Historic tax credit sparked 'wildfire' of development downtown - and in Missouri
This article first appeared in the St. Louis Beacon, July 8, 2013: St. Louis attorney Jerry Schlichter recalls a time when the building that became the Renaissance Grand Hotel was a lot less grand. In the 1990s, he said, the building had broken windows and vegetation growing on the roof. It was common, he said, for people to light fires inside. Plans to renovate came and went over the years, with little success.
What changed the tide, he said, was the state’s historic preservation tax credit, an incentive Schlichter help craft in the late 1990s to rehab older buildings around the state. Soon after then-Gov. Mel Carnahan signed the credit into law, Schlichter said, a Louisiana developer agreed to take on the convention hotel project.
“We got it through and they developed the Renaissance Hotel, built that adjacent tower and a 900-room convention hotel and turned a derelict building into a plus,” Schlichter said.
The state historic tax credit, which came online in 1998, has been instrumental in spurring redevelopment downtown -- especially the conversion of old warehouses and factories on Washington Avenue into residential lofts.
The incentive, supporters say, drove down costs for rehabilitation. That in turn made space affordable for residential or commercial tenants.
Other states have adopted similar programs.
“I’ve gotten calls for the last 15 years – ‘how’d you do it? We’re trying in our state to revive our economy,’” Schlichter said. “We are the national model for historic rehab in the country. Yet it’s under attack (here) more severely than any state in the country.”
Yet while historic tax credits have plenty of fans in the St. Louis area, some lawmakers in Jefferson City have tried to clamp down on the incentive. They contend that the program – along with other tax credits – saps the state of needed funds for more urgent priorities.
"If you’re spending somebody else’s money, who wouldn’t like that? Right?" said state Sen. Brad Lager, a Savannah Republican and critic of the historic tax credit program. "But let’s just say if we implemented right now one simple policy that said for every dollar that is given in a state historic tax credit program, it had to be matched with a local government funded dollar, this would dramatically change the program."
Proponents of paring down the historic tax credit were successful in 2009 when they instituted a $140 million cap for bigger projects. But they’ve fallen short in the past few sessions to make any other major changes to the status quo.
And while this year saw no major changes, supporters of the incentive say they’ll redouble their efforts next year – especially since they see lawmakers continuing to target the incentive.
“A lot of times [lawmakers] get caught up with the idea that they want to cut, cut, cut – no matter what the program is,” said Tom Niemeier, the owner of SPACE Architects. “So they can go back to their constituents and say, ‘hey, I cut ‘x’ amount of millions of dollars from the budget.’ We’re saying ‘you’ve got to look at this program carefully. It’s not just St. Louis or Kansas City.’”
From wilderness to ‘wildfire’
Schlichter said the Renaissance Grand Hotel’s shabby state before it was rehabbed was common in the 1980s and 1990s, a period, he said, when the federal historic tax credit was curtailed.
Thus, Schlichter said historic rehabilitation “came to a grinding halt in the city because the numbers simply don’t work for rehab for rent or sale without incentives.
“Washington Avenue, for example, is a street full of great, turn-of-the-century commercial architecture that many cities would die for. And some people were setting fires to keep warm in the winter,” Schlichter said.
"So I decided to try and do something about it and try to create an incentive to turn those derelict buildings – which could be our best asset – into what they would become if they could be rehabbed,” he added
That incentive was Missouri’s historic preservation tax credit, which provides up to a 25 percent investment tax credit on approved costs associated with rehabilitation. To qualify, according to the Missouri Department of Economic Development, a structure must:
- Be listed individually in the National Register of Historic Places
- Be a contributing element of a historic district that is listed in the National Register of Historic Places
- Be a contributing element of a Local Historic District that has been certified by U.S. Department of the Interior as substantially meeting National Register criteria.
Getting the incentive through the Missouri General Assembly, Schlichter said, required strategy.
The credit, he said, had to appeal to rural and urban lawmakers – and both Democrats and Republicans. And, he added, it “had to be stressing not just the beauty of old buildings, but the true economic development benefit that had come from this.”
The bill creating the tax credit passed during the 1997 legislative session. But Carnahan vetoed the measure, Schlichter said, because he disapproved of unrelated aspects of the bill.
When the legislation came up during the 1997 special session, Schlichter said, the measure's language included important changes. Before, the credit was available only to residential rental and commercial structures. But after attending a Benton Park neighborhood meeting, he said he became convinced that it made sense to extend the tax credit to homeowners.
“The people of Benton Park said ‘we’re trying to revive our neighborhood and this would be a great tool. There’s so much more investment that a person has in a reviving neighborhood who has a 25-year mortgage compared to a one-year lease,’” Schlichter said. “That made a lot of sense. And looking at the economic development literature, I saw that owner-occupied housing is closely linked to economic development of distressed areas.”
Despite initial skepticism, Carnahan signed the reconfigured bill into law. It’s an outcome Schlichter attributes to the coalition pushing for the tax credit.
Dollars and cents
Arguably the most attractive aspect of the state historic tax credit is its ability to be sold, which can make the development of larger buildings more affordable.
Zack Boyers – president and CEO of U.S. Bank Community Development Corp. – said some buildings downtown are often expensive to rehabilitate because they have “big footprints.”
He said that the federal historic tax credit, tax increment financing and new market tax credits were crucial tools in downtown’s development. But state historic tax credits caused redevelopment to spread like “wildfire,” mainly because of their ability to be sold. Boyers' company has become a nationwide leader in this area.
“So if you spend $10 million in qualified expenses, you will get a $2.5 million tax credit from the state,” Boyers said. “Now usually, a developer doesn’t need a tax credit. What the developer needs is cash to get his or her building built. And so, we give them the cash, which means we get the credit, which we use to offset our own tax liability or sell to a third party.”
“Instead of having to borrow $10 million and pay all that back – which means they have to sell or rent the units for more – now it’s really $7.5 million they have to borrow from a bank,” he added.
Schlichter said the ability to sell the tax credit was essential to its success. Without the transferability, he said, the tax credit would not have been an effective incentive for development. He gave the example of a small developer who received a $125,000 tax credit after a $500,000 rehabilitation effort.
“Well, $125,000 in taxes at 6 percent means somebody would have to have a multi-million dollar income to have enough taxes to be able to use that credit to the fullest,” he said. “So the only way that small developer could use that $125,000 tax credit would be to be able to sell it to someone who has tax liability – AmerenUE, Anheuser Busch, somebody like that. And so I wrote it that way to make it transferable.”
Schlichter estimates that the tax credit sparked $4 billion worth of development in the city of St. Louis and $7 billion across the state. According to data from the state Department of Economic Development, the credit’s impact on downtown is immense.
According to analysis of data sent to the Beacon by the Department of Economic Development, $448 million in historic tax credits has been allocated for $1.79 billion worth of development between 1998 and mid-2012 for three downtown Zip codes.
The tax credit was used extensively on Washington Avenue. For all properties listed with a Washington Avenue address at a street number less than 1600, nearly $82.9 million worth of tax credits were allocated. The total rehabilitation costs for these properties were $332 million.
Top 10 downtown projects
The 10 projects in the 63101, 63102 and 63103 ZIP codes that received the most money in historic tax credits between 1999 and June 2012.
Other major projects downtown that got historic tax credits include:
- Renaissance Grand Hotel, a $78 million rehab project that received three issuances of historic tax credits between 2002 and 2004 worth about $19.6 million.
- The Missouri Pacific Building, a $71 million rehab project that last year received $18 million worth of tax credits. That was the largest single issuance of a historic tax credit since 1998, according to the data analysis.
- The Old Post Office, which received three issuances in the mid-2000s for a total of $9.9 million.
DFC President Steve Stogel was a key figure behind the Old Post Office’s redevelopment in the 2000s. Numerous attempts to revitalize the post-Civil War era facility failed throughout the years, including an attempt in the 1970s to turn the building into an art museum and food court.
The rehabilitation in the 2000s was complicated, mainly because it involved the federal government transferring the building to the Missouri Development Finance Board. In addition to state and federal historic tax credits, the project also received federal new market tax credits – an incentive aimed at fostering commercial activity in economically disadvantaged areas.
The state historic tax credit, Stogel said, was “a powerful economic tool for finding and doing renovation projects.”
“The reason it’s so powerful is if you take the federal historic credit and the state historic credit and you blend the two together, you can get upward of 35 percent of your total development cost brought in as equity,” Stogel said.
Stogel said getting the Old Post Office rehabbed was critical to fostering development of surrounding buildings. Eight of the 11 surrounding buildings are redeveloped and occupied, he said, while two others – the Arcade Building and the Chemical Building – are being rehabbed. The Century Building was demolished to make way for a parking garage -- which he said was essential for the area's success.
“From 1998 to 2013, in 15 years you’ve developed almost 2 million square feet of the 10 million square feet” downtown, Stogel said. “And today in St. Louis, the super punch line is of the 10 million square feet, I can count five or six buildings that were on that original list of [70 vacant buildings] from August 2000.”
“There’s huge, substantial renovation that’s been done because of the power of the twin state historic and federal historic credit,” he added.
The credit, of course, has also been used in other parts of the city, including the Central West End and Midtown. Niemeier used the credits to spruce up his company's headquarters in the Grove.
“We’re not a big firm. We’re about 18 people,” said Niemeier in a telephone interview. “And we really wanted to purchase a building. We didn’t want to lease. So when we looked for an existing building, it was for a historic building – because they’re made of brick, have bigger windows and taller ceilings, and are more interesting structures."
If the state historic tax credit weren’t available, Niemeier said that he doesn’t think “you’d see nearly the development that you’ve seen in St. Louis.”
“Because you can re-sell them so easily, it’s very enticing for developers to grab that extra 20 cents on the dollar from state credits,” he said. “When you’re spending millions of dollars, that’s a whole lot of money. So it makes a project doable that’s right on the edge of being feasible."
Beacon presentation editor Brent Jones contributed information to this story.