An economic development tool credited with facilitating more than $170 million in development in Birmingham faces an uncertain future after being pushed aside by lawmakers preoccupied with the state’s budget battle.
An effort to renew Alabama’s historic preservation tax credit was derailed in the spring and has been expected to be renewed early next year. But a leading opponent said he may move to block renewal of the credits even if a state study concludes that they are effective.
State Sen. Lee Trip Pittman, R-Montrose, is waiting for completion of a state study of the law’s effectiveness before taking a formal position, he said, but his opposition to the use of tax credits in general may lead him to try to block renewal of the incentive regardless of the findings. “Personally, I’m against credits,” the Birmingham native said. “Credits distort the market.”
The state’s historic preservation tax credit, which was approved by the Legislature in 2013 and is set to expire in May, 2016, provides developers of qualified properties with up to $5 million in credits over four years. In order to qualify, a building must be certified as historic by the Alabama Historical Commission or have been built before 1936 and meet a number of other requirements.
A total of 46 projects, including 17 in Birmingham, have received or have been approved to receive the credits, which are capped at a total of $20 million per year statewide, according to AHC records and Jennifer Bailey, who coordinates the program for AHC. Among the Birmingham projects that have qualified are the Redmont Hotel, the Thomas Jefferson Hotel and the Florentine Building, which is one of just six qualified projects statewide to have been completed.
A bill that would have extended the tax credits’ availability through 2022 stalled in the Legislature in this spring’s regular session, caught in what Birmingham Business Alliance General Counsel Myla Calhoun termed the “buzz saw” that blocked many bills as lawmakers tried, unsuccessfully, to deal with a funding shortfall. Rep. Victor Gaston, R-Mobile, a supporter of the bill, did not return telephone calls seeking comment but other advocates said they expect the extension bill to be reintroduced early next year.
Building success stories
When the state’s impact study is completed and released this fall it likely will conclude that the incentives have been effective in spurring development, economic development officials and real estate developers said. David Fleming, chief executive officer of the development agency REV Birmingham, credits it with generating more than $170 million in development or planned development in Birmingham – BBA officials put the total over $200 million — and Bailey of AHC said the credits generated $327 million in actual or planned development statewide.
Birmingham’s Florentine Building, at the intersection of Richard Arrington Jr. Boulevard and Second Avenue North downtown, was renovated at a cost of about $2.5 million, bringing back to life a structure best-known locally as the building that was never finished. Intended to be one of the city’s first skyscrapers, construction on it was halted during the Great Depression – at two stories – and it was never completed. After decades as an office/retail building and nightclub it reopened in January as a two-story event center owned by Birmingham’s Corretti Catering.
The building that most point to as a success story resulting from the tax credit, however, is the Thomas Jefferson Hotel. The 20-story building at Second Avenue North and 7th Street North opened as a hotel in 1929, and its ballroom hosted the biggest luminaries of the jazz age. A rusted tower meant to be a mooring for Zeppelins, foreseen in the 20’s as the transportation of the future, still stands on its roof.
But the building closed in 1983 as a low-rent apartment building and fell into disrepair as white-flight gutted the city. In recent years the building provided shelter to homeless squatters and was a favorite destination for “urban explorers” while providing a marker of the limits of downtown redevelopment. The city’s new loft district’s westward march halted near the Birmingham Police Department headquarters, two blocks to the east. (More on the Thomas Jefferson and urban explorers: https://news.wbhm.org/feature/2014/a-look-inside-the-thomas-jefferson-hotel/ )
Scott Reed, whose California-based Reed Realty Advisors is managing the $22 million renovation of the structure, said the tax credits didn’t make the renovation of the tower more profitable, they made it possible. “I can tell you with 100 percent certainty that we would not have developed this building” without the tax credits, Reed said. Reed’s company had long wanted to enter the Birmingham market, he said, but it didn’t make financial sense until the credits became available. “We’ve been watching Birmingham for years,” he said. “We would have been in Birmingham in 2009” if the credits had been available.
Builders today are about midway through a renovation of the tower that will create 96 apartments, restaurant, retail and event space and, along with a new train station being built nearby, anchor the reclamation of the troubled west side of downtown.
A common tool
Alabama is hardly alone in its use of tax credits to spur redevelopment. About 30 states offer similar credits, and they’re widely viewed as useful development tools. An economic impact study conducted for the state of Kansas found that in the 21 years before it made credits available 50 redevelopment projects of historic properties, valued at $114 million, were completed. In the eight years following the adoption of the credits, 542 projects valued at $271 million were completed. The study concluded that the credits were responsible for the creation of 4,443 jobs and the injection of $323 million into the state’s economy.
Most states offer roughly $1 in credits for every $4 spent on construction, and impact studies have found that every dollar spent on construction turns over at least six times in a local or regional economy. That means that for every dollar in forgiven taxes a state’s economy gets at least $24 in economic value, provided that the project would not have been undertaken anyway.
The credits now are in such widespread use nationally – adopted by both Republican and Democratic state governments – that developers say states without them are at a distinct disadvantage. “Alabama needs to do this for themselves, but they also need to do this to remain competitive,” said Reed. “If you want to compete with the big boys, this is what you need to do.”
The biggest criticism leveled against the credits, supporters and opponents agreed, is that they provide an unfair advantage to some developers, or that they distort the market, as Pittman said.
Developers approved for the credits can apply them against state income taxes and against some excise taxes. The credits must be claimed in the year in which the renovated property is reopened, though unused portions of the credit can be carried forward. Property owners must provide the state with documented proof of the project’s costs prepared by a certified public accountant and appraiser after the work is complete.
Joseph McClure, whose Joseph McClure Commercial Real Estate has redeveloped buildings downtown, disagrees with the criticisms. He said that the deck is stacked against the owners of dilapidated historic buildings to such a degree that even architectural gems are likely to remain vacant and crumble without financial assistance.
Older buildings must be brought up to code – often at great expense – and they typically include less rentable space relative to total size than newer buildings. And costs of renovation often include replacement or repair of intricate architectural features, requiring exhaustive labor and rare expertise. In total, said McClure, whose Iron Age Building on 20th Street has qualified for credits, redevelopment of a historic property typically costs 50 percent to 100 percent more than redevelopment of a newer structure.
Without some form of assistance, such buildings are “economically obsolete,” he said.
Next in the Legislature
According to economic development officials who lobby the Legislature, the failed extension bill had the support of 30 of 35 state senators at the end of the 2015 session. But, Pittman said, that should not be taken to mean it has a clear path when it’s reintroduced.
The impact report may paint a picture not of a successful, long-term development strategy, but of a short-term economic stimulus measure that the state should lean on in hard times, he said.
“We’re going to look at (the report),” he said. “But there is no guarantee.”