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Abstract
Problem, research strategy, and findings: Do historic rehabilitation tax credits (RTCs) play a central force in ongoing urban revitalization? I examine the role that federal RTCs have played in transforming U.S. downtowns using a case study approach and geocoded, longitudinal data for 10 cities: Atlanta (GA), Baltimore (MD), Cleveland (OH), Denver (CO), Philadelphia (PA), Portland (OR), Providence (RI), Richmond (VA), Seattle (WA), and St. Louis (MO). I find intense concentrations of downtown RTC investments in these cities; these projects were relatively resilient through the recent recession. Federal RTCs play an important role in the ongoing, postindustrial transformation of U.S. downtowns. RTC-funded projects concentrate downtown and are a key factor in the reinvestment of declining cities.
Takeaway for practice: Historic rehabilitation tax credits are an important tool for downtown revitalization efforts and will help local planners and urban policymakers develop robust strategies for downtown redevelopment. Unfortunately, the RTC program cannot be used for owner-occupied units, public schools, or government buildings; there are a finite number of eligible historic buildings; and planners have little control over the location of RTC-supported projects. Local planners, however, can facilitate the use of RTC financing by removing regulatory barriers to adaptive reuse and downtown mixed-use development, being cautious when considering demolishing older buildings, and working with local preservation groups to streamline the process.
Acknowledgments
The author wishes to thank the Technical Preservation Services division of the National Park Service for providing the data for the study.
Notes
1 Unless otherwise noted, all dollar amounts have been converted to 2010 dollars.
2 The federal government also offers a 10% credit for non-historic buildings built before 1936, although this program is not used extensively and is not studied in this article. The date 1936 is a quirk of the law that has never been updated. To be considered “historic” the general cutoff is that a property must be 50 years old. When the Tax Reform Act of 1986 passed, that meant buildings built in 1936 or earlier met that basic test. Rather than stating that the 10% credit applied to non-historic (not listed in or eligible for listing on the National Register) buildings more than 50 years old, the writers of the legislation used the date 1936.
3 Each state has an official state historic preservation office, as mandated by the National Historic Preservation Act of 1966.
4 The Secretary of the Interior's Standards are federal guidelines for the rehabilitation of historic buildings. The standards can be found online at http://www.nps.gov/hps/tps/standguide/rehab/rehab_index.htm
5 While cases of fraud related to the federal RTC are rare, they do exist. For an example, see Hazard (Citation2013). Since the IRS only grants the rehabilitation tax credit at the end of a project, developers typically generate up-front equity by structuring complex partnerships for RTC deals, which involve an equity investor who provides cash for rehabilitation expenses and who then receives the credit upon project completion. In other words, a local developer in Cleveland might partner with Key Bank, who serves as an equity investor in an RTC-supported project. At the end of the project, Key Bank would then receive the income tax credit to offset the corporation's federal income tax liability. This deal structure is common for RTCs as well as the two other major urban tax credits for low-income housing and new markets. A recent case in New Jersey, known as the Boardwalk case, has thrown this structure into question when the courts found that the equity investor did not share sufficient risk in the project and therefore was not a true partner and not eligible to receive the credits. While this case introduces some uncertainty for future tax credit deals, the situation was also unique, and the IRS has continued to grant the tax credit for other RTC projects in the wake of the decision (Edmondson & Leith-Tetrault, Citation2012; Leith-Tetrault, Citation2012).
6 While I will comment on apparent influences or variations that may be explained by the presence (or lack) of a state credit, it is beyond the scope of this research to analyze state-level credits in downtown development. The availability of state RTC data varies widely among the states, and this is an area ripe for further research.
7 Rather than defining a common size that constitutes “downtown,” the study follows prior work that relies on local definitions of downtowns (Birch, Citation2002, Citation2005, Citation2009); thus they range in size from less than a square mile to about 3 square miles. I standardized the investment data by land area, creating a figure for investment intensity, rather than by population (which would create a per capita metric). Downtown populations are rapidly increasing, making a per capita assessment potentially less accurate than standardizing by the relatively stable metric of land area. Also, since the focus is on physical revitalization, it is important to understand the scale of each city's downtown to make a useful comparison.
8 The NPS tracks 18 building use categories, which I have grouped into 7 more common categories used in planning. The original categories were commercial, bank, office, and private club (grouped as “commercial/office”); industrial; hotel; single-family housing, two-family housing, multifamily housing, and carriage house (grouped as “residential”), public school, rail station, church, jail, hospital, theater, and other (grouped as “other”). Since applicants for the RTC can check more than one use, I also created two land use categories to capture mixed-use properties: mixed-use residential and mixed-use commercial. The NPS data on RTC-funded projects does not allow for a numerical calculation of exactly how many buildings were vacant prior to rehabilitation. For example, it is entirely possible that for a vacant, former industrial building one applicant could check “industrial” as the prior use and another could check “other.”
9 For comparison, U.S. Department of Housing and Urban Development maintains an active online database of Low Income Housing Tax Credit projects (http://lihtc.huduser.org/), while the NPS maintains an online searchable database of project status (http://tps.cr.nps.gov/status/).
10 The original request was made with an open-ended agenda to explore disaggregated data on federal RTCs, and the cities were strategically selected along the following lines: cities in states with longstanding state tax credit programs (Baltimore, Denver, Richmond, and St. Louis); cities in states with state tax credit programs adopted between 2001 and 2010 (Atlanta, Cleveland, and Providence), and cities in states with no state RTC (Philadelphia, Portland, and Seattle). The full dataset includes RTC-funded projects with a Part 2 decision date after January 1, 1997, and before June 1, 2010. Prior to the mid-1990s, the NPS maintained data on RTC investments at their field offices throughout the country. When management of the program was consolidated at the Washington, DC, office in the mid-1990s, the data from the field offices was never consolidated into a comprehensive format; thus according to the staff of the Technical Preservation Services division, comprehensive pre-1997 data are effectively lost, unless made available by an individual state historic preservation office.
11 The NPS data included only partial-year information for 2010. As such, I used the NPS’ limited online database in 2012 to search for all projects without a Part 3 approval date in the original NPS data. If a Part 3 approval was reported in the online data, I updated this field with the correct dates. Thus it is reasonable to assume that most projects completed by the end of 2010 have been accounted for in this study. The only projects missing from the study are those that had a Part 2 approval date after June 1, 2010, and a Part 3 approval before December 31, 2010. The likelihood of this is slim, as the average time between the Part 2 (work plan) approval and the Part 3 (completed project) approval for the RTC projects included in this study is just over two years (26 months).
12 In terms of accuracy, applicants do have to submit audited financial statements to the IRS before receiving a credit, but those are not publically available. An example of reporting error might include how different applicants report before and after building use.
13 The National Bureau of Economic Research asserts that the start of the recent recession was in December 2007. For more information, see http://www.nber.org/cycles.html
14 A full analysis of the relative resiliency offered by the federal RTC is beyond the scope of this study. An ideal future research project could compare the resiliency of RTC projects to other federal tax credits, such as the Low Income Housing Tax Credit and New Markets Tax Credits. In addition, future research could compare the level of RTC activity to overall building permits before and after the recession to evaluate the level of stability offered by RTCs through the recent recession.
15 The Pennsylvania State Legislature adopted a state RTC in 2012.
16 In Denver, it is possible that the adoption of Colorado's RTC in 1990 spurred downtown RTC activity during the 1990s that is not accounted for in this study. The data provided by the NPS did include four years (1997–2000) prior to the study period used for this research; during those four years, Denver's Central Business District (CBD) neighborhood had at least 10 RTCs amounting to more than $98.5 million (compared with four projects at $25 million from 2001–2010). Future research with longitudinal data prior to 2001 is necessary to evaluate the effect of Colorado's RTC and to determine if the market for downtown RTC investments is saturated.
17 In 2013, downtown office vacancy rates for the nine case study cities varied from a low of 8.7% in Portland to a high of 26.2% in Atlanta. The average vacancy rate for the three declining cities (Baltimore, Cleveland, and St. Louis) was 21%; for the rebounding cities (Philadelphia, Providence, and Richmond) was 14%; and for the growing cities (Atlanta, Denver, and Portland) was 16%. For all, except Providence, see Jones Lang Lasalle (Citation2013). For Providence, see CBRE (Citation2013).
18 The buildings were privately purchased from 250 separate landowners, beginning in 1994. Over the more than 15 years that it took to complete the project, the developers of East 4th Street used at least four separate RTC applications during the 1990s and 2000s. For the purposes of this study, only those RTCs granted between 2001 and 2010 were included in the analysis.
19 While Denver gained no hotels through RTC financing in the 2000s, a cursory look at the NPS data for 1997–2000 confirms that three hotel projects were completed in downtown Denver in 1998 or 1999, indicating that Denver's surge of downtown RTC-funded projects may have occurred in the 1990s. Longitudinal data prior to 2001 is necessary is necessary to thoroughly investigate downtown RTCs in Denver.
20 For comparison, the city's new baseball stadium, which opened in 2006, cost $365 million (about $395 million in 2010 dollars).
21 The data for this research does not provide information on whether the company went out of business or relocated to another building.
22 Complying with the Secretary of the Interior's Standards for Preservation is generally only required when a developer uses the RTC to rehabilitate a National Register–listed historic building. If developers choose to do a rehabilitation without using the RTC, they do not have to comply with federal preservation standards.
23 While my focus is not to evaluate if and to what extent gentrification is occurring downtown, it does merit at least some discussion.
24 For more on affordable housing policy in the Portland region, see Oregon Metro (Citation2013).
25 The Martha Washington Hotel was built as a residential hotel, converted to a women's boarding house, and, since 1986, used as a minimum-security prison by Multnomah County. It is also Silver LEED certified.
26 It is possible to convert an RTC building to owner-occupied housing (i.e., condominiums) after the full value of the credit has been used. This normally takes anywhere from 5 to 10 years. One downside of conversion is that no future RTCs can be received for future rehabilitations. A historic public school can receive RTCs if it is converted to housing, but not if it needs rehabilitation for its continued use as a school.
27 Local historic designation is not even necessary (only National Register designation is required) for an RTC to move forward.