When Rocco Termini thinks about the eight historic buildings he has redeveloped in recent years, he’s grateful for the role local banks played.
Besides providing loans, the banks invested in developments like the Hotel @ The Lafayette, AM&A’s Warehouse Lofts and Foundry Lofts.
As partners, sharing risk and reward, the banks helped get the projects done.
And they received another very lucrative benefit: the right to benefit from – at a discount– the projects’ historic tax credits which they use to lower their own federal and state tax bills.
So by investing in the projects, banks and others receive a double benefit: substantial tax breaks and proceeds from the projects’ successes.
“All of these investors are earning a yield, and they get tax credits, which they can use to pay their taxes,” said Steven Weiss, partner with Cannon Heyman & Weiss in Buffalo, which specializes in community development law and handles tax credit transactions.
“It’s like going to a fundraiser where you buy a $100 gift certificate and only pay $75.”
In the process, Buffalo has benefited from a record flurry of historic restorations that put aging buildings back to active use and brought new residents back to downtown.
“It’s a great program,” said developer Nick Sinatra, who is selling historic tax credits from two redevelopment projects in Buffalo. “It’s done great things for the city, and it’s helped foster a ton of redevelopment in this community, as well as preserve our cherished assets.”
The joint federal and state historic tax credit programs, administered by the National Park Service and State Historic Preservation Office, are government initiatives that clearly are achieving the goal of fostering development, particularly in Buffalo.
By offering dual credits of up to 20 percent each – for a total of 40 percent of the eligible project cost – the programs encourage developers to look at adaptive reuse of historic structures instead of knocking them down and building new. And by enabling developers to sell millions of dollars in credits through partnerships, they inject money into urban renewal.
“They allow developers to put together enough capital to renovate challenging buildings, often in neighborhoods that are desperately in need,” said Craig Burton, senior vice president of commercial real estate lending at First Niagara Financial Group, one of the most active participants in tax credit projects.
It’s particularly valuable in Buffalo, where developers have seized on the opportunities presented by an abundance of historic but under-used structures, which avoided demolition in prior decades simply because the city lacked the money to tear them down. The city even published a list last year of nearly 600 such eligible buildings.
In 2014, the National Park Service approved more than $468 million of proposed historic projects in New York state, and certified $382.7 million of completed work.
“It’s because of the extraordinary stock of great old buildings,” Weiss said. “They exist in greater quantity in Buffalo, and the appreciation of those old buildings is something that people have taken notice of. It costs money to knock buildings down.”
Critics say such taxpayer programs are just corporate welfare for big businesses, and that it’s more important to generate good-paying jobs. But supporters say there would have been virtually no redevelopment in Buffalo in recent years if not for tax credits for historic preservation, affordable housing and brownfield cleanups.
“It made a lot of the numbers work before this economic upturn happened,” Sinatra said. “It made projects work when others weren’t really willing to make big investments.”
In particular, Termini cites the introduction of the state’s identical historic credit less than a decade ago for being the big catalyst locally, by doubling the size of the credit available. “We wouldn’t be doing this much in Buffalo today if it weren’t for the state tax credit,” he said. “That’s what covered the additional gap that we had.”
“It’s worth it because you need the additional equity for a deal to make any sense here, because the rents aren’t high enough,” Termini said.
The federal and state programs are almost identical in nature, and piggyback off each other. Both require the active engagement and approval of regulators in ensuring renovations comply with historic preservation standards. So there are strict limitations on what kind of changes developers can make, especially on the outside of a structure.
“They’re giving you a credit and they want something in return,” Sinatra said. “They want buildings built to certain standards and to preserve the integrity of the building.”
Credits for cash
In exchange for taking on the work, the federal and state programs each give the project “sponsor” a credit equal to as much as 20 percent of the development cost, which can be directly applied to offset tax liabilities. There’s no cap on the federal credit, while the state credit is limited to $5 million.
That limit makes the program more useful to the scale of projects in Buffalo – where most cost less than $25 million – but not significant enough to the much more expensive projects in New York City.
The historic credits are not awarded until the project is completed and the building is put into active service. But unlike affordable housing credits, which are spread out over 10 years, all the historic credits are paid out in the first year of service, making them more valuable in the short-term.
Moreover, instead of being limited to the developer, the credit can be “monetized” or sold – in pieces or in their entirety – to individuals or entities that have invested in the partnership that owns the building and holds the tax credits.
The tax credit market is fairly stable, as awareness and demand has grown. Prices for federal credits are hovering at 92 to 95 cents on the dollar, Weiss said. State credits have been worth less, at 62 to 65 cents, he said, because the taxpayer might not get the benefit of a state tax deduction on the federal return if they use the state credit to cover their state tax bill.
But the federal and state credits must stay together, so an investor must still take both, in equal proportions. That was a hindrance for attracting out-of-state capital, until a recent change in state law that made the New York credit refundable. Now, even non-New York investors can benefit by cashing them in.
And where a company must remain an investor for 15 years in an affordable housing deal, the minimum term is just five years for historic credits. “It’s a much shorter investment and a much shorter holding period,” Weiss said. “But because you get the credits immediately, it makes a very good investment.”
At the same time, the outside investors must assume some risk, essentially agreeing to share in potential losses on the project, as well as any gains.
That’s critical, because a federal appeals court ruled in a 2012 case that office-equipment supplier Pitney-Bowes was not a true investment partner in a historic tax credit deal involving the Boardwalk Hall on the Atlantic City Boardwalk. The court concluded Pitney-Bowes, which bought the tax credits, didn’t bear any risk on the deal because the state of New Jersey was the project sponsor, effectively guaranteeing no loss.
So the Internal Revenue Service recaptured the credits, and threw the industry into uncertainty until the agency issued specific rules last year. “You have to be at risk and a partner, so it put a whole chilling effect on the industry,” Termini said.
In response, attorneys scrambled to adjust deal terms. “There were a number of changes in the transactions that had to be worked in,” Weiss said. “It’s not old-hat yet, but we know how to anticipate this.”
Tax credit buyers come from a mix of sources, but it’s usually a single investor on each deal. Some are local companies known to developers. Others are wealthy individuals, such as the Pritzker family of the Hyatt hotel fortune, who are already financial backers for Sinatra.
The rest are brought into “private placement” deals through national brokers or “syndicators,” who are paid to link investors with projects, based on their appetite for risk. The syndicators act as filters for investors, and either match deals and investors, or pool them through specialized funds that invest in multiple projects.
“That’s how a lot of these investors get here,” Weiss said. “I find it very rewarding when I see an investor coming back for more, because they see what we see, that this is a great community with a wealth of historic properties.”
Friends and family
Sometimes, developers have to turn to a “friends-and-family” group, because a local deal is too small to garner attention. Termini said he reached out to high-earning friends to invest in two restaurant projects.
So who are the investors? According to Weiss, they include financial institutions like First Niagara, Evans Bancorp, Five Star Bank, KeyCorp, U.S. Bancorp, Bank of America Corp. and M&T Bank Corp., which invested in the Richardson Olmsted Complex, a project that received $15 million in historic tax credits.
Insurers John Hancock Financial Services and Nationwide Mutual Insurance Co., retirement funds such as the AFL-CIO’s, and utilities like Verizon Communications also invest.
Other participants include big corporations such as oil company Chevron Corp., paint-maker Sherwin-Williams Co., retailer Macy’s, chocolatier Hershey Co., Internet giant Google and conglomerate Berkshire-Hathaway, which owns The Buffalo News.
Evans Bank bought into Termini’s Houk Lofts, the Lafayette Presbyterian Church, and Paul Kolkmeyer’s Stanton Building downtown. “It’s doing our part in the redevelopment and preservation of our communities,” said Jim Rykowski, vice president of commercial lending. “It’s a good use of the bank’s capital, it benefits the bottom line, and it’s extremely beneficial to our shareholders.”
And First Niagara invested in a dozen projects statewide and in Pittsburgh, including Termini’s Foundry and Arco lofts, Hamister Group’s Tishman Building, Bethune and Jake Schneider’s Apartments @ The Hub. “We try to pick the projects that have a significant impact on the communities we serve,” Burton said.