By KERRY SMITH, Editor, St. Louis Construction News & Review Magazine
The Missouri General Assembly ended May 18 with passage of legislation that reduces the state’s historic tax credit program’s annual cap, requires developers to go through more hoops and arguably opens the process up to some arbitrary judgment as to which projects receive these incentives.
Spencer Fane Partner and Tax Credit Group Chairman Shawn Whitney said last Friday’s vote to cut the cap from $140 million to $90 million was somewhat predictable, despite ardent lobbying from the law firm, real estate investors, developers and Historic Revitalization, the nonprofit organization dedicated to revitalizing urban areas including downtown St. Louis. Whitney said the details of SB 590 remain to be discovered. The law takes effect July 1.
State historic tax credits are a valuable economic stimulus tool, according to Whitney, because they require four dollars in private equity before any one dollar’s worth of credit is awarded. HTCs spur economic activity, jobs and overall investment in restoring and redeveloping long-neglected urban areas, he said.
“We’d spent a lot of time hoping to get enough no votes so that Senate Bill 590 wouldn’t pass and that the historic tax credit program in Missouri wouldn’t be modified,” said Whitney, “but toward the close of regular session, it became a mitigation issue. The devil’s in the details, for sure. We’re working with our state legislators to really define what the law means,” he added.
Prior to last week’s passage of SB 590, Missouri’s total annual allotment of historic tax credit dollars was $140 million. While for many years that was ample, Whitney said, in 2017 Missouri exceeded the cap.
“SB 590 reduces the annual cap to $90 million,” he said. “The law does allocate an additional $30 million for high-poverty urban areas, those which qualify under the U.S. Census Bureau’s definition of qualified census tracts wherein at least 20 percent of residents are at the poverty level. That’s a really good provision. But in terms of the annual cap, we feel like we’re going to hit that $120 million number annually.”
More troublesome than the increased annual cap on Missouri’s historic tax credit incentives is the increased degree of subjective input SB 590 allows, according to Whitney. The Missouri Department of Economic Development now has heightened authority over who receives the incentive, as do elected officials whose districts and towns are applying for the state-funded credits.
“Getting through the cost certification process at the end of the development project is already difficult,” he said. “We’ve had projects in Missouri where the respective economic development departments approved our structure at the start of the venture but later changed their minds during the approval process. The entire process is pretty arbitrary, when what a historic preservation and development project really needs is reliability and consistency.”
Each project applying for Missouri historic tax credits is required to go through a net fiscal benefit review, according to Spencer Fane – one that is not yet defined within the new law. “We think that’s troublesome,” said Whitney. “There is a lot of ambiguity in the term ‘quality’ as it pertains to project development,” he said. “Quality truly is in the eye of the beholder. Another section of the new law that concerns us greatly is that input by local officials as to the importance of their proposed project – in whose district the proposed project is located – will now be afforded greater influence. Prior to the passage of SB 590, historic tax credits were by right, meaning that if your project was on the National Register of Historic Places and you rehabbed the building in accordance with the Secretary of the (U.S. Department of the) Interior’s standards for redevelopment, the historic tax credits were guaranteed. The type of language contained in this new law lends itself to what we dealt with in the affordable housing issues years ago,” he added.
Another new requirement in SB 590 is that developers must submit evidence of the capacity of the development to finance costs for rehabilitating the property. “Especially when you’re dealing with a reduced (HTC) cap, it’s difficult for the (development) industry as a whole,” Whitney said. “Due to the increased cost and risk level of historic redevelopment projects, often more projects are attempted than succeed. A couple of current (St. Louis-area) projects that received HTCs have not been able to move forward, yet those historic tax credits aren’t able to be allocated to other rehab efforts in a timely manner. It can truly be a chicken-and-egg issue.”
SB 590 also requires qualifying development projects to commence within nine months of being awarded historic tax credits, rather than over a two-year period as had been in existence prior. “What you’re likely going to see are more shovel-ready projects,” Whitney said. “Developers are going to have to spend a little more money preparing their project to obtain commitments from lenders and tax credit investors, but we think we can work through it. We’ll see as the marketplace plays out. SB 590 doesn’t contain any provisions that should impact the pricing.”
In contrast, he added, the federal tax credit provision – which now allocates a 20 percent credit over five years – may impact pricing, with investors often lowering their investments in qualifying rehab projects by 10 cents to 12 cents on the dollar.
“Having represented developers for nearly 20 years, I can attest to the fact that they’re an adaptable bunch,” said Whitney. “So long as Missouri historic tax credit issuance doesn’t become a political and arbitrary process, developers in St. Louis and across Missouri should be able to adapt.”