Seth Wochensky has a deal for you.
Invest $5,000 with his organization, and you could receive nearly $6,000 in tax credits.
Sound too good to be true? Not so fast. While this certainly has risks and won't be for everyone, it's also real – and very rare.
Wochensky is leading a community initiative in Springville to save a historic building in the village's downtown and turn it into an arts center.
The goal of the redevelopment project is to rebuild the once-deteriorated structure so it can house a performance space, an arts workshop, two artists residences and a public rooftop garden – all centered around a bakery and cafe.
The cost of the rehab is more than $1 million, but a significant amount of work has already been completed over the past six years, funded by a combination of state money, loans and angel investors.
Now Wochensky wants to get the Art's Cafe project over the finish line. But instead of borrowing more or raising money through a lot of grants and donations, his Springville Center for the Arts is trying something unique for part of the funding.
It plans to sell historic tax credits directly to individuals members of the community – through a public offering that is registered with the state.
"It is definitely unusual. We are unaware of anyone who has done this," said Wochensky, the center's executive director. "None of the lawyers, accountants or other people we spoke to across the state had ever heard of it."
Of course, there's no guarantee of success, and there are plenty of cautions to go along with this.
If Wochensky's plan goes off without a hitch, someone who pays $5,000 would receive tax credits that could be used to cut almost $6,000 from their income tax bill – a gain of roughly $1,000, or 20 percent from their initial investment.
But there are risks, and that means the investment isn't a sure thing.
- The whole venture could fall apart.
- The work might not get done.
- The credits might not be approved.
- The business could fail within the next five years, which means the tax credits could be recaptured.
If any of those things happen, investors could lose their entire investment and not get any tax credits.
Beyond that, not everyone can benefit from these credits, especially if they don't owe any federal taxes in the first place. So investors need to do their homework, and check with their tax advisor if they have one.
Wochensky, however, believes that individuals who would buy into an investment of this nature aren't just doing it for the returns.
"This is a very community-driven project. People aren’t solely motivated by the economic returns," said Rich Rogers, an attorney at Borrelli & Yots, who is working with Wochensky on the effort. "People want to see this building saved. It’s much more historic preservation-oriented."
High school hot spot-turned-arts cafe
The Springville Center for the Arts is a performance, exhibition and educational facility that is housed in a historic former Baptist church on North Buffalo Street. Officially founded in 1998, but with roots dating back to the Community Play and Springville Players in 1951, the Center offers various cinema, concerts, dance and theater shows, as well as a gallery and workshops.
"It's a very robust arts organization, especially for the size community that we're in," Wochensky said.
The 1869-era church is located one block north of the intersection with Main Street, at what Wochensky called the "nexus of the downtown historic area."
"This is a small community," Wochensky said. "It's literally one building away from the main light in our downtown area. Everybody sees it every day, and we all, as citizens, want to do something to make Main Street the most vibrant place it can be. It's about being part of the solution."
Built in 1880, the two-story Italianate brick building at 5 E. Main St. is known to many locals as the onetime home of Teddy's Candy Kitchen, which Wochensky described as "a high school hot spot" that was owned by a Greek immigrant. It was later a doughnut shop, but had been vacant for 20 years when the Springville Center took it over in 2012.
"It had essentially collapsed," Wochensky said. "It was threatening the neighboring buildings. Literally, the roof was in the basement."
'A huge liability'
At the time, Wochensky was a member of the village's Historic Preservation Commission, which was concerned about the building's future. Meanwhile, the Arts Center had been discussing an expansion as part of a strategic plan, including the concept of a cafe space.
So when an architect offered free design services and a steel business owner offered labor, Wochensky convinced his board to dive in. County and village officials worked with the nonprofit to clear back taxes, and then transferred ownership.
"It was a huge liability. It was a massive safety concern," Wochensky said. "No one knew what to do with the building. It was just an impossible situation. You couldn't even open the back door to get in. People thought we were crazy."
Workers – including volunteers and members of the Ironworkers union – gutted the building, and rebuilt the interior floor by floor. The front facade has been rehabbed to match its appearance from a late 1890s photo, while the back wall was restored. The two second-floor apartments are ready for drywall, the workshop has been painted and the "green roof" garden is done.
But while "we've done significant work," Wochensky said, the "first floor has a long ways to go."
That's where the creative financing comes into play – now that people can see that the project is for real.
"We took a lot of the risk out of the equation. We wouldn't want to start this tax credit process at the beginning," Wochensky said. "Through the process, we've built enormous confidence in the community in our capacity, because we've done some really crazy work in that building and captured the spirit of the community."
Using tax credits
Real estate redevelopment projects are typically very complicated and expensive, requiring not only expertise in construction and restoration, but often also in financing. That's especially the case in historic renovation or adaptive reuse efforts.
That's why historic tax credits are available from both the federal government and New York State, to support and encourage the reuse of older buildings, as long as the work is done properly. The goal is to incentivize the work by covering some of those costs.
Developers typically receive the credits for completing renovation projects in accordance with standards set by the National Park Service and the State Historic Preservation Office.
But rather than use them, the developer sells those credits to investors – such as banks, insurers and other companies – who benefit by offsetting their own tax bills. The state credit is even refundable, making it even more lucrative. And the developer gets money for the project.
Both credits are valued at 20 percent of the "qualified rehabilitation expenditures," which include the costs of completed and planned work that meets certain criteria. The credits are often held by a separate company, in which the investors buy shares but also assume risks since they don't get paid right away.
"It’s like any investment opportunity. There’s going to be risks," Rogers said.
However, the tax credits are most often used for larger renovation projects, and in bigger urban areas. Developers in smaller towns often have struggled to get any interest. That's because every transaction involves routine professional costs, regardless of size, so corporate investors usually seek tax credits with "the smallest number of very safe, very large deals," Rogers said.
"The reason why we often don’t see transactions with multiple investors is because there’s a lot of disclosure requirements and a lot of accounting that’s required," said Steven Weiss, partner at the Buffalo law firm of Cannon Heyman & Weiss, which specializes in tax credits. "That can be just an accounting nightmare."
Weiss said he's seen smaller "private placements" but not a "full-blown public offering" like the Art's Cafe. "It looks pretty interesting. It looks very thorough and well-done," he said. "I think you’d have to think about it on a case-by-case basis, but it’s certainly worth exploring."
Wochensky also said that the concept hadn't been used before because "there is no money" in it for the lawyers.
But he hopes that will change. "Everything about our project is unusual, but after putting it all together it seems as though it should be a much more common thing," he said. "We certainly hope more people will be able to use elements of our system now that it has been ironed out."
The Arts Center is seeking to raise at least $300,000 but could use as much as $650,000 to finish interior renovations, buy equipment, pay staff and launch the business.
The nonprofit has formed a new limited-liability company called Art's Cafe Community Owners. That company, which will pool investors and then buy into the project, already raised $85,000. Now it will sell "Class A membership units," convertible bonds and the "Class C" shares, which entitle the owners to share in the tax credits. Officials expect that most of the buyers will be local residents and business owners, particularly retirees.
The Class A units are $250 each, and include voting rights and profit-sharing. The bonds – which are only available to Class A members, for a minimum investment of $2,000 – pay 4.25 percent interest.
But it's the tax credits that are unusual.
The group expects to spend $907,380 on "qualified" renovation costs, so both sets of tax credits equal $181,476. That's a total of $362,952 in tax benefits. Of that, a small portion is retained, so $355,730 in tax credits will be available to the "Class C" investors.
So, in exchange for investing at least $5,000 in the company, a person can receive $5,928 in federal and state tax credits.
The offering prospectus was filed with the state Attorney General's office under New York's real estate syndication laws. But it is exempt from Securities and Exchange Commission regulation because it's limited to New York State residents.
The group had planned to start the campaign in the fall but it's taken longer to get it rolling. Even so, five investors have already committed to about 10 percent of the tax credits.
"We have to be a little more patient than we had anticipated," he said. "It's been a very interesting process."