Tax credit program helping to revitalize Virginia’s cities

by Dena Sloan
for Virginia Business
July 2005

Working out of a New Orleans office, George Brower has been able to play a key role in Virginia’s stories of urban revitalization.
Brower doesn’t strip metal off brick facades or patch up intricate ironwork on 19th century buildings. Instead, the managing member of Tax Credit Capital LLC helps connect real estate developers with the cash they need to restore old structures.

His financing method essentially involves buying and selling tax credits earned in rehabilitating old buildings. “I guess I really get wowed by some of these developers and how creative they are and how beautiful they make these buildings,” says Brower, whose firm has been managing its Virginia Historic Tax Credit Fund for about eight years. He estimates the fund has dealt with tax credits worth about $100 million for more than 800 projects around the state. “We’ve watched the rebuilding of these urban cores,” he says.

The myriad historic renovation projects springing up across Virginia aren’t just a coincidence. Many say the historic tax credit program approved by lawmakers in 1996 has paved the way for significant renovation projects. The program can help make these notoriously expensive rehabilitation projects feasible, sometimes rendering the adaptive reuse of old buildings comparable in cost to new construction. Asbestos removal and other costly problems could be lurking behind walls, so additional funding from the sale of tax credits helps to provide a buffer against some of those risks, as well as serve as a source of primary funding.

According to many in the business, the availability of credits and the ability to turn them into an additional funding source makes all the difference when deciding whether or not to sink big bucks into renovation projects. “I attribute the revitalization of downtown Richmond to the availability of tax credits,” says Bob Mills, a founding partner of Commonwealth Arch-itects, a Richmond firm that devotes about 80 percent of its work to historic renovations. “It’s been the salvation of our cities.”

Although Virginia’s program is credited for being easier to navigate than the similar federal tax-credit program, piloting it is not for those short on time, money or willingness. The Virginia Rehabilitation Tax Credit Program issues credits worth 25 percent of eligible rehabilitation expenses, including materials and some “soft” costs like certain consultants’ fees. They are used to reduce state income tax liability. Those credits can be syndicated to companies and individuals looking to lighten their state tax bills.

Credits are not granted directly to the developer of the property but to a separate limited liability company established by the developer and any partners planning to use the credits. Partners pay the developer a percentage of the value of the credits.

Some developers wind up using the credits themselves, but most prefer the influx of cash, says Dan Gecker, a Richmond tax attorney who helped write the regulations for Virgin-ia’s program. “To pick up [and hold on to] $100,000 of credits is not an unusual thing, but $1 million of credits is probably not useful” for most developers, he says.

But there are a number of steps to getting tax credits. The three-part application pro-cess requires showing that renovation plans maintain the historic character of a building, which itself must meet certain guidelines. Rehabilitation expenses must total at least a certain percentage of the assessed value of the facility to ensure that significant changes are being made. There are also time limits for when work must be completed.

“It’s important that people realize it’s not just pennies from heaven,” says Wendy Drucker, a co-chief executive officer of Drucker & Falk LLC of Newport News, which plans to convert the abandoned 1920s-era Chamberlin Hotel in Hampton into about 200 housing units for senior citizens. Because historic preservation rules ban penetrating exterior walls, Drucker has found herself spending considerable time researching vent-less dryers. It would probably be easier to renovate the building without adhering to historic rehabilitation guidelines, but Drucker says the ability to cash in tax credits “certainly makes doing a project like this less risky.”

So far Richmond has seen the most tax credit-funded rehab projects, but Roanoke and the Tidewater area are also seeing a growing level of historic renovation. Richmond developers have helped convert the downtown Shockoe Bottom district from a neighborhood of vacant industrial buildings to an area popular for its renovated lofts and condos. The Maggie L. Walker Governor’s School is housed in a formerly abandoned school building that was renovated with the use of credits. Developer Stephen Salomonsky is using credits to convert a dilapidated building at a key intersection in downtown Richmond into luxury apartments and office space for the First Freedom Center, a religious freedom organization.

There is no fixed or organized market for syndicating credits, though a number of large institutions, including Brower’s firm and Banc of America, have established funds that invest in historic credits. Firms either use the credits themselves or resell them to others. Demand by banks for federal credits appears consistently strong, but the appetite for state credits varies from year to year, according to Paul Norris, managing director of Wachovia’s Tax Credit Investment Group based in Charlotte, N.C., that began investing in federal and various states’ historic renovation credits last year.

Outside those institutional options, attorneys and accountants keep their eyes open for clients who could benefit from purchasing credits. Just word of mouth often connects buyers and sellers, says Steve Farrar, an accountant with Goodman & Co. in Danville.

Although large financial institutions have a healthy appetite for credits, Roanoke consulting firm Brian Wishneff & Associates has begun tapping local banks as a funding source. Company President Brian Wishneff says he’s found that national banks are hesitant to sign on for projects with less than $5 million of renovation because the benefits don’t outweigh the administrative costs.

Wishneff’s firm helped set up a syndication ar-rangement with Community Na-tional Bank in South Boston to renovate a former tobacco processing building into a combination visitors center, visual arts center and live performance theater scheduled to open this summer. The $9 million project will receive about $3.6 million from its sale of state and federal tax credits, about half of which will come from state credits.

But as word of success stories spreads, more developers, especially in Richmond, are buying large historic buildings long before they plan to develop them, says Mills of Commonwealth Architects. “The scramble is on,” he says.

Even Danville, which tends to economically lag behind other parts of the state, is seeing hints of speculative buying. About 10 people have purchased old warehouses and other buildings since the beginning of the year on a speculative basis, says Farrar, the Danville accountant.

That includes Hal Craddock, whose Lynchburg architecture firm Craddock-Cunningham Arhcitectural Partners has designed a number of adaptive reuse projects with the help of state tax credits, including the former bottling plant where his downtown office is located. Craddock is now a part owner of an old flour mill in Danville with the expectation that more demand for downtown living and retail space will come to the Southside Virginia city.

For now, he’s focusing on a $17.5 million renovation to transform adjacent former shoe and tobacco warehouses in downtown Lynchburg into a hotel. Selling tax credits could generate a couple million dollars, a major help for such a large project. “They’re absolutely key,” he says.