In a commentary last April, I discussed the economic and social benefits of redeveloping historic buildings in West Virginia. Now I want to discuss the public/private partnerships that can make this happen.
I’ll start off with a huge surprise: Preserving and redeveloping West Virginia’s historic buildings comes down to an issue of money. From a developer’s perspective, money traditionally derives from three sources: private equity, banks and public entities.
Private equity requires, well, private money. Bank loans can be limited, rightly so, by complicated federal regulatory standards, mandatory financial ratios and nondiscretionary decision making. Just ask Messrs. Frank, Dodd, Sarbanes and Oxley. Public lenders, on the other hand, could potentially hurdle these traditional barriers to investment and development.
For example, West Virginia Code Chapter 16 allows local governments to form agencies to deal with urban blight and health issues. This has led to the creation of urban renewal authorities all over the state, including in Charleston, Fayette County and Huntington.
These authorities have the power to acquire problematic buildings, either through purchase or eminent domain. The urban renewal authority may then lease, rent or sell the building back to the private sector.
Authorities also may loan out funds to developers to help revitalize problematic buildings. These “revitalization loans,” as I have come to call them, should have two distinct characteristics: delayed payback and low interest. They act, in ways, like student loans; you are lent money to develop the building and start paying it back once it is ready to make money. I think this can be the shot in the arm that tips the scales of a project from “not quite there” to “it’s a go.”
▪ ▪ ▪
So let’s take a look at a specific example. In July 2014, my company, Crawford Holdings, purchased the historic Staats Building with a $230,000 loan from the Charleston Urban Renewal Authority. The terms of the loan were 1 percent interest, interest only, for five years. This means that my company pays $2,300 per year, for five years, and at the end of those five years, the loan will be repaid entirely with funds from a conventional lender, ideally once the building is “in the black.”
Furthermore, if the project needs cash infusions beyond what the public lender is able or willing to loan, the conventional lender could potentially make up the difference if allowed to take a first lien position, with the public lender taking a subordinate position. This relationship allows the conventional lender to feel more secure, and it sets up the conventional lender to take over the full note when the public lender note balloons. This can be a soft “lateral off” of the project from the public lender to a conventional lender, once the project is off the ground.
These sorts of terms are crucial for two reasons.
First, because revitalization projects can take years to complete, that can mean there are little to no cash inflows from the project in the first few years. This can make it tough, if not impossible, to make interest and principal payments right off the bat.
For example, if the above loan were financed through conventional means at 5 percent for 15 years, that would mean a monthly payment of approximately $1,800, or $21,600 annually. This doesn’t even include income taxes, property taxes, insurance or miscellaneous expenses.
Without the low-interest, interest-only payments, many revitalization projects are simply not financially feasible. But if we, as a state, can set up and fund more of these types of revitalization loans, we can give developers and mom-and-pop building owners some breathing room to get their projects off the ground.
Second, low-interest, interest-only terms can leverage private investment while allowing a tenant to design their own space. Here’s where it gets creative.
The building owner can reach an agreement with the tenant where the tenant prepays rent, and the building owner uses that prepaid rent to build out the tenant’s space. The owner builds his otherwise empty space out; the tenant customizes their space and pays exactly what they would in a standard month-to-month rental agreement.
▪ ▪ ▪
But where do urban renewal authorities get the funds to loan out? The Charleston Urban Renewal Authority is funded partially through projects like the Charleston Town Center mall, but what about others? One answer might lie in the state Legislature, but given the looming budget crisis, that prospect seems gloomy.
Another source might be federal funds, such as a seed fund grant from the Appalachian Regional Commission. Although the Legislature might be limited in giving direct subsidies, it might be able to help through indirect spending, i.e., through tax credits.
And here’s the icing on the cake. If a building lies within a historic district or is itself historically contributing as designated by the Department of the Interior, it may be qualified to receive up to 30 percent of its qualified expenditures back in the form of tax credits. Qualified expenditures include almost everything except the purchase price of the building, demolition costs, parking lots and a few other minor expenses and capital expenditures.
The tax credits are split between the federal and state governments, with the feds providing 20 percent, and the state 10 percent. There is currently a movement within the state to increase the state’s contribution from 10 percent to 20 percent or more. This increase would not only shift more historic buildings into the realm of feasibility, but also allow West Virginia to remain competitive with surrounding states, all of which have higher state historic tax credit levels.
Now, don’t confuse a tax credit with a tax deduction. Credits are a direct dollar-for-dollar reduction in your final tax burden; deductions reduce your taxable base. Credits are usually seen as a direct, proactive way to incentivize certain behaviors.
Furthermore, a credit can’t be used until the specific action is taken. Thus, in this situation, there is no effect on the state’s overall tax base unless the specific action of saving a building is undertaken. I believe the net long-term effect on the state’s taxes is more than justified by putting these historic buildings back into production.
▪ ▪ ▪
There are a few caveats to the tax credits, though.
First, the work must be done in accordance with the secretary of the interior’s standards. This is not a huge barrier, but it might limit the plans of the developer or owner.
Second, unless you sell the credits on a syndicated market, it could take a year or longer to monetize the tax credits, and there is always a chance you could be denied the credits. Perhaps an urban renewal authority or similar organization would be willing to provide a short-term loan that will be satisfied as the proceeds from the tax credits are realized.
Third, only the state credits are freely transferable. The federal credits must either be used by the company, an owner in the company or sold on a nationwide syndicated market. If sold on a syndicated market, one can expect to sell them for less than face value, perhaps 85 percent to 90 percent. With proper planning and timing, this could be the answer to the tax problem discussed above for businesses using a cash basis accounting method.
All of this is only a rough guide, and prospective investors should seek the advice of professional historic consultants, accountants, lawyers and financiers. All of these professionals might not be necessary, but there is definitely a steep learning curve with these types of projects. The point is, this basic model can be the beginning of long-term, sustainable preservation of West Virginia’s downtowns.
It is time we begin a discussion about the nuts and bolts of financing downtown revitalization in West Virginia.
Tighe Bullock, of Fayette County, owns Crawford Holdings.