Westminster St. will get a boost in funding.
A federal tax ruling to be published later this month is expected to significantly boost the value of Rhode Island’s historic tax credits – creating extra financing for developers to rehabilitate old mills and other historic buildings.
The Internal Revenue Service in a recent ruling concluded that Rhode Island’s historic tax credits can be deducted from federal income tax. That tax treatment – which tax attorneys say was hazy prior to the ruling – could make the credits as much as 40 percent more valuable, developers say.
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“The impact of (the ruling) is incredible for us,” said Michael Corso, general counsel for Cornish Associates, a Providence real estate firm that has redeveloped a number of historic buildings in Downcity. “Without it, we have three projects that probably would not get off the ground.”
Corso said the extra flow of capital likely will put Cornish over the hump to finance $50 million in project costs for the renovation of three historic buildings on Westminster Street: the Peerless, Wilkinson (or Lerner) and the O’Gorman-Burgess buildings.
The ruling, which the IRS is expected to publish Nov. 28, was made at the request of Cornish and developer Ranne P. Warner, owner of Riverfront Lofts, a 60-unit artist loft under construction at the century-old Lebanon Knitting Mill in Pawtucket.
H. Peter Olsen, a tax attorney at the Providence law firm Hinckley, Allen & Snyder, represented both developers in the private letter ruling, which individual taxpayers can request when they are unclear on a certain tax issue.
Private letter rulings only apply to the taxpayer who requested it – it does not set a precedent for how the IRS will treat similar requests in the future. But Olsen said such rulings are “used all the time as guidance to taxpayers.
“As a practical matter, people will see this ruling and they’ll make business judgments based on it,” Olsen said.
Ted Sanderson, executive director of the Rhode Island Historical Preservation & Heritage Commission, which runs the state’s historic tax-credit program, called the additional tax benefit “extremely positive.”
“(The ruling) should make it easier to get private capital moving into these projects to stimulate economic development,” Sanderson said. “It should make it a much more efficient tax credit.”
Rhode Island’s historic tax-credit law was created in 2001 as an incentive for developers to rehab shuttered downtown office buildings, decrepit mills and other historic structures. The state has 900 commercial buildings on the National Register of Historic Places.
The cost of renovating those buildings usually is exorbitant – much more expensive than building on fresh ground – and the credits are a tool used to defray those extra expenses. Both environmentalists and economic-development proponents lobbied for the legislation as a way to revitalize run-down urban areas and curb sprawl.
The historic tax credit has sparked interest from developers. The commission approved 56 historic rehab projects valued at $190 million between January 2002, when the program began, and last May (the latest available figures).
The program works this way: The commission gives a developer pre-approval for a historic rehab.
Once it’s completed, the commission verifies the requirements were met and then issues tax-credit certificates worth 30 percent of the project’s cost.
For example, if a building is renovated for $1 million, the owner is issued $300,000 in certificates.
But the state’s law allows owners to pre-sell the certificates to a third party – individual or corporate taxpayers, or a broker, such as a bank. That gives the developer cash to finance a project up front, while the investor is paid in the form of certificates once the project is completed.
Project owners who have been getting about 50 cents on the dollar for their historic tax credits say investors now should be willing to pay 80 cents or more because of the favorable federal tax treatment implied in the recent IRS ruling.
“This represents a very significant increase in the amount of capital available to us for our project,” said Warner, who plans to add a seventh floor onto the 100,000-square-foot Riverfront Lofts building, directly across the river from Pawtucket City Hall.
Warner’s project, for example, has qualified for around $10 million in historic tax credits (the total project cost is $14 million). When it’s finished, her firm should receive $3 million in state tax credits.
Warner says that before the IRS ruling, she probably would have been able to sell about $1.7 million of those credits ahead of time, or around 50 cents on the dollar. But now she is marketing them for much more – as much as 80 or 90 cents – because she says prospective buyers will see the added value in being able to deduct the full value of the credits from their federal income taxes.
The result: more than $1 million in extra financing for Riverfront Lofts.
“The real winner in this is the state,” Warner said. “We’re going to produce roughly 40 percent more capital that will go directly into projects like these.”
Joel Cohn, Warner’s Baltimore-based accountant, works with many clients who have qualified for state historic tax credits in Rhode Island and other states. He agrees that the IRS ruling will make the credits more attractive to investors.
“It will make the job of marketing these tax credits easier,” Cohn said.
He added, however, that Rhode Island has a much smaller pool of individual and corporate taxpayers than other states that have historic tax credits. And the market for the credits is less mature here than in states that have had programs longer, he said.
The IRS’ ruling is thought to be its first definitive ruling on the federal
tax treatment of state historic tax credits, Olsen said.
Mike Colias is a contributing writer to PBN.
