The Financial Benefits of Chicago's Class "L" Designation for Historic Properties

Wrigley Building | Photo Credit: Jon Miller of Hedrick Blessing Photographers

Chicago appreciates its architecture more than most cities. And it should. This city was the crucible for arguably the most influential American architectural events in the late 19^th and early 20^th centuries:  the 1893 World’s Columbian Exposition which sparked a renaissance of neoclassical architecture throughout the country, and birthplace of the skyscraper, a product of “Chicago School” engineering, innovation, and design.

Chicago is also a leader in creating developer incentives for the preservation and reuse of historic buildings. Acknowledging the positive impact of the City’s historic built environment on the local and regional economy, the Cook County Class “L” Property Tax Incentive Program was created in 1997 to offer specific financial incentives for rehabilitation of buildings designated as Chicago Landmarks. 

Under the Class “L” program, owners of qualifying commercial and industrial properties designated as “landmarks” and undergoing “substantial rehabilitation” can have their property tax assessment levels reduced for a twelve-year period.  Where commercial and industrial properties are typically assessed at 25% of market value, Class L buildings are assessed at only 10% for ten years, 15% in year 11 and 20% in year 12.

To qualify, owners must invest at least 50% of the Assessor’s full market value of the landmark building in an approved rehabilitation project and must be determined a Class “L” property prior to the commencement of construction. The ordinance is intended to foster projects that contribute to long-term growth in the economy, employment opportunities, and property tax base of the city and Cook County.

The incentive applies to the assessment of the building only. The land continues to be assessed at the standard levels of assessment for commercial property and industrial property (i.e., 25% of market value), except where the entire building has been vacant for at least 24 continuous months prior to application for the incentive, in which case, the incentive assessment levels apply to the land as well as the building.

In Chicago, developers frequently utilize the Class “L” incentive in conjunction with the federal 20% historic rehabilitation tax credit as the two programs share many of the same requirements:

• Both require that a building be designated as historic (that means Chicago Landmark status for the Class “L” program and National Register designation for the federal program).  
• Both require a baseline investment in the rehabilitation work (that’s 50% of the Assessor’s opinion of the building’s full market value for the Cook County program and 100% of the building’s adjusted basis for the federal tax credits).  
• And under both programs, the rehabilitation work is required to meet the Secretary of the Interior’s Standards for Rehabilitation.

In our experience and in that of our clients, these incentive programs generally complement each other and there is often an economy of scale in pursuing concurrent applications and coordinating project reviews with the applicable local, state, and federal agencies.

The programs are also complementary in how they deliver financial incentives for a rehabilitation project. The federal program provides a tax credit equal to 20% of total qualifying rehabilitation expenses (both hard and soft costs) that can be monetized to bring equity into a transaction while the project is under construction.  The Class “L” is a benefit that impacts annual operating expenses.

It is worth noting, that the proceeds of federal historic tax credits may not be used to satisfy the Cook County investment requirement.

Given these considerations, it is clear why developers are actively utilizing the Cook County Class “L” Property Tax Incentive, a powerful preservation tool for the City of Chicago that is much more carrot than stick.

Post by Allen F. Johnson, Partner | Director, MHA Midwest and special contributor Elizabeth L. Gracie, Partner in the law firm, O'Keefe Lyons & Hynes

Historic Tax Credits and Hurricane Katrina

You have probably noticed the deluge of articles the last few weeks about New Orleans, the aftermath and the recovery following Hurricane Katrina. It still seems hard to fully comprehend the tragedy of it a decade later; so much destruction of architecturally significant communities and, most overwhelmingly, of the tapestry of people that called these history-rich districts home. 

I had the opportunity to visit the area in December of 2005, just a few months after the storm, to help families sort through the muck. As our volunteer group was carefully clearing out kitchen cabinets - being vigilant of snakes or other creepy crawlies that still lived in water-filled Tupperware, or taping refrigerators shut to drag to the street with rotting shrimp inside that had been ready for a family meal before the storm hit - one of the families we were helping showed up and stood for a long time in the living spaces just taking it all in. Slowly, they began digging through the muck in their bedrooms. (This was the Lower Ninth Ward and the water line had almost reached the ceiling.) Then came the shouts of joy as they found precious and irreplaceable family pictures that were water damaged, but salvageable.

The truth was, however, that this family had come to say goodbye to the home that they had decided that they would never return to after that day. They weren’t sure where they would end up, but it wouldn’t be the Ninth Ward and most likely not New Orleans. Too much damage was done; emotionally and physically.

It is that family I think about when I read the articles of the last few weeks and take a look back at those images. The landscape of New Orleans is forever changed; scarred in many ways, but stronger in others. 

Building rehabilitations have played a major role in the strength of the city over the last decade. They are representative of the resourcefulness that is necessary after destruction, and in the case of the GO Zone incentives, the importance of public policy to help rebuild. Stories like those of the New Orleans Healing Center are a testament to how the reinvention of a building can play a part in healing a community.

~ Katherine Ferguson

Marketing Manager, MHA

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One can’t think of New Orleans without conjuring visions of shotgun houses or French Quarter balconies. Their architecture – along with a great deal of diverse architecture in the city – reveals the special kind of culture in the “Big Easy.” When Hurricane Katrina hit, it was uncertain how much of this fabric could be retained, but most agreed that it was important to rebuild.

For nearly 40 years, the federal historic rehabilitation tax credit (HTC) program has incentivized preservation across the country; from blighted to bustling communities. In the case of natural disasters where there is widespread, catastrophic and costly damage, this type of incentive is essential.

Katrina presented an overwhelming burden for those looking to revitalize buildings of significance in New Orleans and throughout the Gulf Coast. Swift action by Congress and President Bush established the Gulf Opportunities Zone Act of 2005 (GO Zone), a bill that among other things increased the federal historic rehabilitation tax credit to 26% from the normal 20% for Gulf Coast regions affected by Katrina as well as Hurricanes Rita and Wilma that hit only a few months later.

Originally scheduled to sunset in 2008, the bill was extended several times and eventually ended in 2011 when the rate reverted to the regular 20%. Nearly 150 projects, with total development costs in excess of $460 million, benefitted from the program in New Orleans and Baton Rouge alone.

The GO Zone initiative was integral in these projects, but also important was the robust Louisiana State Commercial TaxCredit. This 25% tax credit incentive was implemented in 2002 to benefit income-producing historic buildings in Louisiana’s Downtown Development Districts. In 2007, historic buildings in certified Cultural Districts were made program-eligible.

Other Gulf Coast states have HTC programs, such as Mississippi and Alabama, also offering the tax incentive at a rate of 25%, but came after Katrina; Mississippi began their tax credit program in 2006 and Alabama in 2013. Unfortunately, the Alabama Historic Rehabilitation Tax Credit Program is set to sunset this year unless legislation can be passed to extend it. Rounding out the Gulf Coast states, Texas implemented their 25% HTC in 2015, and Florida has yet to pass HTC legislation.

Katrina Case Study: New Orleans Healing Center

The Universal Furniture Building at the corner of St. Claude and St. Roch dates back to 1887. Its storied history includes time as a bakery and a bargain furniture store. In 2005, the building survived Hurricane Katrina relatively intact while the communities around it suffered.  

The building is located in the Faubourg Marigny National Register Historic District, but is a neighbor to the St. Roche, St. Claude and Bywater Districts as well. Purchased by New Orleans commercial developer, Pres Kabacoff, and his wife Sallie Ann Glassman, the building found new life as the New Orleans Healing Center in the fall of 2011. The duo rehabilitated the building to house a grocery co-op, yoga studio, coffee shop, performance areas, restaurant, and community meeting spaces.

The rehabilitation itself included removing a non-historic aluminum screen and brick veneer on the St. Claude and St. Roch elevations in order to restore original facades. With MacRostie Historic Advisors help, the project generated $2.36 in federal GO Zone HTCs, which was nearly doubled when coupled with the 25% Louisiana State HTC. And for a community that was rebuilding, it provided much needed jobs.

Four years since opening its doors, the Healing Center is growing in popularity and continuing to offerservices to the community.

Preparing for the next Katrina

Hurricane Katrina gets top billing for natural disasters in the United State’s recent history, but FEMAreports over 600 major disaster declarations in U.S. territories since the storm in 2005. These disasters include fire, flooding, earthquakes, tornadoes, and more; none of which are discriminating in their destruction.

Steps are being taken by Congress to provide relief to disaster areas declared from 2012 through 2015 with the introduction of the National Disaster Tax Relief Act of 2015 in July. The bill largely follows the guidelines set forth by the GO Zone legislation, increasing the federal HTC rate to 26% in affected areas. No doubt that similar bills will  be introduced in the future to account for disasters yet to come.

The passing of legislation of this nature signals confidence in our leaders that HTC programs are instrumental in economic development, as well as an important tool to save our historic resources for future generations. And when reflecting on the devastation of Katrina and the brutal power of natural disasters on our built and human landscape, we look to the places that are familiar to find home again.

50(d): The Hottest Topic in Historic Tax Credits (And Not a Rapper)

IRS-File Image

Two weeks ago, the National Trust for Historic Preservation (NTHP) held a tax credit summit. The main topic? 50(d). Representatives from the IRS attended the summit and the good news was that there was no bad news; the bad news was that there was no good news.

So like planes over National in a thunderstorm, we remain in a holding pattern relative to this issue.

The 50(d) issue has now been the focus of every major historic tax credit conference since the revenue procedure was released at the end of 2013, and the major focus of the Historic Tax Credit Coalition (HTCC), as they work to try to get some guidance from the IRS on this issue.

Clearly, who foots the bill for 50(d) within a historic tax credit transaction, the developer or the investor, is a significant issue since the answer inherently impacts return on investment. Both parties should be willing to take some risk, but understanding this part of the playing field allows for a more predictable transaction.

Given all of the above, and the seemingly endless discussion on the topic, an outsider may think that the industry is at a standstill, like that plane over National. 

Fortunately, from our vantage point, that does not appear to be the case. It is probable that 50(d) may have slowed some investor’s reentry into the market place and made it a little more difficult to find new investors, but it has not impacted the use of the tax credit across the country. Part of this is the return of a broader range of real estate sectors.

MHA worked on many affordable housing projects through the downturn – and we continue to add these types of projects to our portfolio – but a look at our Midwest clients makes it clear the hotel market is back, and we are consulting on a number of office and retail projects taking place around the country.  Some of this is based on the market economics (Chicago, for instance) while a large part of it is driven by the availability of the state tax credits. Wisconsin, Alabama, and Texas markets are experiencing a rush on the purchase and rehab of historic buildings after HTC programs were expanded in these states. And like all things Texas, the projects there are big.

Here are a few of our projects that are moving forward and will benefit from HTCS in 2015:

A-Mill Artist Lofts (WH2)
Minneapolis, Minnesota
Client: Schafer Richardson, Inc.

Riverside Apartments

Buffalo, NY

Client: DePaul Properties, Inc.

Somerset Place Apartments
Chicago, IL
Client: Zidan Management Group

The Burnham Building

Boston, MA

Client: Millennium Partners 

The uncertainty over 50(d) may have made the recovery a little slower in the HTC industry, but it is in full swing now. This may be because of simple economics, or because developers just need to develop, but all of it has a positive economic impact in the communities where the projects are undertaken. What sometimes gets lost in all of this, and making the “deal” work, is that a lot of historic buildings are getting saved and repurposed into some of the most vibrant places to live, work and stay. 

Written by Albert Rex, Partner | Director, MHA Northeast

Historic Tax Credits Preserve Affordable Housing

Briarcliff Summit Apartments
Atlanta, GA

The term preservation means different things to different people. To colleagues in our firm, it can mean historic buildings, tax credits or advocacy. To many of our clients, it relates to keeping affordable apartments affordable at the end of their original financing or subsidy period. Many of these housing subsidy programs, like Section 8, have been around for decades and are managed by HUD. 

Not surprisingly, when the term of earlier subsidies end is aligned with the need for significant capital investment in the building. The owner often has to make a choice to preserve the existing affordable housing and reinvest, convert the property to market rate or owner occupied units, or to sell it to a third party. Fortunately, many current and new owners of these properties choose to preserve their affordability and they seek additional forms of financing. This often leads to incorporating state and federal historic tax credits (HTCs) as a component of their capital stack.

According to the Annual Report on the Economic Impact of the Federal Historic Tax Credit FY 2013, between 1978 and 2013 the historic tax credit program helped create over 135,000 units of affordable housing. HTC programs align well with housing preservation projects, as many of these units were created utilizing historic credits and the proposed work on the property will exceed the owner’s adjusted basis allowing for access to the historic credit again. In some cases, the buildings may have never had a historic designation when the units were developed as affordable, but are eligible for National Register listing today.  

A good example of the positive impact the historic credits can have is a recent MHA project, the Briarcliff Summit Apartments in Atlanta, Georgia. Originally constructed in 1924 as a residential hotel by Asa G. Candler Jr., the building was converted to affordable housing in the 1980s. It had fallen into significant disrepair when our client Evergreen Partners, who specialize in affordable housing and are active members of the Institute for Responsible Housing Preservation (IRHP), purchased it. Evergreen utilized a variety of sources for the project, including state and federal historic and low income housing tax credits (LIHTCs) as well financing from HUD.

“The physical needs and renovation challenges a developer encounters on a standard preservation project are always amplified when dealing with a historic structure,” says Evergreen Development Associate Nick Bouquet. “Briarcliff Summit had substantial deferred physical needs and was one of the most transformational projects Evergreen Partners has had the opportunity to participate in. The level of renovation needed to both revitalize the property and renew the building’s distinct historic features would have not been feasible without the availability of the historic tax credit resource”

The capital stack for Briarcliff included state and federal LIHTCs. Combining these with HTCs provided additional funding sources and lead to many positive design aspects for the historic building. Project architects TAT (The Architectural Team) preserved the important decorative features originally designed by architect G. Lloyd Preacher including terracotta roof tiles, iron railings and floral glazed terracotta paneling. Perhaps most importantly for the preservation of the building, the incompatible 1970s era windows were replaced with new energy efficient units that match the windows shown in historic photographs.

Briarcliff Summit Apartments is an excellent example of how state and federal HTCs can be paired with a variety of housing subsidies to create a successful community preservation project. These projects preserve the physical fabric of the neighborhood by rehabilitating important historic resource, but also preserve the social fabric of community by providing high quality affordable housing for the residents who need it the most.

We recently outlined the increase in the Georgia state historic tax credit program in a previous blog. Learn more about these changes here.

Post by Richard Sidebottom |  Senior Associate, MHA Southeast

Historic Tax Credit Programs Make States Economically Competitive

Historic Lincoln School Apartments | Shawano, WI
Completed in October 2014, this former high school was converted to a 24-unit affordable housing apartment building. 

State tax credit programs come in many shapes and sizes, but one commonality is the economic impact they have of bringing investment to historic cities throughout a state. Many of these cities have historic resources related to a period of industry that certainly once shaped the community but now sit abandoned. Repurposing these buildings is a viable and important path to reinvestment. 

Another commonality is that state historic tax credit programs are often threatened from the beginning, as there is inevitably a debate between the dollars coming in as investment versus the dollars going out as tax credits.

Just such a debate has been ongoing in Wisconsin for the past year. Governor Walker proposed to cap the state tax credit program, which was just raised to an uncapped 20% program in January 2014, while the legislature has been working to preserve it in its current form. Since the program change, just 18 months ago, 25 projects have utilized the 20% credit resulting in an estimate of $480 million in construction spending and $88.7 million in annual operations according to a study done by Baker Tilly. 

As consultants on historic rehabilitation projects, we often see immediate results on these state programs once they are signed into law. “Our Midwest Office noticed a surge in the volume of Wisconsin rehabilitation projects in 2014 and 2015 due to the new state credit, including more small and medium sized projects which may not have been viable without the added bump from the increased state credit,” notes MHA partner and Midwest director, Allen Johnson. “We are also seeing projects being undertaken in small towns and cities where previously our work was wholly in Milwaukee.”

The good news is that the Wisconsin legislature prevailed and the program will not change in the coming year.

Meanwhile another scenario is playing out in North Carolina where several tax credit programs, mostly targeted at the state’s large resource pool of historic mills, have been allowed to sunset despite showing a strong economic impact since their creation in the late ‘90s. Myrick Howard, President of Preservation North Carolina, noted in his recent op-ed piece for the News & Observer that “the revival of downtown Durham, Raleigh, Winston-Salem, Asheville, Salisbury, Mount Airy, New Bern and Edenton, to name a few, hasn’t been coincidental. Nearly $2 billion have been spent by the private sector, stimulated by this statewide incentive.”

NODA Mills | Charlotte, NC

Wisconsin is fortunate to have preserved its credit and will certainly have a competitive advantage when it comes to attracting developers, especially from another state in its region, Michigan, which lost its state historic credit several years ago. Developers that are experienced in using the historic tax credit programs are expanding beyond their home states in order to take advantage of these benefits elsewhere. 

In a time of shrinking state budgets and less federal support, legislatures often look to “grow” their state budgets by eliminating historic tax credit programs despite several studies that show there is a positive return on investment from these programs. In addition to the construction dollars and jobs generated by rehabilitation projects, there is a long-term affect at the local level of taking a building that may have been completely off the tax roles and returning it to use, which generates increased real estate taxes that often funds schools or other local infrastructure. 

Hopefully North Carolina and other states will follow Wisconsin’s lead in supporting programs that can have a significant economic at the local level while knitting back together the architectural fabric that makes these cities and towns whole.

 Written by Albert Rex, Partner and Director of MHA Northeast