A generous federal tax credit that developers say has had a catalytic effect on the commercial redevelopment of historic buildings, particularly in downtown New Orleans, could be on the chopping block under the broad tax-overhaul plan that House Republicans unveiled this month.
Whether or not the program is sound public policy — and whether or not it’s driving development decisions — it certainly is being used.
In the 2016 fiscal year, Louisiana ranked No. 1 in the nation in proposed rehabilitation activity as measured by the number of projects, according to the National Park Service, which oversees the federal program.
Additionally, New Markets Tax Credits, a federal program supporting investment and real-estate projects in low-income communities, would also get the ax under the House version of the bill, which went through an extensive committee markup last week.
But the Senate’s tax-cut plan, which differs in a number of significant ways from the House version, retains the New Markets credits for 2018-19 and retains the historic rehabilitation tax credits indefinitely, although it slashes the percentage of rehab expenses eligible for the credit from 20 percent to 10 percent.
Several Louisiana lawmakers in Washington highlighted the historic tax credits when asked about changes they’d like to see made to the House’s plan. And the state's chief economic development official also offered his endorsement, saying that the incentives help redevelop properties in both urban and rural areas as well as low-income communities.
"New Market Tax Credits serve to leverage the financing needed by developers to bring about community development and restore vacant buildings to full utilization," said Louisiana Economic Development Secretary Don Pierson, who cited a number of projects financed by the program, including the Hilton Baton Rouge Capitol Center and the Indigo Hotel in Baton Rouge.
New Orleans' downtown building boom began in 2010 and has accelerated in the past five years, with more than a dozen hotels in various stages of construction or conversion. That's thanks in large part to the incentives now at risk, according to developers and real estate brokers.
The city is a prime candidate for such work due to its trove of historic buildings, many of which — like the former World Trade Center building at the foot of Canal Street — have sat vacant for a decade or more. After being stalled for two years by litigation, plans for converting the 33-story 1960s office building into one of the world's most prestigious hotel brands are now moving ahead. The Four Seasons is slated to open in 2020.
Supporters and critics
Just what happens to the tax credits during what could become a long and messy legislative process remains unclear. Influential construction and real-estate groups are putting pressure on Congress to keep the credits, and a number of other lawmakers have expressed an affinity for them.
But congressional Republicans are also operating under a hard cap on the amount of money their tax cuts can add to the deficit — $1.5 trillion over the next decade — because of the budget process they’re using to push through their eventual tax bill on a simple-majority vote in the Senate. That potentially places the renovation tax credits on a collision course with other tax credits, deductions and cuts.
U.S. Rep. Ralph Abraham, a Republican from the tiny Richland Parish town of Alto, called the credits "an important tool both in helping folks rehabilitate inner cities and in preserving some of the wonderful culture and history we celebrate in Louisiana.”
Sen. John Kennedy said on Wednesday — the day before Senate leaders unveiled their tax-cut plan — that the historic tax credits were among three items he’d pestered his colleagues about.
"I'm working hard in the Senate and guardedly optimistic that we can save them,” Kennedy said. "I happen to think the historic tax credit pays for itself and then some, and by eliminating it, I don't think you save any money.”
House Majority Whip Steve Scalise has been less enthusiastic about putting the credits back into the bill. As a key member of the House Republican leadership team — he is the party’s third-ranking member in the chamber — Scalise has been aggressively selling the House version of the bill since its unveiling.
A spokeswoman for Scalise, Lauren Fine, said the bill is built around "eliminating loopholes and a multitude of deductions and credits in order to lower rates for all American families, workers and businesses.”
Fine argued that cutting tax rates will boost businesses and create thousands of jobs in Louisiana — "major economic growth that will result in increased rates of investment, including in rehabilitation and renovation of historic properties.”
More than 42,000 projects to rehabilitate historic buildings around the nation have been undertaken since the tax incentive program's inception in 1976.
To qualify, a building must be listed in the National Register of Historic Places or be certified as contributing to a registered historic district.
During fiscal year 2016, the National Park Service approved 1,299 proposed projects representing nearly $7.2 billion of investment, federal data show, including an estimated $465 million worth of rehabilitation activity in Louisiana,
Across the U.S., the bulk of the credits were primarily for multi-family housing, totaling more than 21,100 units.
The cost of the credits for projects certified that fiscal year was about $1.2 billion, according to an economic analysis conducted for the agency. The report concluded that the historic tax credit program has generated $29.8 billion in federal tax receipts over the life of the program, compared with $25.2 billion in credits allowed.
State's tax credit
Since 2002, Louisiana has also offered a state credit to spur commercial redevelopment of historic properties in downtown areas, which can be combined with the federal tax incentive. The developer must front the money for the project, but refunds come in the form of a check at tax time.
Louisiana's credit is set to sunset in a few years, dropping from 25 percent to 20 percent in 2018 before disappearing at the end of 2021.
But absent the federal credit, some developers warn, it will be difficult, if not impossible, to make the economics behind many local rehabilitation projects work. That's because it's ultimately more expensive to redevelop an older building, which has often sat unused for years, than to build a new one, they say.
Had the credit not been available, the Pythian building on Loyola Avenue might still be sitting idle, according to the property's developer.
Will Bradshaw, principal and co-founder of the New Orleans-based real estate firm Green Coast Enterprises, is overseeing the $44 million mixed-use project, which includes 20,000 square feet of retail and office space and nearly 70 apartments.
"This development doesn't happen without them, period," Bradshaw said of the federal credits. "It's just not even close."
At the Pythian, the federal historic tax credits were worth about $7.5 million, while the new market credits were about $4.4 million, he said.
Cutting them off, Bradshaw said, could have "an extraordinary chilling effect on investment" that's driving construction in historic parts of New Orleans.
"The historic credits are reinvesting in urban cores and properties that have become nuisances in communities," he said. "Historic investment is usually catalytic in the area where it goes, and those urban cores are often more diverse than the areas around them."
The loss of the credits could increase pressure to raise rents and derive more revenue from the building, which would make downtown areas less affordable, he said.
"Projects that are serving the highest-end people, that's the stuff that'll move forward without it," he said.
N.O., Baton Rouge projects
Meanwhile, many tourism officials in New Orleans hope the highly anticipated Four Seasons hotel project at the former World Trade Center building will drive demand for high-end restaurants and other luxury hotels.
Now expected to surpass $400 million, the Four Seasons project will qualify for federal tax credits worth about $20 million, according to Paul Flower, CEO of Woodward Design + Build, which is overseeing the project. That doesn't include spending tied to the project's condominiums, which aren't covered by the credits.
At the onset, the project "may have been viable without the tax credits," Flower said. But two years of delays due to litigation have increased costs. The federal credits cushion against that, he said.
"The historic tax credits especially are critical to development in New Orleans, just because of the status of our economy and the number of historic buildings that we have," he said.
Flower said that losing the tax credits also could throw a wrench into the latest efforts to redevelop the 20-story Charity Hospital building or Municipal Auditorium, both of which have sat vacant since being flooded by Hurricane Katrina 12 years ago.
In Charity's case, several attempts by the city and state to develop it have gone nowhere. "It could make that effort more of a challenge, but not impossible," Flower said. "I believe that we can find a way, because we still have the state historic tax credits."
But others warn that it's not just high-end commercial spaces that stand to lose under the current proposal.
Chris Tyson, an LSU Law Center professor who is the incoming CEO of the East Baton Rouge Parish Redevelopment Authority, said federal tax credits that can contribute to building affordable housing are critical for the state, especially as many residents are still reeling from the August 2016 flooding in the Baton Rouge area.
"We are heavily reliant on federal funding to restore these homes to livability, and even before the floods, we had an affordable housing problem," he said.
The proposed cuts in tax credits, he said, will have "a tremendous impact on the local housing markets."
"We can expect that could reverberate throughout the general economy in a negative way," he said.