By: Phillip Borrelli and Jason Yots1
New York preservationists, developers and their communities dodged a bullet in late 2017, only to face another round in the new year. Last year, partisan tax reform bills in Congress first eliminated the federal historic tax credit (HTC), then eventually retained a weakened version of the popular preservation incentive. As we described in our October 24th guest essay in the Rochester Democrat & Chronicle2, the HTC has been a powerful and efficient economic development catalyst since its inception, generating billions of dollars of investment and thousands of jobs in Rust Belt regions. The federal HTC program’s elimination would have been devastating for upstate New York communities like Buffalo.
HTC stakeholders breathed a sigh of relief when the federal HTC program survived the tax overhaul, despite now facing a less valuable federal HTC (more on this below). When the dust settled, however, industry members soon realized that New Yorkers faced an equally dangerous threat from within their state’s own HTC program.
Under the new federal HTC law, properties acquired after January 1, 2018 still can receive HTCs at the 20% rate allowed under the old program, but the resulting HTCs now will be available “ratably” over the five-year period following a project’s completion, rather than for the year of completion. Some HTC industry members predict that the 20% federal HTC could be worth less than 15% under the new HTC program, once time-value adjusters are applied to HTC pricing. That value could dip even farther if newly reduced federal corporate tax rates shrink the demand for tax shelters like HTCs, as predicted by some HTC experts.
In addition to creating less valuable federal HTCs, tax reform laws also impacted state HTC programs. New York HTCs currently are tied to federal HTCs. Until New York HTCs are effectively “decoupled” from federal HTCs by New York lawmakers, they arguably will need to be claimed “ratably” over the same five-year period, inevitably leading to a corresponding devaluation of these state credits. Tougher still, this potential devaluation of New York HTCs will be compounded by the program’s looming sunset, currently set for December 31, 2019.
This loss of HTC value and the uncertainty created by the state program’s possible expiration have chilled an already jittery HTC investment market. Less investment activity drives down HTC “pricing”, reducing the net value of the HTCs and creating crippling project budget gaps. If New York’s HTC program is not repaired and extended immediately, development activity across upstate New York could revert to a level not seen since the 2008 recession.
On that front, New York preservation advocates were alarmed to discover that proposed amendments to fix and extend the New York HTC program were omitted from initial drafts of New York’s pending budget legislation earlier this month. But ongoing advocacy efforts by the preservation community led to the introduction by New York Senator David Valesky (D-Central New York) of Senate bill S.76483, which would “decouple” the New York HTC from its federal counterpart, and which would extend New York’s HTC program through December 31, 2024.
While Senator Valesky’s bill is a great start toward repairing and extending New York’s HTC program, it will need bipartisan support for adoption during a politically tumultuous time in New York. During this period of uncertainty, HTC industry members, preservation advocates and their communities must remain laser-focused on retaining and improving New York’s transformative HTC program. Thousands of New York jobs, and millions of dollars of economic activity, hang in the balance.
1 Phillip Borrelli and Jason Yots are the founders of Borrelli & Yots PLLC, a law firm focusing on historic preservation and community economic development law (www.borrelliyots.com).