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Tax Reform Poses Threat to Historic Preservation ProgramLock Icon

7 min read

In the last 20 years, Little Rock developer Jimmy Moses estimated, his company has been responsible for over $300 million in development projects in downtown Little Rock, with $40 million to $50 million of that relying on federal historic tax credits.

Now, the tax reform proposals wending their way through Congress threaten those tax credits, financial incentives that Arkansas developers, government officials and historic preservationists say have been crucial to economic development efforts in the state.

The stakes are high.

“The cost of the credit is so tiny and the impact of redevelopment for cities so significant, it’s just a shame for the historic tax credits to be attacked as frivolous or not necessary,” Moses said. “They’ve really been immense stimulants for development that otherwise wouldn’t happen. And virtually all of it, of course, is in downtown America. It’s a double benefit. It’s not only circulation of additional investment dollars, but it’s also redevelopment of the central cities around the country.”

Projects that have benefited from the tax credits can be found throughout Arkansas. They range from the renovation of the Capital Hotel in Little Rock to the Crescent Hotel in Eureka Springs, from the 106-year-old Friedman-Mincer Building (the old Otasco building) in Fort Smith that is now the headquarters of ProPak Logistics, to the old Quapaw Bathhouse in Hot Springs, once again a functioning bathhouse and spa.

In Little Rock, the projects also include the old Blass Department Store at 324 Main St. and store annex at 310 Main, now the Mann on Main project housing loft apartments, Samantha’s Tap Room & Wood Grill and Bruno’s Little Italy. Imagining downtown Little Rock without this Moses Tucker Real Estate project is almost impossible only four years after it opened.

And the potential elimination of historic tax credits threatens future projects as well, such as the planned $30 million renovation of the Arlington Resort Hotel & Spa in Hot Springs and the Hotel Pines in Pine Bluff.

“We’re hoping that they’re saved, and we’re working very closely with our elected officials [Rep.] Bruce Westerman and other people to save the program,” said Al Rajabi, CEO of Sky Capital Group LP of Little Rock, which bought the Arlington in July. “It’s a very important piece of our project, obviously, and it’s very important to Hot Springs,” he said, adding, “I don’t want to even think about it going away.”

Between 2002 and 2016, the federal historic tax credits spurred $218.7 million in the development of 140 projects in the state, according to Preserve Arkansas, the nonprofit that seeks to preserve the state’s architectural and cultural resources. These projects supported 2,186 construction jobs and led to the creation of 2,320 permanent jobs, Preserve Arkansas said.

“In the wide scheme of things, the historic tax credit may not seem like a big deal to a lot of people, but it’s a big deal to us — and not just Preserve Arkansas,” said Rachel Patton, executive director of the organization. “It’s a big deal to people all over the state and to, particularly, historic commercial districts all over the state, which have experienced record revitalization because of the pairing of the historic tax credits, the federal and the state.”

How They Work
The Federal Historic Preservation Tax Incentives Program seeks to encourage private investment in the rehabilitation and reuse of income-producing historic buildings. It was enacted as part of the Tax Reform Act of 1976.

In 1981, the Economic Recovery Act signed into law by President Ronald Reagan enhanced the program to include a 25 percent tax credit for certified rehabilitations of certified historic structures, which led to an increase in the number of rehabilitation projects across the country.

In 1984, Reagan made special note of the program, saying, “Our historic tax credits have made the preservation of our older buildings not only a matter of respect for beauty and history, but of course for economic good sense.”

The Tax Reform Act of 1986, an effort to simplify the tax code that instituted the greatest changes to the system in years, made the program a permanent part of the tax code but modified it, setting the tax credit at 20 percent, where it has stayed.

The historic tax credit program is administered by the National Park Service and the IRS, working with historic preservation officers in each state.

In Arkansas, those officers are with the Department of Arkansas Heritage.

Developers can use the credit to lower their income taxes, claiming 20 percent of eligible rehabilitation expenses. Although tax credits can’t be sold, they can be transferred to banks and other investors in exchange for equity funding for developers’ projects, a practice known as syndication and used by many developers of historic properties.

Projects must be income-producing or used as a business to be eligible.

In 2009, the Arkansas Legislature created a state historic tax credit of 25 percent, allowing Arkansans to claim part of their investment in a historic structure on their state income taxes. Owners of income-producing properties were allowed to claim up to $125,000 per project.

The Legislature strengthened the state program this year, raising the credit to $400,000 for income-producing projects. That program is administered by the Arkansas Historic Preservation Program, and state law allows the AHPP to award up to $4 million in tax credits per year.

The House version of tax reform eliminates the tax credit, saving $1 billion annually, according to an analysis by the congressional Joint Committee on Taxation. The Senate version keeps the credit but requires that it be spread out over five years, or 4 percent per year.

A conference committee will now reconcile the differences between the two bills.

Paul Dodds is managing director of Urban Frontier LLC of Little Rock, which buys older houses in the Central High School Neighborhood Historic District, many of them unsafe and vacant, and completely renovates them as certified historic structures. He then turns around and rents the properties.

Dodds, who lives in the neighborhood, has bought and restored 13 houses and is working on his 14th. He estimated that he has invested about $2 million in the neighborhood since he started Urban Frontier 13 years ago.

Elimination of the historic tax credit, as envisioned in the House bill, “could really hurt me,” Dodds said, but he figures he could live with the Senate version. His projects are too small to syndicate so he uses the tax credits himself.

If Congress eliminates the credit, “there are marginal projects that I just wouldn’t bother taking on,” he said. “It’s a hard neighborhood to do. I take on hard houses and it only works if I do it with a long-term perspective. The houses are in such bad shape and the market values in the neighborhood are still so low that they’re not really properties that you can flip.” Dodds said he has started to see some properties reselling in the neighborhood, “but that’s not my model … I’m really trying to preserve the historic structure of the neighborhood.”

Every house is a struggle, Dodds said, “because they’re really rundown,” but he has seen signs that the neighborhood is stabilizing.

Westerman has been working to preserve the federal historic tax credit. “It’s proven to be a good program on multiple levels,” the Republican congressman told Arkansas Business. “There’s a study that shows it returns $1.20 to the federal government for every $1 that goes out of the program, so it makes economic sense.

“We also obviously see the economic benefits of it in preserving our historic structures and we see the economic growth that revolves around that. It was a program that Ronald Reagan liked and it’s a program that’s been successful.”

Westerman last week sent a letter to Rep. Kevin Brady, chairman of the House Ways & Means Committee, and Sen. Orrin Hatch, chairman of the Senate Finance Committee, asking that the federal historic tax credit be preserved as it currently exists or, at the least, that the final tax reform bill reflect the language in the Senate bill, which preserves the credit but spreads it out.

The credit, Westerman’s letter said, “should be viewed as a strategic investment,” adding that “the positive economic impact of the HTC far outweighs its cost to the federal government. The United States has realized a cumulative $291.7 billion in output, $106.6 billion in income, and $144.9 billion in GDP growth as a result of HTCs.”

Congress’ goal is to have the tax reform bill to President Trump before Christmas.

“That conference committee will be getting a lot of armchair quarterbacking from other members, and I’m getting inundated with requests from all kinds of groups back home on all kinds of issues, as I’m sure every member of Congress is,” Westerman said.

“But I trust that at the end of the day we’ll have a good bill and overall it will be better for Americans and for the economy.”

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