Author: Jason Yots
“Money is no object!” likely never has been uttered by a Buffalo real estate developer, at least within the last century or so. In fact, due to an array of economic difficulties, finding enough money to consummate a real estate development project in Buffalo, NY very much is the objective.
Buffalo is the kind of place that urban experts call a “legacy city”. Legacy cities, on one hand, endure deep population losses, concentrated poverty, lagging household income growth and rampant property vacancy. On the other hand, though, those cities boast expansive historic building fabric, affordable real estate, economic productivity and opportunity, and community resiliency and sustainability. Your classic good news, bad news dichotomy.
Unfortunately, the “bad news” column of the ledger makes real estate development in legacy cities a tricky endeavor. Shrinking population, surplus aging real estate and lower wages mean that citizens can’t afford top-end rents, that building values appreciate slowly and that developers earn back less ownership “equity” than their national counterparts.
And yet, real estate development in Buffalo is booming, at least in relation to its pace during the last few decades. What accounts for this seeming anomaly? Two words: government subsidies. And, in Buffalo, no government subsidy has been more effective, dollar-for-dollar, than the historic rehabilitation tax credit (HRTC). Consider any recently renovated building in Buffalo that’s over 50 years old and there’s a good chance it was financed using HRTCs. Apartments, hotels, offices, retail outlets, cultural destinations and educational facilities all have been developed using HRTCs.
The federal tax code offers a tax credit equal to 20% of the qualified costs incurred in connection with the rehabilitation of an historic property. When you add a counterpart state HRTC of another 20%, and then discount for the market factors and tax considerations inherent in monetizing those credits, you’re essentially left with a government subsidy at an effective rate ranging from 20 – 30% of a project’s costs. This effective subsidy rate happens to coincide with the funding “gap” faced by most adaptive reuse projects in places like Buffalo. The tax credits plug the gaps, the developers reinvent the buildings, and the community reaps the benefits.
The federal HRTC program is administered by the National Park Service (NPS), for the Department of Interior and the Internal Revenue Service. Each year, NPS issues a report of the HRTC program’s performance during the prior fiscal year. The 2015 annual report reflects the continuation of some programmatic trends of the last few years, both nationally and locally. A fly-over of the HRTC program confirms that it continues to be a strong economic development tool for its host communities, generating in 2015 about $6.63 billion in development activity at an average of about $5.168 million per project (median project size in 2015 was $937,856).
On the ground, the HRTC program proves again to be a strong job-creator. The historic rehabilitation process is labor-intensive and, as a result, inherently local. On average in 2015, individual HRTC projects generated 98 local jobs each, totaling just over 85,000 jobs nationwide. With average annual salaries of about $40,000 industry-wide, HRTC jobs are well-suited to low-cost legacy cities. As mentioned, legacy cities often face an aging housing stock and extensive building abandonment which negatively impact housing quality standards for their residents. The HRTC program provides a tangible boost to the housing inventories of legacy cities. In 2015 alone, the program helped develop 23,569 new rental housing units, over a third of which were available to low- to moderate-income tenants. This affordability factor is key in legacy cities where unemployment generally is higher – and wages generally are lower – than the national average.
While rental housing constituted about half of all HRTC projects in 2015, that’s only half the story. The program also catalyzed the creation of new offices (21%) and other commercial activity such as hotels, retail and educational and cultural facilities (29%). The lack of restrictions on end-use is one of the HRTC programs strongest assets because it helps to diversify the real estate offerings to communities that consistently access the program.
And which communities most consistently tap the HRTC program? The states that are the biggest users of the HRTC program primarily share two important attributes: they contain a high concentration of legacy cities and they feature established state HRTC programs. This latter feature is not surprising when you consider that state HRTC programs enable developers to nearly double-down on the capital available to complete their projects. On an approved-project basis, the top five users of the HRTC program in 2015 were: Louisiana, Ohio, Virginia, Missouri and New York. From a project-cost standpoint, the top five states were: Ohio, Texas, New York, Pennsylvania and Missouri. Clearly, New York, with top-five finishes in both categories, has figured out that the HRTC program is an important tool for reinventing its many legacy cities. And, when money is the object, and historic preservation is the result, developers and communities alike can appreciate the impact of the HRTC program.
Jason Yots is a tax credit attorney, real estate developer and historic preservation consultant based in Buffalo, NY.
 The last several years’ reports can be found at: https://www.nps.gov/tps/tax-incentives/reports.htm