Ohio Senate Budget Proposal Sparks Panic over Loss of State Preservation Tax Credits

By Michelle Jarboe McFee, The Plain Dealer

CLEVELAND, Ohio -- A single sentence slipped into the Ohio Senate's version of the two-year budget bill set off a statewide panic in real estate circles this week, as developers and preservationists realized that a popular tax-credit program was in peril.

The language – a mere two lines in a 4,000-plus-page document – could halt hundreds of millions of dollars worth of development across Ohio, including major historic-building conversions in downtown Cleveland, Columbus and Cincinnati. And the fallout wouldn't be limited to proposed projects. The wording also throws financing into limbo for buildings where developers are wrapping up construction but haven't yet received tax credits pledged for the work.

"It would be a nightmare," said Nancy Recchie, a historic preservation specialist atBenjamin D. Rickey & Co. in Columbus. "I think it will create chaos. ... This has put every project at risk."

Since 2007, Ohio has offered tax credits for property owners and developers who take on challenging historic-preservation projects. The vast majority of those credits support renovations of vacant buildings. Take the revival of Euclid Avenue between Public Square and Playhouse Square in downtown Cleveland.

Look at the growth of the downtown apartment market, fueled by conversions of obsolete office buildings to living space. Consider Heinen's Fine Foods, whichopened a grocery store early this year in the historic Cleveland Trust Rotunda at East Ninth Street and Euclid Avenue.

Preservation tax credits played a role in all of those projects, along with the ongoing overhaul of the old Goodyear Tire & Rubber Co. campus in Akron and a smattering of smaller investments across Northeast Ohio.

And developers tackling some of the region's most challenging near-vacant properties, like the May Co. department store on Public Square and the former Huntington Building on East Ninth, are banking on credits to make their numbers work. So are a few hotel developers racing to finish renovations before Republican National Convention in Cleveland in July 2016.

That's why the Senate's budget bill sparked an avalanche of anxiety-ridden emails this week. The bill essentially would put a moratorium on the tax-credit program, barring the state from issuing project certificates starting July 1. 

Without a certificate, property owners who have completed projects won't be able to obtain their credits – credits the state awards through competitive, twice-yearly rounds but doesn't actually provide until the projects are finished.

"We don't know who did this," Doug Price, chief executive officer of theK&D Group of Willoughby, said of the tax-credit provision in the budget bill. "Obviously, they don't understand the ramifications, because the state will be sued."

A major apartment landlord, K&D just wrapped up an apartment conversion of the old East Ohio Building on East Ninth in downtown Cleveland. The company won state tax credits for the project but hasn't received them. Price's staff spent much of the day Wednesday on the phone, trying to track down senators in advance of Thursday's Senate finance committee hearings.

The Plain Dealer first reported on the proposal Thursday morning. After a day of hearings that included a brief discussion about the moratorium, Senate Democrats announced that they've introduced an amendment to strike the language from the bill.

"The tax credit has been instrumental in community efforts to revitalize neighborhoods and preserve landmark buildings that define our state's history," Sen. Joe Schiavoni, a Boardman Democrat and the minority leader, wrote in an email. "The proposal by Senate Republicans to abruptly end the tax credit through a provision in the state budget would kill jobs and scuttle important projects."

Sen. Scott Oelslager, the Republican chairman of the finance committee, said during Thursday's hearings that the intent of the original amendment was to put the program on hold for a reevaluation, not to kill projects already under way. But he acknowledged that the wording of the amendment - which he said he did not write - might need improvement.

A spokesman for the Republican majority reiterated support for the moratorium in an email Thursday evening. After a hiatus, the program could be revived to offer grants instead of tax credits.

"Existing projects already approved won't lose their funding, and the program will continue after the moratorium, but we believe it will be much more efficient as a grant program," John Fortney, the spokesman, wrote. "The historic renovation credit isn't as efficient as it should be, because it doesn't direct as much money to renovate historic buildings as a grant program would."

K&D is seeking tax credits for a renovation of the Leader Building on Superior Avenue, where the company plans to build apartments atop offices and street-level retail. And last year, the company bought the hulking Halle Building and garage near Playhouse Square – another potential tax-credit project.

"We bought buildings predicated on the credits," said Price, adding that he's talked to developers in a similar bind in Columbus. "We aren't even started."

People who own or have long-term leases on historic buildings can seek the state tax credits for preservation projects. The state credit covers up to 25 percent of a project's qualified rehabilitation costs – capped at $5 million in most cases. The credits, which offset a few different taxes or insurance premiums, are awarded before a project starts but don't actually flow to the property owner until the work is done. Developers often obtain short-term financing in anticipation of the credits.

The state awards roughly $60 million in credits each year, split into two rounds. Competition is fierce. Developer demand far exceeds supply. And Ohio, like other states with similar tax-credit programs, has found that the credits more than pay for themselves. The Ohio Development Services Agency, which runs the tax-credit program, reports that $1 million in tax credits spurs $40 million in economic activity, from construction spending to employment after a project is done.

A 2011 Cleveland State University study found that the state gets back roughly a third of its investment – 31 cents on every dollar – before developers even finish construction and receive the credits.

"This is a program that is incredibly well run," Recchie said. "There is good documentation of the economic benefits of the program, the leverage it creates. This isn't like one of those jobs programs where you promise to create however many jobs and you may, or may not. ... It is one of the best investments that the state can make, and it really has gotten the construction, development and architectural businesses back on their feet after the recession."

On Wednesday, organizations including Heritage Ohio and the Cleveland Restoration Society sent out email blasts, urging their members to contact senators. They're hoping to get the language about a tax-credit moratorium stripped from the Senate's budget bill before it leaves the finance committee. The version of the budget approved by the House does not include similar language. The Senate's proposed changes must be approved and signed into law by the end of this month.

Scott Ziance, a Columbus attorney, submitted testimony to the Senate finance committee on Thursday. Though he was representing Casto, a Columbus-based real estate company, Ziance said he'd heard from more than a dozen property owners and real estate groups who oppose the moratorium.

"Changes that are this significant and this complex should be made only after there is sufficient time to vet the proposed changes, secure input from multiple experts from different perspectives and have a robust understanding of the positives, the negatives and the alternatives," Ziance wrote, adding that the grant idea might be worth exploring but that grants aren't necessarily a better financial tool than credits. "We are happy to participate in that discussion, but it will take more than 19 days. We suggest that this concept be debated this fall and be considered as part of the next [mid-biennium review]."

Jonathan Sandvick, a Cleveland architect and preservation expert, said that nobody has been able to determine the precise origin of the Senate's tax-credit proposal. He started hearing rumblings on Tuesday and, like the rest of the preservation community, was blindsided. Late Wednesday, he remained anxious about the program's future but bolstered, somewhat, by industry pushback.

"I feel very confident that there is strong support in the House for the program and for the correction in the program," said Sandvick, who leads the Downtown Cleveland Alliance's advocacy committee and is vice chairman for Heritage Ohio. "I'm of the belief that it will win the day, because the economics support it. It's a tremendous economic engine for the state."