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  • Tax Credits Really Do Add Up
  • John Leith-Tetrault (bio)

In 1981 the United States was mired in an economic recession that posed a significant challenge to the newly elected Reagan administration. Much like today, the Republican Party then favored changes to the tax code to stimulate investment patterns that would promote economic growth. The President's proposed formula included both tax cuts and "tax expenditures" such as tax credits and accelerated depreciation1 to steer capital back into the real estate market. Effective January 1, 1982, Congress passed a stimulus bill that included the federal historic tax credit (HTC) which, for the past 32 years, has provided a tax credit (20 percent since 1986) for the rehabilitation of certified historic properties. The purpose of the HTC was to level the investment playing field for the rehabilitation of existing buildings which was at a competitive disadvantage to new construction for capital investment in real estate.

The original rationale for the federal HTC poses an interesting question for today's Congress, which is soon likely to debate comprehensive tax reform for the first time since 1986. Is the HTC still needed? Is historic rehab, or rehabilitation in general still at a competitive disadvantage to new construction? As the federal government struggles to pick winners and losers in tax reform, is the HTC a tax expenditure that we can afford to eliminate or roll back?

Since the enactment of the HTC, there has been growing support in public policy circles for property rehabilitation in older communities. Smart Growth advocates now argue that these buildings are part of a built environment already supported by roads, transit, educational facilities, and utility grids. Their reuse reduces dependency on automobiles and fossil fuels. The National Trust's study, The Greenest Building: Quantifying the Environmental Value of Building Reuse, shows that older commercial buildings are inherently more energy efficient and when renovated, retain the "embodied energy" that was used to build them and reduce the use of landfills to dispose of construction waste. Since 1982 the [End Page 30] Main Street program has proven that the authenticity of historic buildings attracts people to unique downtown housing opportunities, restaurants, and entertainment and office spaces. Compact, walkable Main Street districts bring shoppers and tourists to locally owned businesses that provide freshness and vitality that the shopping mall can never match.

Nevertheless, historic rehab still faces some of the same economic challenges that led the Reagan administration to embrace the HTC. None of the above public policy justifications by themselves can drive decisions by individual historic property owners to invest their own money or borrow capital to rehabilitate a building unless there is a chance the building and its tenants will be an economic success. Hurdles to overcome include providing parking options for properties built to accommodate the horse and buggy, respecting the historic arrangement of interior spaces that may not contribute to the property's bottom line, and foregoing in many instances external additions that may give an older building the space needed to adapt to its most viable new use.

On top of these well-known physical challenges to historic rehabilitation is the reality that capital in our economy still gravitates to the tried and true: the franchise that seems to work everywhere, the ubiquitous brand that consumers always come back to, and the area of town that has a track record of supporting successful businesses. Because they are unique by nature, these properties don't offer investors the comfort that comes with sameness and repetition. Nor do these properties typically attract the attention of developers with the deepest pockets. Most developers still prefer the predicable costs, marketability, and higher returns on capital provided by new construction in automobile-friendly suburban markets with proven demand.

In fact, many historic buildings are located in disinvested and diverse parts of downtown that long ago lost the competition with suburban office parks and regional malls. Based on National Trust Community Investment Corporation research, we know that between 2001 and 2012, 77 percent of the HTC transactions were in qualified low-income census tracts.

It is the continuing and overriding need to "make the numbers [End Page 31] work," and to overcome...


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