Virginians Worry About Fate of Much-Used Tax Credit

Southern Stove Works Lofts, one of the many residential developments in Richmond funded by historic tax credits. (Photo by Brad Kutner, CNS)

(CN) – Drive through almost any part of Richmond, Virginia, and you’re bound to see a piece of the past.

The city’s confederate statues made headlines over the summer, but its massive inventory of old buildings might become just as newsworthy if the House’s tax plan comes to fruition as currently written.

That’s because a tax credit that’s lead this old city to invest billions in historic buildings is set for the chopping block.

The program, known formally as the Federal Historic Preservation Tax Incentives program, and less formally as “rehabilitation credits” or “historic tax credits,” were created in the early 1980’s by the Reagan administration. It allows developers to turn 20 percent of the cost of rehabbing older, income-producing buildings into tax credits that are distributed over 5 years after the project is completed.

“With that one initiative, we help to send your tax dollars back into your communities,” said President Reagan in a national address in 1984, three years after the program’s inception.

“Our tax credits have made the preservation of our older buildings not only a matter of respect of duty and history, but economic good sense,” the president said.

Now, in 2017, the House version of the GOP tax overhaul removes those credits entirely.

“You won’t see buildings being renovated, it’s a pretty easy calculation,” said David White, a managing member of Historic Housing LLC, if the tax credits disappear.

White’s business specializes in rehabbing old buildings throughout central Virginia using the credits provided by the federal program as well as some offered by the state. He’s been part of the nearly 700 HTC-funded projects that make Richmond the municipality with the largest total number of developments to receive this support.

Richmond’s high number of HTC projects happened for a number of reasons. A large part has been the state’s embrace of the program and its creation of a state-level program that similarly offers 25 percent in tax credits over five years after a project’s completion.

“I could never fathom a city like Richmond being what it is today without tax credits or something that is equally valuable to a developer,” said Julie Langan, Director of the Virginia Department of Historic Resources which oversees the state-level credits and helps people apply for federal credits as well. She said the cost of rehabbing older buildings is often way too much for a developer to incur alone.

White agreed, and while some may argue the program offers an unfair federal handout to businesses, he points to the nation’s rapid expansion after World War II as the earliest example of federal involvement in the housing industry.

“Eisenhower went to Europe and saw the roads the Germans had built, and he said ‘We need that for our military in times of a national crisis,’” White said. “That started the national highway system. And they are a great part of our economy, but they made an unlevel playing field for development in the cities. So I think the HTCs, to some extent, level the playing field.”

White pointed to Richmond’s population decline starting in the 1970s when the city peaked at about 250 thousand residents. By 2000, that total had dropped to 170 thousand. That decrease, along with the decline of manufacturing in the city, left many buildings to decay. It was just before that low point that the state kicked in their HTC program which got the wheels turning. Then, when millennials were graduating college and looking for cities to move to, Richmond developers like White had already started construction on hundreds of projects, large and small, to offer them housing.

“You have to have a good stock of buildings, some old buildings that need to be renovated, and a great economy. But I think we proved you don’t even need that great economy,” he said, pointing to Richmond’s success with the program — even through the Great Recession.

The city’s population is now estimated at about 213 thousand and continues to grow as White and others continue to renovate.

“It was kind of a ‘if you build it, they will come’ and it worked,” he said. “We have a lot of old buildings … and a populous that loves old buildings.”

Whether the HTC’s survive the reconciliation process with the Senate’s proposed tax reform bill is anyone’s guess, but there’s reason to be doubtful.

Under the rules that govern reconciliation, the process by which legislative proposals in the House and Senate are knitted together, the Senate can only consider the budgetary impacts of programs within specific time frames.

That’s problematic in the case of the HTC because its impact is front-loaded, meaning the program has a bigger impact on the federal budget in the short-term than it does in the long-term, according to a congressional aide who explained the situation’s background.

Still, support for keeping the tax credit has come from both sides of the isle.

In a statement, Rep. Bob Goodlatte, R-Va., a staunch conservative, said he supports the program because it has helped fund nearly 150 projects in his district, which is along the state’s western border.

“I requested on several occasions that this credit be included in the final text, and I am disappointed that it was not preserved,” he said, promising to continue to advocate for their inclusion in the final, agreed upon version.

Goodlatte joined 32 other Republicans and Democrats in signing a letter urging the House to keep the credit late last month. The Senate seems to be listening and their proposed tax bill currently includes it.

Still, Langan has concerns.

Across the state of Virginia there has been a push to use the credits not just to revitalize housing stock, but for schools and other public buildings, many now in the hands of nonprofits, as well.

“[These projects are] so difficult to fund that if you could bring in private investors, and reinvest in historic public school buildings, that would be life changing for some communities,” she said.

White’s company has been involved in a number of these projects. Over the years, it has worked on tax-credit funded projects at two public schools, a few arts facilities, and more. He’s currently working on getting credits for a local nonprofit that addresses homelessness and the issues that give rise to it.

“It gives [nonprofits] a building at a very affordable price and it gives them that money to complete the mission they’ve set out to do: end homelessness and address drug and alcohol addiction,” White said.

But the tax credits have not been without issue. Richmond has a few examples where the program went awry.

In 2011, developer Justin French pleaded guilty to stealing millions through the federal and state tax program. In 2013, a second developer, Billy Jefferson, pleaded guilty to stealing $12 million in tax-credit funds.

“Those were egregious exceptions to the rule,” White said. “Any piece of the economy is going to be tempting to someone who wants to make a quick buck and it’s not surprising to think HTCs would be ones of those.”

Langan said her department has since increased their request for data on projects making room for more accountability in the program. “It’s easier for us to analyze and harder for someone to manipulate,” she said.

Congress hopes to pass their tax reform before Christmas, but for White and Langan, who make their living off programs like these, only questions remain.

“It’s pretty much all everybody is talking about,” said Langan, who spoke to Courthouse News after attending a nation-wide conference of historic resource management employees. “This has been the hot topic.”

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