POSTED ON NOVEMBER 2, 2011:
Is Downtown Revitalization Dependent Upon Tax Credits?
Tulsa's downtown growth spurt was boosted by millions of dollars from a little piece of tax code with a very long name: the qualified rehabilitation structure expenditure tax credit, commonly referred to as the historic preservation tax credit.
The Mayo, an abandoned hotel purchased by the Snyder family in 2001 for $250,000, required nine years of renovations and $40 million to return the historic place to its former glory. After its grand opening in 2009, the freshly fashionable hotel was praised as a galvanizing example of what Tulsa's downtown could be.
Greasing the wheels of the Mayo Hotel project was about $7 million in state tax credits, according to the Oklahoma Historical Society figures. Another $4.9 million was also provided through voter-approved Vision 2025 money.
A Helping Hand
The Mayo Hotel isn't the only great old downtown building revamped with the help of tax dollars. The Mayo Building, the Philtower Lofts, Atlas Courtyard by Marriott, Tribune Lofts and Hotel Ambassador were all projects that may not have been possible without historic preservation tax credits, said Amanda DeCort, city of Tulsa historic preservation planner.
"The [historic preservation] tax credit makes these projects happen," DeCort said. "The finance industry is locked down, and it's hard to get a loan. People really need these tax credits."
At least seven downtown rehab projects currently in the works depend upon the credits, too, including the renovation and re-purposing of the Tulsa Paper Co. buildings, said DeCort.
The brick and concrete Tulsa Paper Co. buildings are owned by George Kaiser Family Foundation, which has been under fire recently by national media for possible organizational tax avoidance and the foundation's role in the Solyndra scandal.
A geothermal field was developed and drilled earlier this summer to help heat and cool the Tulsa Paper Co. buildings. Manhattan Construction, one of the nation's top-ranking green contractors, developed the field with other federal dollars, including a $2.5 million American Recovery and Reinvestment Act (ARRA) Energy Demand Reduction grant and a $200,000 Oklahoma Department of Environmental Quality Brownfield Development grant, according to a May press release from the construction company.
Tulsa's downtown revitalization, pushed along by tax credits, "creates jobs, brings economic growth and can turn a whole downtown around," DeCort said.
City planners are working to place five downtown areas on the National Register of Historic Districts: Brady Commercial, Oil, Blue Dome, Civic Center and Greenwood. National recognition would pave the way for downtown properties to gain access to more federal tax dollars, and by extension, more state tax credits as well.
Federally, a 10 percent tax credit can be used toward qualified rehabilitation expenditures (or money spent on renovating historic buildings) on a structure built before 1936. But a building that's on or will be on (within three years) the National Register can get up to a 20 percent credit.
Oklahoma will then match the federal credit up to 20 percent, and together these credits offer a possible whopping 40 percent off expensive, labor-intensive renovations.
No Strings Attached
The difference between the federal and state historic preservation tax credits lies in transferability -- a word that's caused some controversy in recent meetings of the tax credit task force. Governor Mary Fallin commission the task force earlier this year to examine tax credits and economic incentives, and hopefully, to trim the fat around Oklahoma's budget waistline.
Federal credits are only transferable to a business or person who keeps an ownership interest in a tax-boosted rehab property. Plus, they must maintain that interest before the property is up and running.
Not so for Oklahoma's historic preservation credits, one of the few state credits that are freely transferable. So, once a person or business is approved for a certain amount of these tax credits, they are allowed to sell unused credits (for about 80 cents on the dollar) to someone else.
That someone else doesn't have to be involved in any historic preservation project at all; they can use the credits simply to reduce their own tax bill. No questions asked, no strings attached.
And many Oklahomans have a problem with that. A recent Sooner Poll found that on the whole, Okies are unfamiliar with tax credits yet 51 percent were supportive of some tax breaks. However, three out of four surveyed people said they didn't support any transferable tax credits, or said the recipients shouldn't be able to sell the credits.
Additionally, the historic preservation tax credits are transferable for up to five years after they're acquired and can be carried forward or cashed in for up to 10 years. This loose timeframe can make projecting an annual state budget difficult, since legislators don't know how many tax credits will be cashed in on any given year.
The idea behind transferability is to allow all of the credits to be used through added flexibility. Other freely transferable tax credits are offered for restoring old railroads, building energy efficient homes and the Eastern Oklahoma coal industry.
Last year, before he was named chairman of the tax credit task force, District 85 State Representative David Dank submitted pointed questions about the constitutionality of tax credits to the Oklahoma Supreme Court.
The Oklahoma City Republican sought answers from the court about tax credit transferability because, as he said, those "to which the credit is transferable may have the benefit of reducing a tax liability without any corresponding economic obligation."
The Oklahoma Supreme Court responded with an official opinion on Dec. 20, 2010. The court upheld the constitutionality of state income tax credits as a whole, though the transfer of historic preservation tax credits was deemed unconstitutional unless they fulfill three required elements.
All credits must "promote a public purpose" locally, offer more benefit than cost and have adequate controls and safeguards in place.
In the opinion, historic preservation tax credits were held up as an example of a credit that may be breaking the rules of transferability because of one additional sentence in its statute: "Only the transferor originally allowed the credit and not any subsequent transferee of the credit, shall be held liable to repay any amount of disallowed credit."
This wording essentially keeps preservation credit buyers off the hook for any lost dollars, even if they're the cause. The tax credits can be revoked if not used to fulfill those three crucial elements.
However, the December opinion cleared the way for state legislators to possibly withdraw tax dollars from buyers who don't use the credits appropriately, stating, "Despite Legislature making the transfers 'freely transferable,' the State would have recourse against the transferee to revoke all or part of the credit transferred because the credit was unconstitutional."
On the Chopping Block
Surrounded by complex legal issues and budget concerns, the historic preservation tax credit was suspended for two years starting July 1, 2010, and can be reinstated July 1, 2012.
No amended tax returns allowed. No current projects can file for that funding, even if construction depends upon it. Do not pass go. Do not collect $200.
Oklahoma Historical Society Executive Director Bob Blackburn warned that many statewide historic preservation developers could face bankruptcy if they don't receive promised tax credit funding.
In a 2010 article in the Oklahoman, Blackburn also cited a similar situation that occurred in Kansas, after the state chopped historic preservation tax credits from its budget. Lawsuits piled in from developers, and Kansas ended up reinstating the credits because court costs would be higher than the savings in tax credits.
During the opening tax credit task force meeting on July 15, 2011, the historic preservation credit was the first of Oklahoma's 55 income tax credits to be inspected and discussed. Dank said he was skeptical about providing public money for private commercial development.
Blackburn defended the tax credits once again. He mentioned the Mayo Hotel and Oklahoma City's Skirvin Hotel as good examples of projects that have created jobs and boosted the economy through historic preservation.
The rehab tax credit program "encourages private investment where it wouldn't occur otherwise," Blackburn said.
Dank said that about $9 million worth of historic preservation credits were transferred in 2009.
The task force called Blackburn back to revisit rehab tax credits during its Oct. 12 meeting. This time, Dank was armed with more information. "Just between the Skirvin and the Mayo, we're talking more than $23 million in tax credits," Dank said.
Dank also said that many other states had caps on their historic preservation tax credits, while Oklahoma does not. "Safeguards just don't seem to be in place," Dank said.
Tangible Benefits, Intangible Rewards
Despite concerns over safeguards and loopholes, a 2008 study prepared by Rutgers University Center in cooperation with an Oklahoma State University professor found big returns on historic preservation investment.
In Oklahoma, $357 million in direct tax dollar (and other) spending created more than 8,000 jobs statewide, the study reported. These jobs generated $460 million in output, $166 million in labor income, $243 million in gross state production and $25 million in Oklahoma state and local tax revenues.
"Studies show that building rehabilitation outperforms new construction in creating economic activity," according to a summary of nationwide studies on the topic by Advisory Council on Historic Preservation, a national non-profit organization.
Also in 2008, the 62nd Annual National Preservation Conference was held in Tulsa. After the conference, National Trust for Historic Preservation President Richard Moe wrote a long and thoughtful op-ed published in the Tulsa World. In the editorial, Moe praised Tulsa's original Route 66 structures, cluster of art deco buildings and historic neighborhoods.
But despite Oklahoma having "one of the best rehab tax credit programs in the nation," Moe was concerned that not enough had been done to preserve historic structures in Tulsa.
"The alarming number of surface parking lots in downtown Tulsa -- by some estimates, more than half of downtown's land area is devoted to surface parking -- means that for far too many of the city's historic buildings, it's too late," he wrote in Oct. 2008.
Moe also said neighborhoods like mid-century modern Lortondale neighborhood were experiencing tear-downs and demolition to make way for new houses too big and incongruous for their lots.
This year, the National Preservation Conference was held in Buffalo, N.Y.
As lawmakers agonize over the abuse of the rehab tax credit's wide-open transferability loophole, opportunities to preserve Oklahoma's history may be shrinking. Time, history, quality of life and cultural shared memories are intangible commodities not discussed at tax credit task force meetings, and cannot be measured in number of jobs created or dollars saved.
The task force's recommendations on whether to keep, cut or reduce statewide tax credits will be announced at the end of 2011.
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