Congressional tax plan could hit builders big

By Crain's reporter Jay Miller

The tax plan also could have an impact on affordable housing and its developers, even though the Low-Income Housing Tax Credit program (LIHTC) would continue under the new bill."

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Sections of the Congressional tax plan announced Thursday, Nov. 2, could thwart the goal of growing the residential population of downtown Cleveland to 20,000 people by 2020 and make it harder to attract businesses to the under-construction Opportunity Corridor and other underdeveloped areas of the city, local observers say.

The tax bill that started its trek through the House of Representatives last week would end or alter three programs that have stimulated much of the commercial and residential development and redevelopment Northeast Ohio's struggling cities have seen in recent years.

The Historic Tax Credit (HTC) program, which has been critical in attracting developers to renovate downtown office buildings into apartments and condominiums, would be eliminated, as would the New Market Tax Credit (NMTC) program, which provides tax incentives for business investments in low-income areas.

The tax plan also could have an impact on affordable housing and its developers, even though the Low-Income Housing Tax Credit program (LIHTC) would continue under the new bill. That's because private activity bonds, often used in conjunction with the LIHTC program, no longer would be tax exempt, reducing their value as low-cost financing.

"It was worse than I feared," said Michael Novogradac, managing partner in Novogradac & Co., a national accounting firm that specializes in tax credit financing and has offices in Cleveland, Columbus and Dover.

"If this is passed (as introduced), I don't know the exact dollars in Cleveland, but historic preservation wouldn't be financially feasible," he said. "Cleveland has done a lot with historic credits and New Markets."

The programs create credits against federal income tax for qualified investments. A $5 million investment in a certified rehabilitation of an historic structure, for example, creates a 20%, or $1 million, HTC against federal income taxes. The NMTC offers a similar incentive for new construction in neighborhoods the federal government has identified as low-income or depressed, and the LIHTC program encourages the construction of affordable housing.

Tax credits are awarded by a competitive process. The federal government limits the amount of tax credits available in a given year and allocates them to public agencies or nonprofit organizations across the country that make specific awards.

In Ohio City, the Snavely Group this summer won low-income housing and historic tax credits for the $10.8 million redevelopment of the Forest City Bank Building and the Seymour Block into 38 units of housing with a maximum monthly rent of $785. The buildings are part of a larger, $60 million Snavely development at the corner of West 25th Street and Detroit Avenue that includes the Quarter, a 194-unit market-rate apartment building. New Market Tax Credits made that part of the deal work financially.

The incentives are important in Northeast Ohio because commercial and residential rents are relatively low compared to other metropolitan areas, even though construction and renovations costs don't vary greatly from market to market. HTCs and NMTCs that reduce construction financing costs have been one way to make building here more attractive to developers.

"What we know is that (these programs) are remarkable economic and community development tools that have bipartisan support," said Joel Ratner, president and CEO of Cleveland Neighborhood Progress, just before the new tax plan was announced. CNP is a community development nonprofit. Its Village Capital provides financing for low-income tax credit partnerships.

Radhika Reddy, founding partner of Ariel Ventures LLC, a business advisory firm that has begun investing in real estate, said the loss of HTCs would be "a big blow."

Reddy, who has redeveloped several buildings, including the Ariel Center, her company headquarters on East 40th Street, said that rent payments can't always cover the development costs of renovation in Northeast Ohio.

"These buildings don't (cover) cash flow," she said. "You need the subsidy (that comes with tax credits) to make deals work. Rents are low in Cleveland."

Michael Deemer, executive vice president for business development for the Downtown Cleveland Alliance, said the HTC has been critical to the central city.

"What would downtown Cleveland be today without the federal historic tax credit?" he asked. "Imagine downtown Cleveland without East 4th Street, without the 1,400 hotel rooms that were added in historic buildings; imagine downtown without Heinen's (supermarket); without the Warehouse District. That's what we're talking about."

Deemer said that 40% of the current downtown population of about 15,000 lives in buildings renovated with historic tax credits and that the tax credits are critical to future growth. "We've identified 17 buildings in the pipeline that need to be completed to reach the goal of 20,000 by 2020 and 12 of them are historic-tax-credit eligible," he said.

The loss of NMTCs could have an impact on the Opportunity Corridor, the new road being carved out on Cleveland's Southeast side. While state transportation money is paying for the pavement, NMTCs were expected to be a vital element in the city of Cleveland's plan to attract strong, established businesses to build on what had been hard-to-reach and battered properties on newly cleared land adjacent to the roadway.

"The corridor will be built," said Cleveland City Councilman Anthony Brancatelli, whose Slavic Village ward includes part of the Opportunity Corridor. "I'm concerned that we will compromise (the city's vision) if we don't have that tool (NMTCs) available to us."

Brancatelli said that without the tax credits, the Opportunity Corridor might not attract the larger developments, and the big employers, envisioned by the roadway's planners.

The only bright spot in this gloomy tax credit outlook are the low-income housing credits. The tax bill spared those credits, which have been used extensively in Northeast Ohio. In June, the Ohio Housing Finance Agency, the state agency that administers low-income housing programs, announced 12 projects that won tax credits in Cleveland, Akron, Elyria, Bay Village and Ravenna.

But the tax bill eliminated what are called private activity bonds, tax-exempt bonds issued by state or local governments to reduce the cost of development. Novogradac said that these so-called PABs are used to finance more than 40% of all LIHTC-financed affordable homes annually."

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