May 27, 2023 Supporting Manhattan-area entrepreneurs, businesses, events

Finance Explained: Historic Tax Credits

The Orville Huntress building was a post office, and later, a bank. Standing at the corner of 3rd Street and Poyntz Avenue for over 130 years, it has been a mercantile company, a gas and electric company, a milling and power company, a variety of shops, a car dealership, and a bar. That bar had a kitchen. And that kitchen … well, that kitchen was not envied by many. “That kitchen was a thorn in the side of people with the city,” said building owner Jan Miller. “They knew it was on its last legs, but they still allowed it because it was grandfathered in.”

Today, that kitchen is no more. It was trimmed from the Huntress during recent renovations completed by BHS Construction. “When I told the city that we were taking out all aspects of the bar, as well as the kitchen, they were very happy.”

Orville huntress Building Manhattan Kansas Poyntz Ave Jan Miller

Miller, also the owner of Steve’s Floral, purchased the Orville Huntress Building in 2010 with the idea that she could turn it into a space to be envied. After a nine-month effort that saw updates to the building from top to bottom, the $1.2 million renovation is now complete. Miller’s tenants — The Village Geek, The Winged Lion, and 502 — occupy a space that mixes elements of the building’s history, such as stained glass windows and an original tin ceiling, with modern features and updates, such as new floors and walls. The transformation is absolutely awe-inspiring, and it’s largely thanks to historic tax credits.

“Historic tax credits are the most important tool we have, in terms of a tool to encourage people to purchase historic buildings and help maintain them,” said Brenda Spencer, preservation consultant with Spencer Preservation.

The History of Historic Tax Credits

Historic tax credits are nothing new. In 1981, the Reagan Administration enacted federal historic tax credits as part of an economic stimulus package to encourage the preservation and adaptive reuse of historic buildings. In 2001, Kansas lawmakers followed suit, implementing the state’s Historic Rehabilitation Tax Credit.

Though similar, the federal and state credits do bear distinct differences. While the federal program is designed for large-scale, one-time renovations, requiring that expenses meet or exceed the owner’s adjusted basis in the building, the state program can be used annually for any qualified projects that hit $5,000. The federal credits equal 20 percent of project expenses, spread over five years, while the state credits equal 25 percent of qualifying expenses in a single year. Any project that qualifies for the federal credit automatically qualifies for the state credit. Projects that qualify for both credits can use them together for a combined 45 percent tax credit.

Perhaps the most significant difference is that while federal historic tax credits are non-transferable, state tax credits can be sold to banks, usually for close to 90 percent of their face value. For example, the owner conducting a $1 million renovation that generates $250,000 in tax credits could sell those tax credits to a bank for close to $225,000 in cash, meaning that building owners can finance nearly one quarter of their expenses with historic tax credits. Whether that means a new storefront, a new heating system, or a whole new space, a significant chunk of renovation expenses can be covered. “It is such an effective economic development tool that the demand just hasn’t wavered,” Spencer said. That demand has taken Spencer across the state, from larger cities to small towns. She has worked with everything from homes and hotels to high schools and hospitals. She has even taken part in a project that transformed an old parking garage into housing in downtown Wichita.

While demand is high, these credits are not simply given away. To earn the Kansas State Tax Credit, equal to 25 percent of qualifying expenses incurred during a qualified project on a qualified building, building owners must meet four conditions:

  • Provide evidence that their building is a qualified historic structure, meaning it has been listed on the National Register of Historic Places or it contributes to a National or State Register Historic District

  • Follow a qualified rehabilitation plan, reviewed and approved by the State Historic Preservation Office (SHPO)

  • Exceed $5,000 in qualified project expenses

  • Meet the Secretary of the Interior’s Standards for Rehabilitation

Four bullets on a list may not seem that imposing, but completing that checklist requires extensive, often painstaking documentation. That’s where Spencer comes in. As a preservation consultant, leading historic renovation projects is one of Spencer’s primary duties. In recent years, she has participated in 10 to 15 of these projects annually. She devotes hours to reviewing construction plans, providing photographic evidence, and documenting every aspect of the building — down to the trim — that will be impacted by renovations.

“What I’m trying to do is ensure that the client’s improvement project is going to qualify for historic tax credits, meaning they’re doing work that meets the Secretary of the Interior’s standards for rehabilitation,” Spencer said. “They’re pretty general standards, but there’s also a lot of room for interpretation. Unless you work with them daily, they’re a little too vague.”

10 Standards for Rehabilitation

  1. A property shall be used for its historic purpose or be placed in a new use that requires minimal change to the defining characteristics of the building and its site and environment.

  2. The historic character of a property shall be retained and preserved. The removal of historic materials or alteration of features and spaces that characterize a property shall be avoided.

  3. Each property shall be recognized as a physical record of its time, place, and use. Changes that create a false sense of historical development, such as adding conjectural features or architectural elements from other buildings, shall not be undertaken.

  4. Most properties change over time; those changes that have acquired historic significance in their own right shall be retained and preserved.

  5. Distinctive features, finishes, and construction techniques or examples of craftsmanship that characterize a historic property shall be preserved.

  6. Deteriorated historic features shall be repaired rather than replaced. Where the severity of deterioration requires replacement of a distinctive feature, the new feature shall match the old in design, color, texture, and other visual qualities and, where possible, materials. Replacement of missing features shall be substantiated by documentary, physical, or pictorial evidence.

  7. Chemical or physical treatments, such as sandblasting, that cause damage to historic materials shall not be used. The surface cleaning of structures, if appropriate, shall be undertaken using the gentlest means possible.

  8. Significant archeological resources affected by a project shall be protected and preserved. If such resources must be disturbed, mitigation measures shall be undertaken.

  9. New additions, exterior alterations, or related new construction shall not destroy historic materials that characterize the property. The new work shall be differentiated from the old and shall be compatible with the massing, size, scale, and architectural features to protect the historic integrity of the property and its environment.

  10. New additions and adjacent or related new construction shall be undertaken in such a manner that if removed in the future, the essential form and integrity of the historic property and its environment would be unimpaired.

To meet the standards, Spencer works with building owners and architects to comb over the minutiae of improvement plans, eventually passing them along for review and approval by the state historical society, as well as the National Park Service if the building owner chooses to pursue federal tax credits. Once renovations are finished, Spencer completes a post-project review to make sure all renovations were completed as originally discussed.

With 30 years of her life devoted to historic preservation, Spencer has a great appreciation for historic tax credits. “While all buildings have great history and reflect different things to us in terms of what aspects of society they’re representing, I’m a pretty firm believer that preservation has to make economic sense or we’re not going to get very far. To me, that’s the basis of historic tax credits. It really helps level the playing field.”

The advantages of the credits are many, Spencer said, while the disadvantages are few. “Some people think that listing a building on the historical register is not worth the incentive. To me, there’s no proof of that.”

A 2010 study conducted by the Rutgers University Center for Urban Policy Research for the Kansas Preservation Alliance supports Spencer’s view, noting, “On the plus side, the $69 million [Kansas Historical Tax Credit (KHTC)] has encouraged a four times greater amount of historic rehabilitation ($271 million), which, in turn, has supported thousands of jobs (about 4,400) and hundreds of millions of dollars of total (direct and secondary) economic gains in Kansas … The KHTC leverage and multiplier benefits support the argument that the KHTC is a ‘good’ investment.”

“The only con is the review period,” Spencer said. “You’re talking about a 75 day minimum review period to get the state historic preservation office and the national subsidies to review your packet. You have to plan ahead. You can’t swing a hammer until you have your project approved.“

A Well Thought Out Purchase

Jan Miller contemplated purchasing the Orville Huntress building for years. She discussed the space’s potential with her father. She pursued, but was turned away multiple times. Finally, in 2010, she and the previous owner reached an agreement. Was the price higher than she hoped to pay? Yes, but she and her father agreed that she had made a wise investment.

She spent years maintaining the building before deciding to push forward with renovations. Originally, she envisioned apartments on the second floor, going as far as having an architect draw up plans. She pivoted, though, and considered new ideas. She asked Blade Mages, principal of 502, a strategic marketing firm, about using the space for offices. “I approached him and said, ‘Are you interested?’” After a tour of the space, the answer was yes.

From the moment an agreement was in place, Mages played a key role in providing input and vision for the architecture and design of the second floor space. That meant keeping the original tin ceiling and incorporating a bar into a meeting room. Out of the norm? Perhaps. But the owner was on-board with the new bar. “I think it’s spectacular,” Miller said.

Miller’s banker recommended that she have strong leases in place before the renovations began. With 502 signed and The Winged Lion, a store specializing in home furnishings and gifts, already a tenant, Miller had one more space that was in need of some serious TLC, so she needed a tenant. That’s when she found the Village Geek.

“The Village Geek’s space had wavy floors,” Miller said. “It had broken windows. It used to be used by a car dealership at one point and there was a sunken area where you could do the oil change and so on and so forth … we had to address that.”

Renovations began in the fall of 2017. For nine months, Miller kept a watchful eye on the progress, often checking in multiple times a day. She took pride and ownership in the work, and admittedly, found it difficult to let go once it was complete. “It was hard for me to walk out of The Village Geek and then leave it alone, because I wanted to be there to make sure everything was just right.”

With renovations complete, Miller can reflect. Which piece of the renovated space is her favorite? “They’re all pretty equal. They’re all my children.”

The Story of the Huntress Continues

The Orville Huntress building is dramatically different after the extensive renovations, but Miller still has a future vision for the building. Her vision includes a rooftop garden, a new elevator to replace the service elevator inside, and a completed cornice at the top edge of the building.

“My father knew that this was a good decision. He and I had the vision. We understood what it would look like. How the building would appear. Lights on. Active. We understood that, and to see this fulfilled is a dream of mine, but it was also a dream of my father’s. It’s wonderful.”

Could Miller have funded the building renovations without historic tax credits? “It would have been very difficult for me,” she said. But Miller had a plan and extensive planning, which Spencer emphasizes is key to a successful historical preservation project using historic tax credits. “If you plan for it up front and you make your schedule accordingly, then, to me, if you’re not using historic tax credits and you own a historic building, you’re leaving money on the table.”

With historic tax credits, Miller was able to make her dream economically viable and she hopes that her willingness to chase dreams and further elevate downtown Manhattan, remains long after the building is in new hands. “I want the passion of what it took to get us here to be maintained.”

Derek Larson is the communications manager at Nelnet Diversified Solutions.

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