By Sean J. Miller

Iowa’s history, preserved in the bricks and mortar of aged buildings from Davenport to Des Moines, was in danger of being bulldozed. Many historic buildings in Iowa sat vacant or underused, developers say, because the cost of renovating weathered architectural marvels was exorbitant compared to the price of demolishing them and building on top of the dusty rubble.

Without financial incentives, “these projects would not get done because people can’t afford to do it,” says Sam Erickson, vice president of Community Housing Initiatives Inc., a non-profit organization that rehabilitates historic properties around the state. “Iowa was previously very behind on its preservation effort because we grossly under funded the project.”

In 2000, the Legislature created a program to help preserve Iowa’s history by offsetting the cost of renovating historic buildings with tax credits. The Historic Preservation Tax Incentive Program offers developers a tax credit certificate — essentially a state-backed ‘I-owe-you’ redeemable at tax time — for those restoring buildings in Iowa listed on the National Register of Historic Places.

Here’s how the program works. If the building is already on the Register, the developer applies to the Iowa Department of Cultural Affairs for the tax credit. Once the work on the building is complete and found to meet the national restoration standard, the developer receives a tax credit certificate. The developer can use the certificate toward the company’s state tax return for the year it’s issued or sell it to an investor — an individual or a company — for quick cash.

The program provides $1 of state tax credit for every $3 the developer estimates he will spend. For example, the 2003 restoration of the Temple for Performing Arts, formerly known as the Masonic Temple, cost $7 million and the developer, Downtown Preservation Partners, received close to $1.7 million in tax credits for the project.

Overall funding for the program, until the passage of new legislation in April, was capped at $6.4 million a year. That might sound like a lot of money, but it was insufficient compared to the value of the projects that were requesting funding. “Our annual demand [for tax credits] was about $30 million,” Erickson says. The program’s annual budget didn’t even come close to handling the demand for historic restoration projects.

The Department of Cultural Affairs had a dilemma: it couldn’t meet the yearly demand for tax credits for preservation projects but didn’t want to turn developers away, Erickson says. If these buildings aren’t preserved, “people are just going to keep putting up uninteresting, artificial buildings.”

So rather then refuse tax credits to qualifying projects — effectively putting them on hold — a loophole in the program’s mandate allowed the department to postdate the tax credits until funding was available, she says. Some projects received tax credits that weren’t redeemable until 2017. Developers who received these credits and tried to sell them to investors to finance their projects quickly learned the credits had almost no value.

“It destroyed the program,” says Dan Garrett, vice president of Midwest Housing Equity Group, a firm that brokers deals between investors and tax credit holders in Iowa and other states. “I’m going to sell you a reduction on your taxes in five years? You don’t know what your taxes are going to be,” Garrett says. Tax credits are typically only viable to sell if they’re dated three years ahead, anything further and the seller is lucky to get 25 cents on the dollar. “When you have tax credits that are so far out, you went from having a viable entity to something that’s [worthless],” he says.

Erickson says that wasn’t the department’s intention. “The Department of Cultural Affairs was really trying to do the best they could for Iowa history and Iowa architecture,” she says. “It was an unfortunate situation.”

For the past three years, advocates have pushed the Legislature to increase funding for the tax credit program. This year they were successful. A bill reforming the program and increasing its funding was passed on April 29, receiving no votes against in the Senate and only two votes against in the House.

Some legislators were initially reluctant to support a program they regarded as a subsidy for rich developers. Especially while the Legislature is providing generous funding for other cultural programs, such as tax credits for film production in Iowa, opponents of the program say.

“We’ve got priorities — health care, education, public safety,” says Rep. Bruce Hunter, D-Des Moines, who voted against the bill. “At this point we really don’t have a handle on what those priorities are going to cost us. Until we get a handle on these priorities, we should be real cautious about giving out tax credits to interest groups…There’s a reason why we’re scratching our heads to come up with money to pay teachers a good salary.”

Rebuilding history

The legislation passed in April went into effect July 1, adding millions of dollars to the tax credit program. “We changed everything in the funding structure,” says Gordon Hendrickson, legislative liaison for the Department of Cultural Affairs. The funding for the program is set to steadily increase from $6.4 million in 2007, to $10 million in 2008 and $20 million by 2010. The bill also limits to three years how far in advance the tax credits can be issued, and moved up the redemption date on the credits that remain outstanding, he says.

“The furthest out that we go with every tax credit that is in the hands of a developer, not sold to an investor, is 2011,” Hendrickson says, although $300,000 of those credits have been sold, and their redemption dates remain until 2017.

The new money is available to three categories of projects: 10 percent of the tax credits are reserved for projects valued at $500,000 or less, 40 percent of the money is reserved for projects in state designated cultural or entertainment districts, and 50 percent is available to any project anywhere in the state.

In order to be approved for tax credits by the department, the proposed project first needs to be on the National Register of Historic Places. In the application, a developer sends the department “before” photos and a detailed plan for the project. If approved for the tax credits, the restoration work must meet the Secretary of the Interior’s standards for rehabilitation. A developer is required to preserve “distinctive features, finishes, and construction techniques or examples of craftsmanship that characterize a property,” according to the Secretary of the Interior’s Web site. “Those standards are very strict,” says State Sen. Jack Hatch, a Des Moines-based developer, and require skilled labor to maintain, which increases a project’s costs.

Taking on a historic restoration project is risky, Hatch says. If the developer’s work on a project fails to meet the national restoration standard, his tax credits will be voided.

Hatch’s company, Hatch Development Group, recently purchased two buildings on Locust Avenue across from Western Gateway Park. The buildings are almost 80 years old but were not on the National Register of Historic Places. “There’s a leap of faith here,” he says, because even if an owner puts together a good application to get on the National Register, it’s possible for historic buildings to be denied a place.

Hatch’s two buildings, the Chamberlain at 1308 Locust St. and the Kruidenier at 1408 Locust St., both housed car dealerships in the early part of the 20th century, he says. “The architecture has a certain amount of art in it.”

Before revamping the buildings into commercial space, Hatch hired a consultant to research their historical significance in order to increase the chances they’d get placed on the National Register. To get a building placed on the Register, the owner must prove it to be significant to American history, archeology, architecture, engineering, or culture — which requires extensive documentation.

“The Chamberlain building was approved easily,” he says. But the Kruidenier building’s application was denied.

“Over half of the front façade was missing, and that was it,” Hatch says. It couldn’t qualify for the tax credits. “If that happens, you have to adjust your business plan,” he says. “The Kruidenier is up for sale as a result.”

While historic preservation projects can be risky, they’re also rewarding for the developer. Finding tenants for a unique, historic building is easier, Hatch says. “People want to work or live in a historic building.” Restoring historic buildings also dramatically increases their value. The Temple for Performing Arts building increased $3.5 million in value after its restoration, according to a report by the Department of Cultural Affairs.

Hatch, who abstained from voting on the new legislation, is adamant that the restoration of the Chamberlain building, now underway, couldn’t have happened without receiving historic tax credits. “The tax credits we’re going to get are about $1 million,” he says. “To go to the bank and borrow that money, I couldn’t have done it.” Some of the first developers to use the program also credit it with being the linchpin of their project’s financing.

Harry Bookey, an attorney turned developer, renovated the Masonic Temple in downtown Des Moines into the Temple for Performing Arts, which includes a theater, office space, restaurants and a cafe.

The tax credits are “very necessary to preserve old buildings,” Bookey says. “It was absolutely necessary for us to even think about doing the Temple Building.” The impact of the tax credits needs to be measured by what the preserved building does for the community, he adds. The Temple for Performing Arts “has been a great thing for Des Moines, and it just wouldn’t have happened without [the tax credits].” According to a report by the Department of Cultural Affairs, the renovation of the Temple also added $224,891 in property taxes to Des Moines.

Historic tax credits also help small Iowa towns maintain their old Main streets, supporters of the program say. Between 80-90 percent of the buildings in rural areas are historic, says Jacky Adams, president of the Iowa Historic Preservation Alliance. “All the little towns in Iowa struggle with historic preservation, with economic development,” she says. “This [legislation] will be very helpful.”

Perhaps no historic building symbolizes the hopes of small town Iowa more than the Hotel Pattee, in Perry. The 40-room hotel never received any state historical tax credits; however, it is a case study of both the economic impact and the costs related to renovating historic buildings.

The 94-year-old hotel was restored in 1997 at a cost of more than $10 million, but it never turned a profit in its almost decade of operation, says Bill Clark, vice president of Pattee Enterprises, which owns the building. Still, the town has felt the impact since the hotel closed on Dec. 30. In the past six months, “Perry was 13-16 percent down in retail sales, and the hotel was a factor,” Clark says.

Money doesn’t get old

There are currently historic restoration projects underway in every major urban area in the state, according to a report by the Department of Cultural Affairs. These rehabbed historical properties have added an average of $1.3 million in property tax revenue to the state over the past six years. Historic rehabilitation also stimulates the economy directly by adding construction jobs, Erickson says, because labor is 60-70 percent of the construction cost on restoration projects; compared with 15 percent on new construction.

Overall, the new financing for the tax credit program will add millions of dollars to the Iowa economy, says Hendrickson, who lobbied for the bill’s passage on behalf of the Department of Cultural Affairs. “I expect that we will have stimulated between $60-$70 million worth of construction projects in the state.” The program has stimulated $236 million in new rehabilitation projects in the last six years, according to the Department of Cultural Affairs report.

Without providing tax incentives for developers, many historic buildings will remain shuttered or underused, says Erickson, who’s company is starting work on a Mason City hotel designed by famed architect Frank Lloyd Wright. “The majority of applications are for vacant buildings. We’re taking things that are very low on the tax rolls” and increasing their value, she says. Without a program like this, historic buildings will be lost, she says. “People understand; they really do.” CV

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