Although developer Justin French abused the historic-tax-credit program, it has been instrumental to urban revitalization in Richmond. The program has been used successfully many times by developers to preserve and renovate old buildings rather than tear them down to put up cookie-cutter structures.
The renovations of the Hippodrome Theater in Jackson Ward and Maggie Walker Governor's School, as well as the J.E.B. Stuart Elementary School condominium were possible in part because tax credits were used to finance those projects. And revitalization of entire swaths of the city — Shockoe Bottom and Manchester, for example — came about because historic tax credits could defray the cost of restoration that otherwise would have been too expensive to undertake.
Because the program is so valuable to the public as well as builders, "we want to protect the integrity of [it], and that means you need to root out all bad actors," says Kathleen Kilpatrick, director of the state's Department of Historic Resources, which administers the tax credit program. "Because we value it, we will not hesitate to ask questions and raise the right flags with law enforcement," she adds.
The idea behind tax credits is fairly simple. Developers restoring historic buildings can apply for tax credits worth 45 percent of the cost of the improvements they're making on their projects. They can then sell the tax credits to companies or individuals with high tax burdens and use the proceeds to finance the cost of the work they're doing. The companies or individuals, in turn, use the credits to offset how much they have to pay in taxes.
Typically, developers sell the credits for 75 percent to 90 percent of their face value. So, for example, if a developer is making $2.2 million in improvements, she might qualify for $1 million in credits, which could in turn be sold to a company or individual for as much as $900,000. The developer would use the cash to defray the cost of the project; the company or individual buying the tax credits would get what amounts to a 10 percent discount on $1 million in taxes owed.
Typically, the credits are available to developers to sell after they complete the project. But some developers — among them French — seek to sell the credits at the front end of the project. In this case, developers use the promise of getting credits to secure financing from investors up front. In other words, developers sell partnership stakes to investors in exchange for being able to use the credits — once the Department of Historic Resources has approved them — to offset investors' tax burdens.
Under this model, the investor assumes more risk, since the value of the still-unapproved credits is uncertain. As a result, the developer often lowers the price of the credits so they're sold not for 75 percent to 90 percent of their full value but for 60 percent or 65 percent. —CD and NN