Building Boom Fuel

Travel writers paint a rosy picture of life in Richmond, extolling the restaurant scene, the vibrant arts district, the infusion of millennials and empty nesters into downtown, the revival of the city’s historic areas like Shockoe and Manchester, and a mini-boom in population. Travel + Leisure magazine ranked the city No. 3 on its list of 50 best places in the world to visit in 2016. It doesn’t get much better than that.

But if you dial back 25 years to the beginning of the 1990s, Richmond could have been a tableau out of Dante’s “Inferno.”

The population had dropped more than 20 percent, from approximately 250,000 in 1970 to a low of about 195,000, as residents fled to the suburbs and businesses closed, leaving behind boarded-up buildings. The city’s two iconic department stores were among the early casualties, Miller & Rhoads in 1990 and Thalhimers in 1992, signaling a retail tailspin. With economic conditions growing dire, Richmond became a breeding ground for thugs and drug gangs, recording some of the highest homicide totals per capita in the nation during the ’90s.

There seemed to be no way to staunch the hemorrhage of people, retail enterprises and a valued way of life.

In 1995, a mid-level government bureaucrat had an inspiration. Kathleen Kilpatrick, then a special assistant for policy to the state secretary for natural resources and later deputy director of the Virginia Department of Historic Resources (DHR), proposed a state historic tax credit (now at 25 percent) on top of a federal credit (20 percent), saying it could help restore the city’s historic fabric, perhaps revive decaying neighborhoods, produce jobs, and accelerate economic activity and development.

More than 1,400 historic tax credit projects — and $2 billion in rehabilitation expenditures — later, Richmond has become a new city. Between 2006 and 2016, an estimated $4.5 billion in projects, including new and rehabilitated properties, have been recorded by Venture Richmond, an advocacy group for downtown development.

Officials say the tax credit championed by Kilpatrick has been the jet fuel for much of the city’s turnaround.

“Name one public policy that’s had that impact. It’s been critical,” says Lucy Meade, director of marketing and development for Venture Richmond.

Before joining state government, Kilpatrick had worked with the U.S. Department of the Interior, which, through the National Park Service, administers the federal historic tax credit program, adopted in 1976. Kilpatrick had seen how layering a state historic tax credit program alongside the federal tax credit could encourage development. Other states had been successful with state historic tax credits — today about 30 states have some form of the program — and she thought Virginia could be, too.

Kilpatrick also believed that Richmond, with its high number of historic properties, could be a centerpiece for the ambitious proposal.

“If you want to rebuild a city, first you have to bring the people back in town, then the businesses will come,” she says. “It’s really tied to how people live, how they want to work and how they want to play. If all of these things come together, you can check a decades-long pattern of movement out of the city.

“I told the governor [George Allen at the time] we wanted to unleash the power of the private sector in restoring our historic buildings and creating economic opportunity,” Kilpatrick says.

In talking with legislators to sell them on the state historic tax credit program, she invoked the success of The Jefferson Hotel, which had used federal historic tax credits in 1986 during its successful restoration.

“It was a very early project,” Kilpatrick says, “and it was a prime example in our legislative presentation of what can happen when there is some reinvestment in historic resources. It exploded investment in the immediate area.”

She also could have pointed to the use of federal historic tax credits in the adaptive reuse of old tobacco warehouses and cigarette factories in the Tobacco Row development. The project spawned shops, offices and apartments and helped revive the city’s riverfront and downtown. In the late ’80s and early ’90s, Tobacco Row was considered one of the nation’s foremost urban rehabilitation projects.

The state’s historic rehabilitation tax credit was created by the General Assembly in 1996 and implemented a year later. The National Park Service notes that in fiscal year 2015, Virginia was among the four states with the most historic rehabilitation activity, along with Missouri, Louisiana and Ohio.

Statewide, according to a 2014 study by Virginia Commonwealth University commissioned by Preservation Virginia, state and federal historic rehabilitation tax credit programs generated nearly $4 billion in economic activity and helped provide about 31,000 jobs between 1997 and 2013. Those figures are expected to climb substantially when VCU releases an update of its study, likely by the end of the year. And, for the first time, the study will include data about historic tax credits’ return on investment.

By using both state and federal tax credits, developers can claim 45 percent of eligible expenses used in the rehabilitation of a historic property. Those credits, in turn, can be used for dollar-to-dollar reductions in income tax liability for the developer, or the credits can be syndicated to investors.

The National Park Service notes that a tax credit differs from an income tax deduction in this way: “An income tax deduction lowers the amount of income subject to taxation. A tax credit lowers the amount of tax owed. In general, a dollar of tax credit reduces the amount of income tax owed by one dollar.”

Elizabeth Tune, director of DHR’s Division of Preservation Incentives, says that for the purposes of the state historic tax credit, a developer of a commercial property would be required to spend at least 50 percent of the assessed value of the property in its rehabilitation, assuming the rehabilitation meets the U.S. Secretary of the Interior’s standards, which Virginia uses. So, if a property is assessed at $200,000, the developer would have to spend at least $100,000 to become eligible for the 25 percent state tax credit on the money expended. A homeowner rehabilitating a historic property would have to spend at least 25 percent of the assessed value to earn state tax credits.

“Name one public policy that’s had that impact. It’s been critical.” —Lucy Meade of Venture Richmond, discussing the state’s historic tax credit program

Kilpatrick says the impact and size of the $2 billion state historic tax credit program in Richmond was within her expectations from the start.

“I’m not surprised at all,” she says. “We said at the beginning that it would address blight and promote growth. It has taken existing buildings and put them back into productive use, and that’s kept them out of landfills. This is fundamentally community revitalization.”

LEGISLATIVE CONCERNS

Twenty years after its inception, and despite its success on many fronts, the state tax credit program is getting a hard look from state legislators. Some see it as disproportionately benefiting urban areas and keeping tax money out of state coffers.

During the upcoming General Assembly session that starts in January, the Joint House and Senate Subcommittee to Evaluate Tax Preferences likely will be poring over the updated study from VCU with special interest. The subcommittee has been evaluating the historic tax credit program as proposals have surfaced to possibly put a limit on the amount of tax credits that are available, or shrink the amount per project.

All this comes amid a $1.5 billion revenue shortfall in the state’s biennial budget, which has made legislators more cautious in money matters.

Del. Benjamin Cline, the Republican vice chairman of the House Finance Committee who represents Rockbridge County and adjacent areas, spoke out about the possibility of curtailing historic tax credits during a joint summer meeting of the General Assembly money committees.

“I’m happy to embrace Richmond for the enthusiasm of the program, but rural areas, which have an equal number of historic properties, might not have the awareness of a program like this one. Where Rockbridge [County] has received $1.5 million over the course of [the program’s] history, Richmond city has received $2.1 billion.

“At some point, there’s a limit,” Cline says.

The city of Richmond leads the state by far in the number of historic tax credit projects, with more than five times the number of second-place Arlington County, which had 213 projects from 1997 through the end of 2015. The cities of Roanoke, with 119 projects, and Norfolk, with 111, had the most after that.

Del. Jimmie Massie, a Republican who serves on the House Appropriations Committee, explains why historic tax credits must have a good return on investment.

“When we give somebody a tax credit, we’re foregoing revenue to the state treasury that could be used for education, roads or other needs. When we say to a developer, ‘If you do this renovation, you won’t have to pay these taxes,’ the state is making an investment in the development,” says Massie, an investment banker.

The Henrico legislator says he understands how valuable the state historic tax credit program has been to Richmond and its development over the past two decades, “but we have to know what the state is getting back in return,” Massie says. He asserts that the General Assembly must have reliable figures about what those returns are. “We just don’t have the data.”

URBAN REVIVAL

Broad Street, Richmond’s central thoroughfare, is a poster child for how historic tax credits can lift an area. In the 1990s, sections in downtown Richmond resembled a ghost town, with boarded-up and abandoned businesses. Today it’s thriving, with landmark properties like the 23-story art deco Central National Bank building, the Quirk Hotel and The National Theater. The former Miller & Rhoads department store is home to a Hilton hotel.

All of those venerable Richmond landmarks, and many more, have been beneficiaries of historic tax credits.

Rehabilitating historic properties, from Shockoe to Manchester to Scott’s Addition, has also spurred an unprecedented wave of new construction in Richmond: apartments, restaurants, office buildings and corporate headquarters, as the city has become more attractive for investment overall, as well as a nicer place to live, work and dine out.

Kilpatrick, who retired from state government on Oct. 1 as executive director of the Capitol Square Preservation Council, says the primary role of governing officials is to provide leadership, encouragement and support for change makers in the private sector.

“When we give somebody a tax credit, we’re foregoing revenue … We have to know what the state is getting back in return.” —Del. Jimmie Massie, R-Henrico

She’s proud of the role tax credits have played in Richmond’s revival, reversing a decades-long pattern of movement out of the city.

Today, the city’s population has rebounded to 214,000, and Venture Richmond has reported that nearly 20,000 people now live in downtown Richmond, compared with the approximately 10,000 who lived there in 2010. Baby strollers on sidewalks, bicycle lanes and pedestrian thoroughfares have marked a cultural change in the River City. National publications herald Richmond’s burgeoning food and art scene, its creative vibe and its downtown renaissance.

“In my lifetime … there’s been nothing else like it,” says Bryan Green, director of historic preservation for Commonwealth Architects, which has completed more than 150 tax credit projects statewide, the majority in Richmond.

Lee Shadbolt, a principal with Commonwealth Architects, says many, if not most, of the projects his firm has been involved in would not have happened without tax credits.

“Neighborhoods that were the ‘Wild West’ have been transformed, because new uses have been brought into older buildings,” he says.

Commonwealth Architects was involved in the recent $39 million renovation of the Central National Bank, a landmark listed on the National Register of Historic Places. The tower, and its annex, has been renovated into more than 200 apartments. Reopened in June, the building had been unoccupied since 2000 and was in a state of rapid deterioration.

“Without tax credits, there was no way you could justify it,” Green says of the renovation. “And when you have an anchor project like this, you’ll see other projects develop around them — it’s a ripple.”

Tom Dickey of the Monument Cos., another firm that has used historic tax credits extensively, says state historic tax credits were not an immediate hit.

“It was a slow rollout,” he says. “The program spread through word of mouth. Then it took some time for the developers and architects to learn the program. It also took a while for people to learn to work with DHR.”

John Accordino, acting dean of the Wilder School of Government and Public Affairs at VCU, cautioned that historic tax credits were not the sole reason for the city’s revival.

He noted, for example, that VCU’s growth to 31,000 students, up from about 22,000 in 1990, and its expenditure of $1.6 billion since 1996 on its Medical College of Virginia and Monroe Park campuses has helped to propel the city’s comeback.

“Having said that, a lot of what has made Richmond livable, desirable and encouraged VCU to invest here has been its historic fabric,” Accordino adds. “And that historic fabric simply would no longer exist to the extent that it does today but for the renovations that have occurred, fueled by historic tax credits.”

Still, not everything has been smooth going with historic tax credits.

For example, two Richmond-area developers, Justin G. French and Billy G. Jefferson Jr. went to prison and were ordered to pay millions in restitution for fraudulently obtaining tax credits.

 Jefferson was sentenced to 20 years in prison in 2014, in part for grossly inflating the cost of renovating historic buildings and then receiving tax credits that cheated the government and investors. He reportedly claimed $27 million in expenses for the purposes of historic tax credits, but more than $17 million of that amount was fraudulent. In 2011, French was sentenced to 16 years in prison for a similar scheme.

With both Jefferson and French, the wrongdoing was discovered by DHR officials, who alerted police and assisted prosecutors in obtaining convictions. Meanwhile, the department has tightened its procedures, with more site visits and stricter verification of the work that has been done, officials say.

Elizabeth Kostelny, CEO of Preservation Virginia, says that the preservation community has embraced historic tax credits as a tool that can be used in neighborhood revitalization. She points outs that some of the neighborhoods in Richmond that 15 years ago might have been perceived as dangerous places have been transformed into livable communities because of historic preservation activities and rehabilitation.

Although there is always the danger of gentrification, she says that organizations interested in affordable housing are increasingly using historic tax credits.

“You increase the quality of the neighborhood in terms of quality of life, but not necessarily change the people who live in the neighborhood. You keep them in their homes,” Kostelny says. Preservation Virginia is working with VCU to gauge the increase in tax revenues and job creation after a historic property is rehabilitated using historic tax credits, she says.

In the mid-1990s, Tim Kaine, then mayor of Richmond, found a way to use historic tax credits to transform Maggie Walker High School into a governor’s school.

Julie Langan, the director of the Department of Historic Resources and the state’s preservation officer, believes her department and other groups need to do a better job of educating decision makers about how successful the historic tax credit program has been for Richmond, and for Virginia. She says historic tax credits are often the tipping point in whether developers undertake a project, but that the commonwealth’s role is seldom mentioned when the project is completed and the celebration begins. “It’s one of the things I’ve never understood,” Langan says.

Richmond has 55 registered historic districts, covering 6,790 acres, and 30 percent of all the structures in the city are within these districts, Langan says.

That means that although the city has been a huge beneficiary of historic tax credits already, there is room to expand the program.

Kilpatrick says she’s confident that the General Assembly will see the value of continuing the state historic tax credits program because of its undeniable history of creating jobs, spurring the economy, building communities and preserving historic properties that drive tourism.

“I look at myself as a very lucky person who was at the right place at the right time,” says Kilpatrick, who served as DHR director under four governors. “I had the support of a succession of governors who have remained committed to a program that’s doing good for Virginia.”

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‘The Worst-Looking House on the Block’

The showpiece of an unscrupulous developer from the 1890s is one of the latest Richmond restoration projects made possible through the use of historic tax credits.

Builder Clark Glave found the house on a bicycle ride in Barton Heights several years ago. Shrouded by an overgrowth of bamboo, it didn’t look like anybody’s dream house.

“It was ready to come down,” Glave said of the 18,000-square-foot property on Monteiro Street.

The house was built in the 1890s by James Barton, who developed the Barton Heights neighborhood before disappearing with huge debts piling up and creditors filing lawsuits. Glave says Barton used the proceeds from new home sales to build other houses that he had already sold, and his business venture was soon under water.

Barton left behind a 4,200-square-foot Queen Anne Victorian structure, which over the years has been expanded to more than four times its original size. Among other uses, it has served as a sanatorium for the victims of polio and other disabilities, and as a home for the aged.

Glave, operating as Ark Construction & Development, has been restoring the property and converting it into apartments. Work began in June of 2014 and is expected to be completed next summer. He’s hoping to create 17 one- and two-bedroom apartments with monthly rent between $700 and $1,300.

Glave paid $425,000 for the house and 4.5 acres of surrounding land, and he anticipates he’ll spend $2.5 million or more on its renovation. He is using state and federal historic tax credits.

“It’s going to be somewhere in the neighborhood of $900,000 worth of credits for $2.5 million in renovations,” he says. “It could not be done without tax credits. So instead of having a $2.5 million mortgage, I’m going to have a million and half mortgage. That makes this project happen.”

He will not know the total tax credit amount until the project is completed and architectural historians and others evaluate the property to see if it meets the standards for historic rehabilitation.

Glave is also planning to use Richmond’s tax abatement program for rehabilitated structures, which provides a partial exemption on property taxes for up to 10 years. He says that many developers in the city use the program, in addition to state and federal tax credits, to reduce their tax bill.

“I make my living buying the worst-looking house on the block, and this was definitely the worst-looking house on the block,” Glave says. “It was dragging down the neighborhood. But when it’s completed, I think it will be very special.”