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ALL OR NOTHING: Matthew Miller’s Vecino Group was Springfield’s 2015 Developer of the Year for its Park East redevelopment work. He says historic preservation tax credits are key to urban rehabilitation.SBJ file photo
ALL OR NOTHING: Matthew Miller’s Vecino Group was Springfield’s 2015 Developer of the Year for its Park East redevelopment work. He says historic preservation tax credits are key to urban rehabilitation.

SBJ file photo

Taxing Business: Developers count on economic tax credit programs

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Area developers say they’re dependent on certain tax credits under review at the state level, and economic harm would occur without them.

The historic preservation tax credit – those awarded for rehabilitating older buildings – was crucial in the build-out of The Vecino Group LLC’s Park East development.

The urban neighborhood project for students and young professionals at Park Central West and Jefferson Avenue can be propped up as proof of the tax credit’s importance, said Vecino Group President Matthew Miller.

But the state says the tax program hasn’t delivered on its economic development promises. On June 29, the Governor’s Committee on Simple, Fair and Low Taxes formed by Gov. Eric Greitens recommended the historic preservation credit and the state brownfield remediation program be converted into a new state rehabilitation tax credit program with an annual cap of $50 million, a fraction of the $140 million current cap for the historic credits.

In Springfield, the debate begs the question: Would Vecino Group’s housing transformations of the Woodruff building into Sky Eleven, the McDaniel building into The U, and Hotel Sterling into The Sterling have occurred without the incentives?

“Oh, Lord, no,” Miller said. “I believe firmly that these buildings would still be sitting vacant.”

Together, those projects represent roughly $38.5 million in investments and the addition of over 150 housing units for young Springfield residents, according to Springfield Business Journal archives. Of the three projects, Sky Eleven counted the most on state historic tax credits, at $3 million, followed by The U at $1.2 million and The Sterling at $629,941. Nearby, Dalmark Development Group secured roughly $4.1 million in credits for the redevelopment of the hulking Heer’s building on Park Central Square, according to the Missouri Accountability Portal on the state’s website.

Beyond Missouri, federal historic tax credits also weigh heavily in economic development. The National Park Service’s 2016 report on historic preservation tax incentives found $5.9 billion worth of rehabilitation contracts were completed last year, with 104 jobs per project on average. That resulted in 108,528 jobs total created in 2016 from the incentives. From 1977 through 2016, rehabilitation investments totaled over $84 billion, resulting in 271,174 rehabilitated housing units and an estimated 2.44 million jobs created, according to the report. Developers can apply for federal historic tax credits and Missouri incentives in tandem, with both lowering the tax threshold on income-producing projects.

By comparison, Missouri historic tax credits resulted in 1,603 housing units and 685 jobs in fiscal 2016, according to state data.

So what’s the problem?

The Missouri Department of Economic Development found Missourians realized 26 cents of direct and indirect economic benefits from each dollar in historic tax credits awarded in the decade prior to fiscal 2015. In fiscal 2016, the amount lowered to 16 cents for each dollar.

Additionally, an audit released in June by Missouri Auditor Nicole Galloway found a $3 billion tax credit liability would extend at least into the next 15 years because the credits were authorized but not yet redeemed. The audit focused on the seven most costly tax-credit programs, including historic preservation and low-income taxes.

“Tax credit programs serve a purpose, but each one must be regularly analyzed for efficiency, effectiveness and to ensure they meet desired purposes,” Galloway said in a news release. “Budgets are about priorities and the impact tax credits have on the budget has to be considered.”

Following the release of its recommendations, tax force Chairman Joel Walters said the group’s work would result in fairer use of tax dollars and work toward balancing the state’s budget.

“After listening to Missouri families and businesses across the state, we believe these proposed changes to the state’s tax credit programs will better align to meet the needs of the business community while instilling a higher level of accountability,” he said in a news release.

On June 7, the governor’s task force met in Springfield, one of four stops statewide to gather input from constituents. At least one group thought the review was not sufficient.

“While the effort to reform the tax structure in Missouri is a laudable goal, it is clear that some on the commission imposed their preconceived views and disregarded data, facts and testimony shared with the commission about the benefits of tax credits to Missouri communities and taxpayers,” Missouri Growth Association Executive Vice President Megan Werner said in a statement. “The commission held only four public meetings and failed to hear public testimony in communities like Columbia, Joplin, Kansas City, Kirksville, St. Charles and St. Louis.”

To Miller, the credits are representative of financial windfalls not only for Vecino Group, but also the community.

“Do we care about our cultural centers? Do we care about jobs? Do we care about the economic impact?” he asked of the possibility of tax credits being reduced or eliminated. “It would be a hit to the state and a hit to our city and in my opinion, a dramatic one, from an economic standpoint, from a job standpoint.”

Trickle down
A similar story unfolds at O’Reilly Development Co. LLC, where the firm led by business partners Pat O’Reilly and Denise Heintz often uses the state’s low-income housing tax credits, in addition to historic incentives, for various projects.

The company recently gained approval to build a senior housing project in Lebanon called Tower Village, for which it’s utilizing the low-income incentives. Heintz said the incentives are valued at $3.8 million over a 10-year period.

O’Reilly Development also relied on historic credits for its $35 million renovation of the historic Folgers complex in Kansas City into the apartment project dubbed Roaster’s Block.

Heintz said credits used for such projects are a direct benefit to the residents.

“If credits are taken away, that increases the debt burden on the property, which is a direct factor in setting the affordable rents,” she said. “Our income-qualified seniors, it would directly affect them.”

She said rural areas would be hit the hardest if the low-income tax credits are reduced. If forced between metropolitan and rural living, developers will choose urban centers when less incentives are available, according to Heintz.

“The gap between the market rate rents and the affordable rents is a lot less in the rural communities,” she said, noting the larger gap in metro areas makes rents truly more affordable. “If you take away or reduce the state credits in the rural communities, then the affordability is going to be directly affected.”

The task force also recommends converting the low-income credit program into a low-interest loan program for affordable housing construction. The move would result in the same amount of money available, according to the report.

The developers are hopeful legislators will consider the consequences of eliminating the credits.

“I am confident that the leaders of the state will recognize this,” Miller said.

Missouri Works
Another tax credit program under review by state legislators and the task force is the Missouri Works program, designed specifically to incentivize job creation.

When stainless steel tank manufacturer Watson Metal Masters Inc. relocated its headquarters to Republic from Nixa, Missouri Works was part of the funding puzzle.

The same is true in the Phase II expansion if its headquarters, a $4.8 million endeavor that’s on top of $4.7 million the company spent in the first phase in mid-2014 to build operations in the Brookline Business Park. President Bill Schahuber said he applied for the program in both phases and will for the rest of the six-phase plan, a requirement by the state.

Since the move, he said Watson Metal Masters has created 28 jobs. In return, the state waives the employee withholding tax for a period of six years per phase. Schahuber estimates that’s resulted in $380,000 in tax savings.

“Ultimately, this comes down to one thing and that’s the tax advantage that we get from it and being able to reinvest those dollars back into our business,” he said.

Schahuber said the manufacturer’s organic growth would have enabled expansion plans regardless of the Missouri Works program, but the incentives were an added cushion for the project.

That’s not the case elsewhere.

Vecino Group’s Miller said a reduction or elimination of historic tax credits would force companies like his to search elsewhere for work involving the rehabilitation of old buildings.

“It’s very difficult to make these deals work with a historic credit – it’s impossible to make those deals work without it,” he said. “If historic tax credits go away in the state of Missouri, we’re not going to be renovating historic buildings because you can’t make it work financially.”

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