Historic Tax Credits and Georgia
Kronberg Wall HQ in Reynoldstown, Atlanta, completed in 2015. We were able to renovate the historic Bearden Temple AME Church with the help of state and federal tax credits.
We’ve been working on multiple projects lately that are dependent on Historic Renovation Tax Credits (HTC) to help cover the increased cost of historically compatible renovations. Currently, there is a federal tax credit, and Georgia is one of the states that also offers a state tax credit. Combining state and federal credits becomes a powerful financial tool to help make difficult projects possible. Through our experience with HTC’s over the years – and some recent changes – we’ve developed some thoughts on how the system could be adjusted to work for projects that have different scales and available resources.
Importantly, HTCs are one of the few tax credits that are cash flow positive for state and federal governments, meaning the credits generate more than their value in tax revenue. For those curious for more information, a good history of the federal program is available here. For years, Georgia had a cap on the amount of credit an individual project could claim of $300,000. This effectively limited the benefit of the credit to smaller projects. There was an expansion of the state program in 2016 to create a second pool of HTCs that were not subject to a project cap, but subject to an annual overall state budget cap of $25 million, with the funds available for five years (the program ends in 2021). This pool opened the State HTC up to become a powerful tool for larger, more transformative projects.
There are several challenges with the state program. The first is that it is set to end in 2021. The second issue is that the $25 million credits available each year are already mostly or completely claimed through 2021 – so there aren’t any more funds available. One of the technical problems with the program occurs when an applicant applies for credits and either doesn’t complete their project or completes their project and claims fewer credits than were originally estimated. The unused credits are lost instead of being returned to the common pool to be leveraged by other projects.
The State Senate issued a generally positive report on HTCs in December of 2017, but as might be expected in Georgia, there was a lament that the program wasn’t being utilized effectively in smaller towns. One other thoughtful item was that it would be good to index caps with inflation. An obvious call to action is to push our elected officials to renew the current program for another five years, and to fix the technical limitations to allow unused credits to return to the common pool.
Successfully acquiring tax credits on a redevelopment project is typically a complicated and challenging endeavor, and one that typically requires professionals who are versed in the nuances of the process, many of which are subjective. There is often a baseline cost for these professional services regardless of the size of the project. This means that smaller projects often don’t have the budget necessary to afford an expert to help in the project. As smaller projects are often the only ones that occur in smaller towns, this puts them at an immediate disadvantage to leveraging the program.
There is a straightforward tension in any government credit program to ensure compliance and minimize waste and fraud. The significant requirements for historic compliance established by the Department of the Interior do a good job of verifying historic renovation appropriateness for projects that receive credits, but at the expense of tons of expertise needed by multiple parties in a renovation project.
Until 2017, the federal government had an alternate program intended to be simpler to use for renovation of old, yet non-historic properties. The program was established under the Reagan administration in 1986, and the credit was available to buildings built before 1936 (50 years or older). The credit was only half as valuable as the full federal HTC (10%), but compliance was far simpler. Essentially, you had to save a majority of the existing walls, floors, and structure of the building. Interestingly, the legislation put a hard date on 1936, and not simply 50 years or older, meaning that the 1936 date has stuck for the many decades since the program was enacted.
The reporting for this 10% credit was also very straightforward, which means you don’t need a historic consultant versed in the nuance of historic renovation standards. Unfortunately, this program was a casualty of the recent federal tax reforms. We would strongly encourage our State legislature to consider a state credit based upon the previous federal 10% HTC program as a simpler way to offer renovation credits. We see this as an effective tool for smaller towns that don’t have or necessarily need historic consultants to help with their projects. Putting a cap on the amount of credits used per project also seems reasonable; keeping it on par with the current $300,000 cap for projects might translate to a cap per project of $150,000. Whether setting a sliding date of buildings fifty years old or maintaining the 1936 date is a question for legislators to debate as well.
We appreciate thoughtfulness on the part of elected officials that think hard on appropriate ways to spend state resources to make better, more inclusive places for all Georgians. HTCs have long been a powerful tool to facilitate renovations in places we love. We highly encourage our state leadership to expand and extend our current programs.