Why This Tax Credit Halt Could Destroy Some Developers
By now hopefully many of you have read my story about the potential impact of the planned two-year moratorium on the use of historic tax credits and my column on how it might kill redevelopment of the old Bond Bakery.
So, how could this hurt projects already underway?
Critics of this move say the two-year moratorium will be most punishing to those developers most active in redeveloping older buildings. Here’s why:
A developer buys an empty 10-story building in 2007 for $1.5 million. They spend three years working with the state’s Historic Preservation Office to get approval for designs that meet the requirements to obtain a 20-percent state historic tax credit and a matching 20-percent federal historic tax credit.
Renovation of the 100,000-square-foot building comes out to $140 per square foot – or $14 million. The tax credits are deemed critical to covering a funding gap that can not be financed through traditional means, and in this scenario developers interviewed by The Oklahoman say adaption to basic lofts could easily lead to a gap of up to $7 million.
This fictional project would likely qualify for state and federal historic tax credits each adding up to $2.6 million.
Assuming all additional financing is obtained through other means, XYZ Bank buys the federal and state tax credits knowing the credits can not be realized until the renovation is completed and a certificate of occupancy is issued by the city. The developer guarantees to over the tax credits if they don’t materialize. If the tax credits are approved in advance of the project and the renovation is done as planned and promised, there is rarely ever any risk to making such a guarantee – the developer is moving forward with the full faith and credit of the state.
If the moratorium goes into effect, even if the project has been approved for tax credits, developers who are midway through construction could find themselves in default of such agreements if, as in this case, the developer couldn’t personally cover the state tax credit of $2.6 million because the tax credits are frozen.
If this is all too complex to understand, let’s put in simpler terms we can all understand.
Imagine that you took advantage of the appliance tax rebate program last week. You could only afford to pay $300 for a new washing machine – but you bought a $500 washing machine by taking advantage of the $200 rebate promised by the federal government. Now imagine, after using the washing machine for a few months that the big box store called you up saying you owe that additional $200 because the feds failed to deliver on that promised $200 rebate. You did everything right. It’s the government that is backing out on the promised deal they made with you.
That’s what developers are facing across the state – only instead of owing $200, the amount will be in the million.
Legislators seem to think that developers stung by this will agree to using the historic tax credits when they are resumed in two years. Don’t be so sure of that. State historian Bob Blackburn suspects many of those developers won’t survive the above scenario and those that do will likely abandon historic renovation projects for years to come instead of believing in the full faith and word of the State of Oklahoma.
So how does this impact downtown Oklahoma City? Ask yourselves about how all of this might affect the future of the Bond Bakery, the old Sunshine Cleaners, the Fred Jones factory, the Rock Island Plow Building and the First National Tower.
And to those of you spending all of your time worrying about the fate of the buildings being targeted for demolition by SandRidge Energy – you’ve got a lot more to worry about.
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Comments
Yep, this is a bad deal for developers. If the state wants to do this, then they should take no NEW applications for two years and allow the ones already in process to be completed.
I honestly don’t see this coming to pass. Blackburn’s right – the cost to litgate will exceed the monies saved.
Wow! This is huge in a bad way. When is the gov. scheduled to see this for his signature?
Also, I do hope developers plan to file a lawsuit against the state if this passes.
Just saw the other day that Okla ranks #10 for most corrupt state government. This should help us move up the rankings.
I have no problem reinstating the tax credits at the cuts seem shortsighted, but we need to have a proposal for where the money will be offset so we can still balance the budget. Any suggestions? We need real dollars and cents to propose, so where does the money come from? Anybody have a copy of the budget online we can look at and find a way to keep the development credits?
This would be a big blow to the Tower Theater project just west of the state capital. We as well as other investors use the tax credits to capitalize these projects. these bulildings will sit vacant and will not produce any income.No tax revenue no nothing. Bad Bad situation.please spread the word.
I’ve written the governor about this. I don’t really know what else to do. This is incredibly worrisome.
What percentage of the total tax credits are historical tax credits? I wonder if there would be a way to keep them without abolishing the moratorium on tax credits. And why two years for the moratorium? If, as is used as a reason in one of the articles, the moratorium is designed to review the program for loopholes, why will it take two full years to find those loopholes. My other question is: how does this affect the business climate in Oklahoma? We already have to compete with other nearby states that sometimes seem more business friendly. Are some of the tax credits being used to attract and/or keep valuable businesses in the state? Isn’t this being penny wise and pound foolishe?
As usual, Steve gives us something to think about.
The Historical issue clouds it for because I think we need to be very careful about letting our history be bulldozed.
But in general I am against tax credits, especially when they can be sold and used by others (i.e. Great Plains Airlines). Any such credits need to be non-transferable, solely for the entity they are given. Just too many ways of funneling funds otherwise.
I agree that there deals already in the pipeline need to be grandfathered in, but since the Legislature is in it’s final week, making a change seems unlikely at this point. Only hope is the Governor vetoes it and it survives an over ride. But isn’t this actually the Governor’s plan?
As far as “why 2 years?” There are numerous tax credits and all of the loopholes that have been written into them by the Legislature over the years/decades could take a while to sort out. I am not surprised on that one.
If passed, this law would hurt MANY more businesses than just those associated with historic building tax credits. The moratorium would also kill all the energy-tax credits on which many builders of new homes rely. This moratorium would kill the main financial incentive for constructing energy efficient buildings.
This bad law might temporarily help the State’s coffers, but it would permanently damage many more businesses, and cause long-lasting damage to Oklahoma’s economy. You should oppose this law every possible way… and do it today.
Thanks Mart for being the first developer to publically come out and give us an example of exactly WHO this is affecting.
Because it is only a two-year moratorium, basically the ONLY tax credits being taken away are ones already guaranteed–as opposed to funds that may yet be guaranteed.
“the ONLY tax credits being taken away are ones already guaranteed”
interesting point and that brings up the question: What good is the guarantee?
When is a debt not a debt? When the Legislature authorizes bond debt. I have seen bill after bill after bond bill that had the disclaimer that in no way was the bond debt to be held against the State. Wish I had the exact quote…
Very helpful analysis — esp., the “developer guarantee” issue. It would be great if some of this explanation could make it’s way into the paper. I think some readers of today’s article might have come away thinking: “So these developers go without tax credits for a couple of years during a big, multi year project — what’s the big deal?” Thanks.