historic rehabilitation projects are complicated. They often take years to sort out before work begins. The process entails verifying a project qualifies as historic, developing architectural/engineering plans, obtaining Virginia’s Department of Historic Resources and National Park Service approvals, securing city permits, finding a bank that is willing to finance the project, and securing an investor who can use the tax credits if the building owner cannot use the credits for themselves. It is an extremely lengthy process, fraught with conflicting priorities amongst the various stakeholders. But it is ultimately worth it in the end. Were it not for the credits, the only other alternative would be to tear down these beautiful old structures. Nearly all of the 692 historic building renovations throughout Richmond over the past 14 years simply would not have been possible were it not for the historic tax credit program.
Depending on how the grandfathering for projects in the planning phase is or is not determined, a large number of commercial banks, building owners, developers, architects, engineers, and contractors could be left in a lurch. Many of these stakeholders have purchased historic buildings and incurred significant costs associated with preparation for renovations that may now no longer happen if the program is eliminated or curtailed.
It all comes down to the details of A) whether tax reform is ultimately signed into law, B) whether the historic tax credit program is eliminated or curtailed, and C) what the rules for grandfathering the projects in the planning phase end up looking like.
All this uncertainty makes this time extremely perilous for those who are stakeholders in the business of historic building renovation. And if you live, work, or play next to a historic building you’d like to see stick around, you have a stake in this fight as well. I would encourage you to contact your representatives which can be done easily via the following link at the National Trust for Historic Preservation website. It only takes 2 minutes.