What Historic Tax Credits Can Do

http://www.novoco.com/journal/2013/09/news_htc_201309.php#.UiiV7HrQ1Qk.twitter

Map of Detroit's Financial District
criticaldetroit.com

Hello Everyone:With the looming shutdown of the American government, I thought it would be a good idea to look at Historic Tax Credits and their role in the future of American cities.  John M. Tess, President, Heritage Consulting Group, recently posted an essay titled "Historic Tax Credits: The future of Detroit and the Future of American Cities" in the online newsletter published by Novogradac & Company LLP that examines how historic tax credits can play a role in community development.  Mr. Tess uses the case study of Detroit, Michigan as a way to illustrate just exactly how the economics of historic preservationcan help meet the challenge of a bankrupt city and the future of American cities.

Aerial view of the Financial District
nps.gov

The challenges facing the city of Detroit are very well-known.  The images of graffiti-covered, decaying abandoned buildings and half-occupied blocks with vacant lots where houses used to be have been broadcast all over the media.  In 2005, the National Trust for Historic Preservation (http//www.preservationnation.org) placed the historic buildings of downtown Detroit on its annual "11 Most Endangered Historic Places," citing, " The city is at a crossroads.  Detroit's leaders can continue their demolition campaign, or they can work with developers and preservationists to breathe new life into old buildings and save the history of one of America's great cities."  Four years later, the city had the ignominious honor of appearing on the cover of Time magazine with the headline, "The Tragedy of Detroit."  At the time of this post, the city is in bankruptcy.

Seal of Oakland County, Michigan
en.wikipedia.org

By contrast, Oakland County, Michigan, Detroit's neighbor to the northwest, was featured in the July 29 issue of Bloomberg Businessweek in an article title, "Detroit is Dead.  Long Live Oakland County."  Oakland County is about twenty minutes from downtown Detroit but it might as well be in Illinois or Ohio.  Why?  While Detroit's population has dropped by sixty percent since the 1950s, Oakland County's population has tripled, making it one of the wealthiest counties in the nation, according to Bloomberg.  It's easy to dismiss Detroit's woeful state as an anomaly, a major urban industrial center that failed to change with the times that reached the point of no return where the economic realities overtook economic viability.  Sad to say that the current challenges that face the Motor City are not sui generis and they represent the task facing the preservation community.

The development community of Wayne County, where Detroit is located, beat the drum for "New Urbanism" and the combined experiences of Wayne and Oakland Counties demonstrate how urban flight, which began following World War II continues to the present.  Across the United States, urban centers continues to lose market shares to the suburbs.  While there has been some success in mitigating the bleed, the reality is while more people are heading into the cities, even more are leaving.  The irony here is that this migration is going as urban tourism is thriving and where there is an appreciation of our history.  It is in the urban cores where American history flourished not in farmland-turned-residential development.

One factor is that real estate development is a risk adverse industry and suburban development is pretty straight forward.  No guts, no glory.  The framework is established and it's simple for a developer to build specifically for the market.  The economic models and pro formas are clear, smoothing the way for financing.  A well-run project has a good chance of meeting the market in a timely manner.  For example, a developer planning a small Hilton Hotel or a Marriott near an airport can pretty much schedule an opening day once the first construction crew arrives and be comfortable with the fact that the building will be built according to the project requirements.  No brainer construction.  This is true of a product type, think Westfield Malls or Caruso Properties.  Mass produced buildings.  Soup cans on the supermarket shelf.  While your truly and my fellow preservationists may shudder at staying at hotel near the airport, there is a profitable market for it and developers know it.

Let's contrast this with the experience of building in a downtown area, where developers face a far more complex review process that involve public hearings and protracted, eyeball rolling discussions on what constitutes the right shade of blue.  As well as even more mind numbing discussions on how "maybe the programmatic elements should be changed to suit the building."  Please.  Even worse, is that woe begone developer who suddenly discovers that the one-story building on the site of his proposed high-rise project has been landmarked.  Quel horror.  A developer working in a downtown area can estimate an opening date and hope that the final design remotely resembles what was planned.  Cross your fingers and hope for the best.  That old saying "time is money" still rings true.  As you can see, urban development is far more of an exhausting process than suburban development.  There is the additional challenge of integrating new and existing construction so a more pragmatic approach is essential, factoring the uncertainty of the real estate market and the limited number of interested developers.

Street view of the Financial District
en.wikipedia.org

What types of compensation and risks are involved in the preservation of an older urban building?  An older building has an evolving history that spans decades, even centuries, evident in the architecture.  Sometimes an iconic building such as The Empire State Building or Radio City Music Hall do a magnificent job of capturing and freezing that history.  At a macro-level, a collection of buildings can create a sense a unique sense of place and time.  One example cited is Detroit's historic Financial District, which comprises a significant portion of the downtown and was listed in 2009 on the National Register of Historic Places.  This twenty-seven acre district is composed of thirty-three buildings, two sites, and one object.  The nomination states, "From the 1850s to the 1970s the Financial District in downtown Detroit was the financial and office heart of the city."  The buildings within this district capture the glorious history of the automobile industry that epitomized one of America's great cities.  Detroit was the epicenter of a revolution in global transportation.  The automobile industry not only transformed the city but also the entire upper midwest region.  During the twenties and thirties, Detroit was the fourth largest city in the United States.  A sense of place and an amazing heritage.

Bankruptcy and hard times aside, a new group of civic leaders are attempting to "breathe new life into old buildings and save the history of one of America's great cities."  Industry leaders have started buying buildings in the city's core, investing in redevelopment, moving employees from suburban offices to the urban location.  One example is Dan Gilbert, the founder of Quicken Loans.  Mr. Gilbert is to own thirty buildings with about 7.5 million square feet of space filled with roughly 9,200 employees.  Another example is Daniel Loepp, CEO of Blue Cross Blue Shield of Michigan, who in 2012 moved 3,400 employees from Southfield Michigan bringing the total number of downtown office employees to 6,400.

The Argonaut Building
en.wikipedia.org

Messrs Gilbert and Loepp's vision is to focus on the new economy as the foundation for a revitalized downtown core, creating an around the clock critical mass of people living, working, and playing in downtown Detroit.  Helping to create this vision are non-profit institutions such as the College for Creative Studies.  Aided by donations from the Ford Family and General Motors, the school renovated the Argonaut Building, designed by Albert Kahn, into a charter design school and creative center.  Also furthering the cause are events such as "Redesigning  Detroit," a juried design competition sponsored by Mr. Gilbert's Rock Ventures, focusing on imagining the possibilities for the vacant site of Hudson Department Store.  One green shoot is the anticipated 2014 opening of the Aloft Hotel in the historic 1914 Whitney Building.

In the context of the ongoing suburban migration, the revival of the Motor City cannot be borne on the shoulders of individuals alone.  Messrs. Gilbert and Loepp have the advantage of a work force able to relocate.  The historic Financial District is mainly composed of speculative office buildings built with the hopes of being occupied by businesses of all size from the traditional down sectors: insurance, financial, legal, and other related professional services.  The trouble is that those and their allied professions have shrunk and no longer require sprawling downtown office space.  Further, Detroit, like most cities, still has to come up with an answer to the question, what is the new downtown job base?

Penobscot Building
ilovedetroitmichigan.com

Like hundreds of buildings in the financial district and around the country, many of the commercial high-rises were built between 190 and 1930.  From a preservationist point of view, these older buildings are in danger until that $64,000 question gets answered.  One possibility is adaptive reuse for housing.  That's one possibility.  However, as John Tess points out, what if there is no downtown job base to make downtown housing sustainable?  The trick is creating an around the clock mix of housing, jobs, retail, commercial, and entertainment.  Some of us in the preservation nation joke that poverty and economic inactivity are good agents for preservation, true to a point.  Buildings deteriorate over time, in the case of Detroit, poverty as an agent of preservation has its limits.

In january 2013, former Secretary of Interior Ken Salazar toured the city and spoke with stakeholders about the challenges facing Detroit from a historic preservation point of view.  This visit led to an announcement of several National Park Service (http://www.nps.gov) initiatives promoting historic tax credits (HTCs) in economically depressed areas.  In particular two initiatives stand out: first,  one emphasized and expanded on the 2006 "Recommendations for Making a Good Program Better" report from the NPS Advisory Board, suggesting improving the flexibility of the HTC program.  Second, was partnering with the White House Council for Strong Cities, Strong Communities (SCSC).  Announced in 2011, the SCSC seeks to strengthen municipal governments' abilities to develop and execute economic visions and strategies.  Typically overlooked, the partnership with the SCSC is an important and positive step in the HTC program mindset.

The central core of downtown is a historic district.  These buildings, which present a unique sense of place and purpose, offer the city a very potent weapon to mitigate suburban flight.  The one greatest resource for reviving these buildings is the HTC, with a number of additional local, state, and federal incentives that can be paired with historic rehabilitation.  Further, there are a wide array of local, state, and federal community development incentives that can support activities within these buildings. Truthfully, even a rehabilitated building does not create demand.  Former Secretary Salazar's announcement recognized the fact that the HTC program, specifically and the preservation nation must be active partners in the larger scheme of saving the urban core as a way to turn the tide on suburban flight.

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