Getting out of rehab
Tax breaks for renovating historic buildings breathed life into dying downtowns. Now the credits are expiring.
By Greg Lacour
On a chilly, drizzly February morning, Nathan Kirby crouches in a downtown Gastonia alleyway, screwdriver in hand. He couldn’t find his drill. He labors to remove the sheet of plywood he had fixed to a doorway of a century-old neo- classical building that once was — and, Kirby believes, will be again — a limestone-and-brick jewel. The screwdriver slips from his grip. “Damn it,” he mutters, then picks it up.
He pulls away the wood. The inside of the Lawyers Building is as it has been for three decades: vacant and dusty. Assorted bric-a-brac — sheets of drywall, stacked doors, an old cash register — clutter the dim interior. But sunlight reveals beauty beneath the dust. Half-moon windows, heart-pine floors, buttressed ceiling. Stone-faced elevators and brass fixtures in the lobby. You realize what Kirby — a developer who specializes in renovating historic structures — sees in it and why city officials believe its $4 million renovation will spur downtown’s rebirth.
“This ground floor was basically limestone. It was made with concrete and reinforced with steel, so the building is as tough as they come.” Kirby, 32, is boyish and unkempt. His thinning light-brown hair is unruly. His shirt is untucked. Even in the dank cold, he eschews a jacket. “They had a nuclear-fallout shelter in the basement.” It’s one of the oldest and most visible buildings in downtown. “If you listen to the cries of the community, the old-timers who have been here all their lives, all you hear is, ‘Nothing’s going to happen downtown until the Lawyers Building gets renovated.’”
It’s a familiar argument. Historic preservation is touted as a catalyst for downtowns, especially in small places struggling to survive population loss to big cities. To help pay for such rehabbing, the federal government enacted a historic-preservation income-tax credit in 1976, and North Carolina added one in 1998. Developers say they are necessary because of the cost and complications of restoring decades-old buildings. City and county officials, who often layer public funding on top of the credits, say incentives encourage development in downtowns that would otherwise stay dormant. “It really took off due to the tax credit,” says Janet Gapen, director of community planning services for Salisbury. “They really have fueled the revitalization of downtown.”
Statistics support her claim. Credits helped finance 1,324 projects for residential or commercial use between 1976 and 2007, generating an estimated $1.4 billion in economic output, according to The Historic Preservation Society of North Carolina Inc., a Raleigh-based nonprofit that buys endangered properties and sells them to people who will restore them. From 1998 to 2013, developers completed 716 income-producing ventures, totaling $1.2 billion of investment, the N.C. State Historic Preservation Office says.
But the state credits are scheduled to expire at the end of the year, leaving potential development in limbo. In mid-April, Gapen and the Salisbury city manager met with a developer who wants to convert a downtown commercial building into 12 to 14 residential units. The estimated $1.2 million project would help fill the streets with residents primed to spend money at restaurants and other retailers, Gapen says. The city may offer the developer an incentive package, but that might not be enough. “He’s very concerned about tax credits. He actually said that could be a deal breaker.”
Since 1976, 71 Rowan County projects have received historic-preservation tax credits worth $27.4 million, according to the state preservation office. During roughly the same period, developers renovated 288 buildings — not all of them historic — in Salisbury, the county seat, investing more than $117 million. “The impact of these projects is so far-reaching, from the renovation, redesign, construction, purchase of the building, their employees, people shopping at it,” says Paula Bohland, interim director of Downtown Salisbury Inc., which promotes the center city. According to the city’s 2013 fiscal report, more than 90% of downtown’s first-floor business and retail space is occupied.
“It’s a cumulative thing,” says Myrick Howard, who became president of Preservation North Carolina in 1978, two years after the birth of the federal credit. In theory, the renovator of a historic building for commercial use claims 40% of qualifying expenses — 20% from the federal credit and 20% from the state — as a credit on income taxes in years following the project’s completion. (Rehabs for residential use get 30% from North Carolina, which added an incentive for improving mill buildings in 2006.) The benefit dwindles to about 26% after navigating tax law, Kirby says. The credits, for instance, have to be counted as added income.
Still, they’ve been especially popular in small and midsize towns. Hickory, with about 40,000 residents, suffers from the collapse of its once-bustling textile and furniture factories. Its unemployment rate of 7% in February exceeded the state’s 6.4%. But shells of factories throughout the city are ideal candidates for renovation. From 2009 through 2011, the city issued $230,000 in development grants, the seed money for $1.3 million in private investment, Community Development Manager Dave Leonetti says.
Hickory’s biggest completed historic-preservation project is the $6 million renovation of Hollar Hosiery Mill. The 10,000-square-foot building, which opened last spring, contains event space, a 720-square-foot stage for musical acts, meeting rooms, a restaurant and catering service. “What it’s done is halt the decline as much as anything,” Leonetti says. “There’s definitely some momentum that’s been created.” It also enticed the owner of a larger former hosiery plant — the 85-year-old, 83,000-square-foot Moretz Mill — to begin a $9 million renovation that will accommodate a restaurant, gym, offices, apartments and retail space when it opens in late summer or early fall.
The private investment for Hollar Mill came mostly from three local families, who got about $100,000 in city grants. Cutting the red tape entangling the tax credits, however, proved troublesome. A Charlotte contact mentioned to the families that a young guy who had completed preservation projects in Gastonia and Monroe could help. Kirby didn’t put any of his own money into Hollar Mill but became a co-developer by helping structure the financing. “The thicker that stack can be, the more varied — from private but also public through grants, tax credits — the more sources, the more comfortable everyone is,” he says. “If you have a $10 million project, no one wants to get caught holding the entire bag.”
Kirby grew up in Clinton, a town of 8,600 about 20 miles east of Fayetteville. Its tiny downtown stayed vibrant through the 1970s and 1980s, when other center cities lost business to Kmarts, Wal-Marts and other retailers that opened on the outskirts. Kirby recalls both of his grandfathers taking him downtown for hot dogs and ice cream. “To me, small-town downtown was the place to be. It seemed like every small town I went to, I was missing what I loved about home.”
Kirby never earned a college degree. He followed his parents into the insurance business but detested the work. He tried brokering real-estate deals on the side but found that fulfilling only when it involved an old industrial building someone wanted to save or rehab. He consulted Preservation North Carolina in 2005 about where he might make the biggest impact. He wanted a place with a wealth of older industrial buildings and little movement to restore them. Gastonia, he was told. His wife is a native, so he closed his insurance office and told her they were moving to her hometown. “I can be pretty impulsive,” he says.
His first project was the Groves Cotton Co. building, one of downtown Gastonia’s most dilapidated structures. Through a limited-liability corporation, he bought the two-story yellow brick structure from the city for $10,000. A mix of loans, private investments and tax credits covered the $1.5 million renovation. The building was divided into four apartments and an Italian restaurant that opened in 2008. In 2010, his company, Gastonia-based Downtown Pioneers LLC, completed redevelopment of the 51,000-square-foot Monroe Hardware warehouse, built in 1926. It includes 26 apartments and ground-floor retail space. The $6 million project qualified for federal and state preservation credits, and Monroe provided a $1.3 million, 10-year loan. The building’s tax value jumped from $200,000 to $4.7 million, according to a UNC Chapel Hill School of Government analysis of the project.
All along, Kirby eyed the Lawyers Building, which had housed a bank before evolving into law offices after the Great Depression. By the late 1980s, the final tenant had departed. In 2007, Kirby and Gastonia doctor and friend Charles Hutchins pitched a plan to convert the building into apartments and retail space. The economic collapse a year later scuttled that idea. He bought out Hutchins for $350,000 in 2012 and lined up federal and state tax credits. The city pledged 10 annual grant payments of nearly $60,000 plus a decade of property-tax exemption for turning the building into a 31-room upscale hotel rather than an apartment building. Downtown needs hotel rooms more than apartments, officials say. Three years ago, the city opened the $10 million Gastonia Conference Center. It has failed to meet expectations — losing $290,000 its first year, $35,000 more than projected — and city officials believe the lack of adjacent lodging was a factor. So Kirby plans what he describes as the 62nd iteration of his idea — a hotel with a bar, restaurant and “speakeasy” in a vault in the basement.
To the city, the property-tax break is worth the risk because a successful project eventually would generate significant property-tax revenue. “That’s money we would never get if the building were not rehabbed,” says Todd Pierceall, who chairs the City Council committee that guides downtown development. It’s unclear, though, if credits expand property-tax bases. Between 2000 and 2013, the assessed value of Rowan County real estate increased 65%. That of property in downtown Salisbury, hailed for its use of tax credits for revitalization, rose only 35%. In Gaston County, property values also increased at double the pace of that in downtown Gastonia, where little historic-preservation renovation occurred.
But few could say credits don’t encourage development. A mile west of the Lawyers Building sits Loray Mill, site of the bloody 1929 strike that culminated in the deaths of Gastonia’s police chief and a prominent union leader. It was once the world’s largest textile mill. The 111-year-old structure rises six stories and contains more than 600,000 square feet. Last year, Preservation North Carolina reached a deal with Palos Verdes Estates, Calif.-based JBS Ventures LLC and Atlanta-based Camden Management Partners Inc. for a $39 million renovation of the mill into 190 loft apartments plus office and retail space. Camden is financing the project with the help of a federal-housing loan and the promise of state and federal tax credits. It expects to complete the first phase this year.
“It took eight years [to get financing], and we could have walked away at any time. But we felt it would have such an impact on the city and community,” says Billy Hughes, a principal at JBS. “I’ve been at this for more than 20 years, and what we see happening — and you don’t learn this in Real Estate 101 — when you start renovating an old building in the center of town, all of a sudden people start to take notice.”
After a decade and a half, though, the credits may be on their way out. The program is scheduled to expire at the end of the year, a casualty of an overhaul the General Assembly passed in 2013 to simplify the tax code by eliminating exemptions and closing loopholes. All three state historic-rehabilitation tax credits — for commercial, residential and mill buildings — would be eliminated.
The legislature can revisit tax reform during its short session this month, but there is no plan to do so, says Rep. Julia Howard of Mocksville, the Republican senior chairwoman of the House Finance Committee. She and other legislators say they’re not opposed to the program per se; its elimination is just part of their larger push to simplify the tax code. Some lawmakers, though, think the credits are worth re-examining. “I know it’s a very important development tool,” says Rep. Mitchell Setzer, a Republican from Catawba County and Finance Committee co-chair. “What the General Assembly will do when it goes back in, I can’t tell you, but I’m hoping we can look at this again.”
Howard, president of Preservation North Carolina, admits the program could be simplified. He teaches a class on preservation at UNC Chapel Hill. “At the end of the semester, people still look at me like, ‘Huh?’” The credits benefit from a scheduled sunset of Jan. 1, 2015, rather than the year before, when Republicans, who had finally gained control of state government for the first time since Reconstruction, were intent on revamping tax policy. “We thought it would be better to wait to make our push until the General Assembly settled down a bit. 2014 is closer to elections, so people will move closer to the middle,” Howard says. Plus, the credits are popular. “No one wants to shut down a billion-dollar economic-development tool.” He believes the General Assembly would support them at a reduced rate, 15% instead of 20%. Mills or projects in economically distressed counties would get an extra 5%.
If the program ends, Kirby says he will live in North Carolina but mostly work in other Southeastern states — Georgia, Alabama or Louisiana, which offers 25% state tax credits for commercial and residential renovations and an additional 25% credit if a residential project revives a blighted building. The threat of the North Carolina tax credit’s demise also imposes a hard deadline for the Lawyers Building project, which Kirby has to finish by year-end or risk losing the credit. He’ll probably work 20-hour days till then, but promises it will get done. It has to be. “I’ve had that conversation with my wife. She knows what’s coming.”