Published by Allen F. Johnson on Wednesday, February 3, 2016
Editor’s Note: This article first appeared in the February 2016 issue of the Novogradac Journal of Tax Credits. It is reprinted here with permission.
It all started in Green Bay. The Hotel Northland, built in 1924, was sitting prominent and vacant and ripe for redevelopment. Mike Frantz, founding partner of Frantz Community Investors, was asked to take a look at the property. “It really is an amazing community and downtown area,” Frantz said of Green Bay, “and the project was right in line with our credo to help communities restore and revitalize their downtown and historic neighborhoods.” However, the 160-room luxury hotel rehabilitation faced challenges in acquiring investors with the Wisconsin state historic tax credit (HTC) set at 5 percent. “We realized once we got into the metrics of the deal that it would have been impossible to finance the project without more robust state tax credits,” explained Frantz.
Former City of Green Bay Business Development Planner Neil White took up the cause on behalf of the Hotel Northland rehabilitation, along with preservationists, developers and advocates throughout the state and helped raise the rate to 10 percent in 2013. With bipartisan support in the special October 2013 session of the Wisconsin legislature, that rate rose again to match the federal HTC rate of 20 percent. Gov. Scott Walker said in a press release, “The passing of this legislation will revitalize downtown districts across the state. Restoring these buildings will create a temporary and permanent economic increase for local and state economies.”
More often than not, success is a good thing. In the case of the popularity of the HTC program in Wisconsin, state officials saw an overwhelming interest in the program as a problem. The 20 percent HTC was uncapped and by midyear, the state had awarded nearly $21 million. This led Gov. Walker to halt the program temporarily in June 2014, partially lifting the moratorium three weeks later on certain federally qualified historic buildings and urging the state agency overseeing deployment to proceed with caution.
In March 2015, with Wisconsin facing a $2 billion deficit, Walker proposed a cap of $10 million available annually for the program. That’s when supporters of the program mobilized to demonstrate why Wisconsin’s legislature should be supporting an uncapped historic rehabilitation tax credit program, maintained at 20 percent.
The Economic Impact
HTC advocates from around Wisconsin set about preparing economic impact reports to demonstrate to Madison lawmakers what a robust state HTC program could mean for communities statewide. While the Wisconsin Economic Development Corporation (WEDC), which administers the state program in coordination with the Wisconsin State Historic Preservation Office, requires reports on job creation and revenue attributed to each project in the program, numbers were not yet available since the 20 percent program was in its infancy.
The Historic Preservation Institute in the School of Architecture and Urban Planning at the University of Wisconsin-Milwaukee, with support from the Wisconsin Trust for Historic Preservation, quickly pulled the numbers from recent projects that benefited from the 20 percent state HTC with the help of advocates such as Jonathan Beck, a senior fellow at the University of Wisconsin-Milwaukee and development project manager at The Alexander Company. He and Matt Jarosz, director of the institute, led the charge to personally contact the developers of the 31 projects that were approved in 2014, and in six weeks collected all the data needed for analysis.
Using this information collected by University of Wisconsin-Milwaukee, the public accounting firm Baker Tilly conducted an impact analysis that focused on jobs created, labor income, project output, economic development impact and the overall impact of the state HTC on the Wisconsin tax base. The study found that an uncapped state HTC program produced more than 2,800 full-time jobs and significant impacts to Wisconsin’s economy and tax base based on the funded projects studied. In particular, the study found that 40 cents of every state HTC dollar under the current program comes back into the economy in the first year through construction payroll and property taxes, while the other 60 cents is recouped to the state within seven years and an estimated 133 percent return in Wisconsin state tax revenue by Year 10. These figures were presented by the Historic Preservation Institute to the state’s Legislative Fiscal Bureau, which included them in a budget report to the Wisconsin Joint Committee on Finance as it took up the vote on the future of the credit.
The Current Market
Efforts to demonstrate the viability of the Wisconsin HTC program enacted in 2014 were a success. The program remains uncapped with a 20 percent credit and touts some of the best features found in other state tax credits: it is transferable and is priced well for the investment marketplace.
Ted Matkom, Wisconsin market president for the development firm Gorman & Company, says that there are two aspects of the state HTC that make it extremely attractive to investors. “First, it’s uncapped, so there is no political maneuvering; you can count on it,” said Matkom. “Secondly, it is a certificate program and easy to transfer to a third party.”
Programs that are capped or are based on a lower percentage of eligible costs, such as the previous 5 percent rate in Wisconsin, tend to relegate projects to the largest metropolitan areas in a state where the resources are plentiful–in Wisconsin that means such cities as Milwaukee, Madison and Green Bay. With the increases in the program, Matkom is now overseeing the rehabilitation of the historic Kenosha Elks Club/Heritage House Inn into a boutique hotel. Kenosha’s hotel industry is relatively underdeveloped and most visitors to the city stay in Illinois.
Matkom saw the opportunity to save one of the city’s most prominent historic buildings with the new 20 percent program. “The state and federal historic tax credits were necessary resources to subsidize the construction costs because we had the challenge of establishing hotel and venue rates in Kenosha,” said Matkom. “Those subsidies were essential to the deal.” These subsidies are also the catalyst for new meal and room taxes in the city.
Oshkosh-based developer Cal Schultz of Keystone Development has used the Wisconsin HTC in smaller communities like Oconomowoc, where he converted the former high school into senior housing and in Appleton, where he is rehabilitating a former woolen mill, a site ideal for adaptive historic reuse as housing development on the Fox River with proximity to the downtown commercial core. “In both cases, the most cost effective redevelopment of the site would have been to demo the buildings,” said Schultz, who credits the state HTC with making rehabilitation and reuse a possibility.
Schultz also credits the rehabilitation-friendly environment in Wisconsin for the HTC program’s success. “We love doing business in Wisconsin,” he said. “The state agencies are great to work with, we have developed a team of professionals with historic rehabilitation experience and the determination to figure out how to get the project completed.”
In the political world where Speaker of the House Rep. Paul Ryan, R-Wis., is calling for “dynamic scoring” for tax reform, economic impact reports that demonstrate the viability of HTC programs like those conducted in Wisconsin are critical not only for state programs but the federal program as well. Ryan is a native of Wisconsin and represents southeastern Wisconsin’s District 1, which boasts more than two dozen projects utilizing the state’s HTC, including the Elks Club in Kenosha.
It is also worth noting that across the country, 16 states have no annual HTC cap and an additional five states have annual caps that exceeded $35 million in HTCs in 2014. Ten states have 20 percent HTCs like Wisconsin, and an additional 20 states exceed and have a higher HTC per project than Wisconsin.
As more Wisconsin projects with a 20 percent credit see completion in the coming years, the University of Wisconsin-Milwaukee intends to continue its studies of the HTC and commission similar reports in the future. According to Beck, the reporting will get easier and more efficient as additional projects are approved.
“It was kind of a fire drill in 2015,” said Beck, “but now we are building a database where developers can enter data confidentially and a user-friendly platform where people can see where these projects are being done all over the state.”
After some initial hesitation in 2014, Gov. Walker appears to fully support an uncapped 20 percent HTC in Wisconsin after the legislature reinforced its commitment to the program. The project that is credited with getting the ball rolling, Green Bay’s Hotel Northland, is set to open this fall as a full-service boutique hotel following a $44 million rehabilitation. It is clear that this National Register property–and many others across the state–could have remained vacant, underused and in decline without the critical support of the state HTC program spearheaded in 2014 by a consortium of public and private advocates.
Allen F. Johnson is a Partner of MacRostie Historic Advisors LLC and Director of MHA Midwest in Chicago. With 25 years of professional experience in historic preservation planning and consulting, Allen and his team provide services to a diverse mix of public and private clients for a wide range of historic rehabilitation projects. Allen can be reached at firstname.lastname@example.org or (312) 878-1246. Visit www.macrostichistoric.com for more information about MHA.
This article first appeared in the February 2016 issue of the Novogradac Journal of Tax Credits.
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