To
Members of the Chelsea City Council,
As
Chelsea leadership deliberated about the Longworth property and the
proposals that were submitted to rehabilitate the property and
revitalize the corner of Jackson and Main, it was suggested by some
members of the DDA that the development group is not putting enough
“skin in the game” relative to the financial package they’ve
developed. To some, the group appears to be taking advantage of too
many financial benefits—benefits that put them at an unfair
advantage to others in town.
Not
so. The financial tools specifically made available for historic
preservation are designed to level the profoundly lopsided playing
field that disadvantages the rehabilitation of historic buildings
relative to other kinds of construction, especially new construction.
Here’s what we mean by “lopsided.” Seeking financing at the
bank, the historic property developer finds a banker who, almost
always, is skeptical that an old building can be saved. The
resulting loan-to-value ratio is low, forcing the developer to become
extraordinarily creative in attracting any kind of loan, grant, or
incentive available. The more complicated the package, the riskier.
And the greater the risk, the less likely there is a return
commensurate with what it takes to work on a property that has
surprises at every turn – a weaker foundation than expected,
asbestos in the plaster, rotted floor joists or ceiling beams, and
the like. If returns were assured, generous, and easy, don’t you
think everyone would be doing preservation projects?
In
spite of these challenges, the Kadushin/Beal group has been skillful
in suggesting a financial package that can revitalize the Longworth
property, a large, complicated, deteriorated complex of buildings
that only a seasoned preservation group would even consider taking
on. Let’s take a closer look at the financial components proposed
by the group.
A
Tax Incentive Program:
For
32 years, the Federal Historic Tax Credit has quietly and effectively
created skilled jobs, stimulated local economies, and revitalized
historic buildings and communities. Nationally, 37,000 historic
properties have been rehabilitated with the help of this credit,
generating 2 million jobs and attracting $90 billion in private
investment. The amount of tax credits paid by the U.S. Treasury is
far less than the amount of federal taxes generated by these
projects. Michigan has used the program since its inception. What
many people forget is that the credit is not a benefit provided
before the work is done. Rather, the investor must cover all
rehabilitation costs and conduct all work in keeping with the
“Secretary of the Interior’s Standards for Rehabilitation”
without any assurance of qualifying for the credit. Only when
returned to service and certified by the National Park Service, may
the property owner claim the 20% credit that is taken against
qualified expenses.
A
Grant Program, a Loan Program:
Governor
Rick Snyder is keenly interested in the revitalization of urban,
suburban, and small town Michigan and last year created the
“Community Revitalization Program” to make his vision a reality.
He factored in historic preservation by having “creates jobs,”
“addresses blighted properties,” and “works with historic
resources” included among the selection criteria for program
participation--clearly all of which play to the desire to see
historic preservation supported. Successful applicants receive an
incentive of up to 25% of rehabilitation expenses as a grant or a
loan, both with dollar maximums. The pool of dollars currently
assigned by the Governor is $100 million with at least $20 million
for Brownfield and Preservation projects. The Michigan Economic
Development Corporation is charged with getting the program
up-and-running, and preservation projects have been among the first
to be approved. We understand that Chelsea has been deemed a
promising environment for successful use of this program.
A
Tax Freeze Program:
Michigan’s
Obsolete Property Rehabilitation Act (OPRA) was established in 2000
as another means by which to spur development. While not
specifically for historic
properties,
they have often been the recipient because they reclaim some of the
state’s most deteriorated properties. Unlike a tax abatement, OPRA
freezes the current tax liability for a property so that improvements
can be made without the taxes going up for from 1-to-12 years. A
developer can finance a rehabilitation, an existing business can
finance an increase in capacity or efficiency, or an entrepreneur can
finance a start-up, knowing that they have a period of time to get
underway. Rather than creating a competitive advantage for a
project, it allows a project to compete when its neighbors may
already be going concerns. The payoff? The municipal unit gets a
more robust business able to pay its fair share at the end of the tax
freeze, rather than one stunted by a tax burden that forever places
it behind its neighborly competition. And of course, even as a
historic property is being assisted through OPRA, the community
benefits--i.e. sales tax is paid on building materials, people are
employed to do the rehabilitation, employees in the new business
spend their earnings in the community, income taxes are paid,
visitors are attracted and spend their dollars around town, etc.
If
Chelsea’s community leaders are not using all the tools available
to make a historic preservation project successful, they are
short-changing their community’s economic success and compromising
the architectural history they are responsible for stewarding.
Rather than making it impossible for the Kadushin/Beal team to work
with the Longworth Property by dismissing their use of one tool or
another, the City of Chelsea, its City Council, and especially its
DDA should be helping create a great project—a genuine success
story that will grab attention and attract others. And best of all,
these tools are not just for outsiders who can bring new ideas and
vitality to Chelsea. They’re for those who already have invested
in Chelsea’s future and deserve a level playing field, too.
Sincerely,
Scott
Lowell
Owner
Traffic
Jam and Snug Restaurant
Detroit,
MI
&
&
Gregory Saxton
Director of Development
J. E. Johnson, Inc. Midland, MI
Postscript:
We
challenge the belief held by some that the Kadushin/Beal group is
taking advantage of too many financial incentives in lieu of their
own equity – i.e. at a DDA meeting, it apparently was noted in a
critical tone that the group had factored $500,000 into their term
sheet for themselves. It must be noted that Kadushin/Beal are
not investors who simply are putting dollars into a project with no
sweat equity involved. Rather, they ARE the project. They
need to pay themselves for the hours they invest as professional
architects, planners, builders, and retailers. They need to pay
themselves for the risks they are taking using the Federal Tax Credit
which is not paid, or even assured, before the project is
undertaken. And don’t forget they have invested cash equity
as well. This is indeed “skin in the game.”
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