Prompting Preservation

Financial Incentives Offer
Boost to Restoration Projects

by Bruce Buckley

In the historic restoration and rehabilitation market, if you offer incentives, they will come.

As home to some of the best financial incentives in the country for historic preservation projects, Midwestern cities and communities are attracting developers to revive rundown structures and neighborhoods.

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Missouri Tops in Incentives

Missouri has been among the most aggressive states in the country to lure redevelopment through the use of tax credits, loans and other programs.

In 2005, for the second year in a row, Missouri ranked first in the nation in the number of federal historic preservation tax credit projects completed as well as the number of such projects that received preliminary funding.

The federal program, which is administered by the National Parks Service, offers a 20% credit for income-producing properties that are listed on the National Register of Historic Places, including commercial, industrial and rental residences.

Projects include the Paul Brown Building conversion, St. Louis Centre shopping mall and Pet Inc. tower conversion.

While the federal program offers a healthy boost to projects, the introduction of Missouri's rehabilitation tax credit in 1998 is responsible for catapulting its success. The program offers a 25% state tax credit for eligible properties in addition to the federal credit.

According to a National Parks Service report, interest in the federal program doubled after the introduction of the state incentives.

"Without programs like this, we wouldn't be doing this kind of work," says Brian Arnold, vice president at Paric Corp. of St. Louis.

Paric is among the Missouri-based general contractors that have been able to carve out a niche in the historic preservation market, particularly in the St. Louis area. Arnold said it's important for architects and contractors on such projects to understand the available incentives upfront to keep projects on track.

"It's a fragile model with the potential for unknowns that can take a bite out of a developer's pro forma," he said. "You need people in there who understand the process so that everything meets the requirements."

St. Louis Building Gets Millions in Credits

Among the most elaborate deals put together in St. Louis through the use of incentives was the Paul Brown Building. Once a 16-storyoffice tower, it was turned into a 222-unit apartment building in a $53.4 million project.

Paric served as general contractor with St. Louis-based Rosemann & Associates as the architect. The project broke ground in 2004 and opened in June 2005.

The developer, Pyramid Cos. of St. Louis, was only able to secure approximately $25 million in debt at market rate, but through federal and state programs, the project received $9 million and $11 million in credits, respectively.

To offset the cost of removing hazardous materials, Pyramid tapped the state's brownfield program and saved $1.6 million. The program offers dollar-for-dollar credits on the cost of remediation at contaminated buildings and sites.

By incorporating affordable units, Pyramid made the project eligible for $5 million in state and federal low income housing credits. It also used local tax increment financing and tax-exempt bonds at 5.75% for 42 years, which enabled the company to increase its eligible debt on the project to $28 million.

Matt O'Leary, senior vice president at Pyramid, says the deal required his full attention for four months to pull everything together, but the results were worth it.

"That deal almost killed me," he says. "Every time you layer one subsidy over another, the implications start to spiral. We learned a lot on that job, and others have been able to take advantage of the learning curves."

Incentives Bring Back Chicago Gem

In Chicago, Northern Realty Group of Chicago has been able to carry out a $36 million conversion of the Shubert Theatre through a series of incentives, including easements.

The project includes the restoration of the theater, which reopened in May as the LaSalle Bank Theatre, and the reuse of the adjoining Majestic Building as a hotel, which opened in January. Chicago-based Booth Hansen was the architect, and the Chicago office of New York-based Bovis Lend Lease Inc. was the general contractor.

The Landmarks Preservation Council of Illinois offers an easement program that has ramped up substantially in recent years. Under the program, the owner of a certified historic structure conveys an easement to the LPCI, and the structure can never be demolished, significantly altered or added to without the organization's permission.

Easements are considered a charitable donation under federal tax code, offering significant savings to developers. LPCI currently holds 415 easements.

As part of its plan, the Shubert Theater project team conveyed the facade of the theater to LPCI. Including the easement, tax credits, a TIF loan and other incentives, the team realized nearly $6 million in savings.

"The decision was easy-you either use these programs or you don't do the project," says Michael Tobin, managing principal of Northern Realty. "I've yet to see a renovation of this type that can be profitable if it's funded solely from private and conventional sources."

LPCI also launched its Heritage Fund in 2004, which provides grants for projects through nonprofit groups with historic structures. In 2005, it provided $400,000 in grants for renovation and restoration work.

Illinois' major state-level preservation incentive is its property tax assessment freeze. Under the program, homeowners of registered historic structures can have their state taxes frozen for eight years if at least 25% of the property's market value is spent on a rehabilitation project. After eight years, taxes increase incrementally every quarter for the next four years.

Although savvy developers are making use of many of the state and federal programs available in Illinois, Lisa DiChiera, director of advocacy at LPCI, says many are missing out on an opportunity.

"A lot of time, architects and contractors either aren't knowledgeable or they forget to recommend these incentives to their clients," she adds. "There are incentives out there that might mean the difference in doing a project or not doing it at all."

Indiana's Experience

While some in Illinois are working to increase the use of redevelopment incentives, Indiana is taking a more guarded approach.

Tina Connor, executive vice president of Historic Landmarks Foundation of Indiana, says her organization has offered numerous easements over the years, but is pulling back. HLFI is studying its current program to make sure it is properly structured and funded. Part of the concern has been the cost of enforcing easements, such as legal bills.

"It's a heavy obligation," she says. "We don't believe everything should be a rarefied museum property, but we do need to make sure the integrity of the design is preserved."

Indiana is also struggling with its state historic tax credit. The program offers a matching 20% credit to the federal tax credit program. However, the

Legislature capped yearly credits at $750,000 with no more than $100,000 offered on any one project.

"The program has gotten so popular that we have a queue that stretches out past 2016 of people looking to claim this credit," says Mark Dollase, vice president of preservation services at HLFI.

HLFI is also active in several other programs, particularly around Indianapolis.

The group's Fund for Landmark Indianapolis Properties program, or FLIP, attaches protective covenants on historic properties and resells them to buyers who will restore them. The program also offers loans to nonprofit community organizations to purchase and restore historic properties.

"This program has been at the core of revitalizing downtown Indianapolis neighborhoods for years and it's still very active," Dollase says.