When the Missouri General Assembly's 2010 regular session adjourned in May, the state's highly lauded historic rehabilitation tax credit program narrowly dodged a bullet. Despite the efforts of Governor Nixon and his allies to reform historic tax credits ("HTCs") and other state tax credit programs "from scratch," new legislation to curtail the use of HTCs was not passed. Supporters of the HTC program celebrated the near miss, while simultaneously warning of "a greater fight next year."
It appears that those demanding changes to the state's tax credit programs do not intend to wait that long. An e-mail recently circulated by the Coalition for Historic Preservation and Economic Development has shed light on an "expanded review process" recently implemented by the Missouri Department of Economic Development, that apparently affects both preliminary and final HTC applications. A sample letter from the DED to a potential HTC recipient states that the purpose of the expanded review process is "to ensure the eligibility of all projects, costs and expenses."
According to the Coalition, the details of the new process are unclear, "without clarification on the length of time being allocated for the added review[,] who within DED is responsible for conducting the expanded HTC review," or "when final approvals will be obtained." As far as I can tell, the state isn't even bringing the new process to the public's attention, with the website for the Missouri Department of Natural Resources continuing to refer to a 30-day process for "initial processing at the Department of Economic Development, review of proposed work by the State Historic Preservation Office and final processing by the Department of Economic Development." The Coalition's view of the result of the new "undocumented" process is clear, however: a slowing down of the entire HTC process, a resulting increase in project costs, a reduction in the number of HTCs issued, and an inability to obtain financing for new projects.
In the same e-mail, the Coalition notes that "$350 million in line item vetos and expenditure restrictions for the FY2011 budget that went into effect July 1 included $47 million to come out of existing tax credit programs." The e-mail highlights a spreadsheet from the Office of Administration, that includes the following comments next to the noted $47 million tax credit item: "Tax credit redemptions anticipated to be lower than orginally forecast based on economic sitaution. Also, more carefully review all tax credits before they are authorized." [Emphasis added.]
This below-the-radar tinkering with the HTC rules, coupled with new program caps and other changes implemented in 2010 and the governor's presumed intent to pursue further limits on the program next session, appear to have already created the uncertainty and confusion in the tax credit marketplace feared by supporters of the HTC program. In today's front page Post-Dispatch article, Tim Logan reports that only $13.4 million in HTCs were authorized in the first half of 2010, down from $87.7 million in the first half of 2009 and $86.1 million in the second half of 2009. The number of applications filed during the first half of 2010 fell by over 60% compared to the same period in 2009, with half of those "still awaiting approval."
Tim notes that a rough economy, particularly in the commercial real estate sector, is surely partly to blame. But the real estate market has suffered and credit markets have been tight for several years now. The actual and threatened changes to the HTC program in recent years, and related uncertainty in obtaining the credits, has almost certainly caused some, if not most, of the drastic drop-off in use of the HTC program. Elements of fear have even been injected into the process, with Tim's article referencing "a dozen local bankers, developers and others who work with historic tax credits" who would not speak publicly "for fear of alienating the powerful state Department of Economic Development."
How can a market for tax credits--one that, in prior years, was held up as a national model and a key driver of the Missouri economy--function efficiently in that environment? Not surprisingly, it can't. In Tim's words, "[q]uestions about when, or even if, they will get repaid can make banks and investors skittish." Up-front financing for historic rehabilitation projects becomes much more difficult in the absence of clear, objective, apolitical criteria for the HTCs that are sold to the financier (at a discount) prior to their issuance.
In a post earlier this year, I detailed the costs and benefits of Missouri's HTC program, as well as the political points that I believe should be made by those seeking to protect the program. Those include the economic benefits that bely Governor Nixon's characterization of the HTC program (in context of the overall Missouri economy) as a "zero sum game"; the jobs that are created by the HTC program; and the probability that changes to the HTC program would result in "dollars that could have been invested in Missouri [] being invested elsewhere"--in other words, states with more favorable tax credit programs. Tim's article addresses this last point directly, quoting Representative John Diehl (R-Town and Country) as stating: "Investors just aren't going to invest in places where the rules and the process aren't clear."
In that post, I referred to Governor Nixon's broad attack on the HTC program--akin to taking a hatchet to a problem requiring a scalpel--as "political malpractice." Although some changes to Missouri's tax credit programs are surely needed in light of budgetary hardships, changes to a hugely successful program--the success of which relies on clarity and objectivity--must be made in a careful, targeted, and transparent manner. By using administrative antics to achieve what the governor could not achieve legislatively, the state appears to have muddied the waters enough to cause a drastic slowdown in the use of the HTC program and, presumably, future redevelopment.
It is troubling to consider the extent to which the market uncertainty created by these changes, and even more problematic changes potentially enacted in the future, may negatively impact the City of St. Louis. The HTC program has been a critically important component of the ongoing rejuvenation of the City, and downtown in particular. In downtown alone, more than 100 historic buildings were redeveloped in the last decade, with 4,400 new residential units coming online and 5,000 new downtown residents, making downtown "the fastest growing community in the St. Louis region." By the end of this year, over $5 billion dollars will have been invested in the redevelopment of downtown in the last decade, much of which could not have occurred without the HTCs used to help finance the high-cost rehabilitation of the City's historic buildings.
Mayor Slay has rightly opposed changes to the HTC program that are likely to hinder continued urban development and achievement of the City's goals for upcoming years (which include a 60% increase in downtown's population by 2020, to 20,000 residents). In Tim Logan's words, builders know that "ad hoc, unspecified changes threaten to bring redevelopment in St. Louis to a grinding halt." Which recent projects might have been delayed or not occurred at all, but for the certainty of obtaining HTC financing? Would the complex and fragile financing of the Peabody Opera House, which included $12.5 million in Missouri HTCs coupled with $12 million in federal HTCs, have come together? Which future projects might be significantly delayed or never happen at all--perhaps a future rebirth of the gorgeous Arcade Building? Or, more likely, will it be the many smaller rehabs undertaken by the politically unconnected that will suffer as a result of new, undefined rules and probable future attacks on the program?
It appears that the question now being asked by the tax credit market is, "Who knows??"
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