Tax credits benefit downtown redevelopment

The number of rehabilitation projects in downtown Springfield that receive historic tax credits may increase, in part due to an Alabama-based company that has purchased federal tax credits for small-market rehabilitation projects nationwide.

Small Deal Fund LP is targeting Springfield and its downtown revitalization, starting with Dan Scotts redevelopment of the former Marquette Hotel at 400 E. Walnut St.

Scott and Small Deal Fund President John Bowman have been working out a deal for the past few months to generate roughly $350,000 in federal tax credits for Scotts $2 million project. They expect to complete the deal by the end of the year. Scott is rehabbing the nearly century-old building into first-floor commercial space with 15 loft apartments above.

Before receiving a cold call from Bowman, Scott could not find buyers of tax credits on a project the size of his. Bowman said Scott is not alone.

The market is very efficient for the large deals, typically $2 million and above in tax credits, Bowman said. To get $2 million in tax credits, youve got to spend $10 million in eligible rehab costs. The farther away from $2 million you get, theres nobody that wants to buy the credits.

Enter Small Deal Fund and its investor, Chevron. A partnership in early 2002 was designed to fill a void in the market for smaller projects, Bowman said.

Now theres a chance for Springfield developers to capitalize and a number are showing interest. Bowman was in town Oct. 1 to speak with local developers at Springfield Brewing Company during a meeting that Scott arranged. As a result, Bowman is in conversation with about six Springfield developers. Among them are Warren Davis Properties, owner of the Heers building, and Craig Wagoner, who is renovating the former Seville Hotel on Walnut Street.

Hopefully, it all comes to fruition, Bowman said. I would like to do more.

Kim Harrington, an owner-member of Davis Properties, said Bowmans Small Deal Fund is just one option the company is considering for the Heers building project, which is an estimated $10 million rehab. Harrington said Davis Properties is seeking about $2 million in federal tax credits, and another $2.5 million in state tax credits.

Its another avenue, she said of the Small Deal Fund. We are very much in an infant state, where we are learning this whole process. We have talked with several other purchasers of tax credits, including Commerce Bank.

Were just really keeping the door open.

Tax incentives

The Federal Historic Preservation Tax Incentives program is administered by the National Park Service in partnership with the Internal Revenue Service, and funded by Fortune 500 companies looking to invest capital, Bowman said. No public money is involved, Bowman added.

Tax incentives reward private investment in rehabilitating historic properties such as offices, rental housing and retail stores by lowering the amount of tax developers owe. Developers rehabbing a certified historic structure can apply for federal tax credits of 20 percent of the project costs.

In order to reap the benefits of tax credits, developers must sell their company to buyers of the tax credits.

Its an intriguing deal. In order to get the tax credits to transfer to (Bowmans) company, you have to sell off, basically 99.99 percent of your company, with the right to buy it back at the end of five years when the federal credits can no longer be recaptured, he said.

For a conservative Midwestern, it takes a little thought time to convince yourself that this is a good idea.

Even though Small Deal Fund becomes owner, the developer retains complete control of project operations as a managing partner.

Scott is selling off Big Ugly Building LLC, the entity behind the Marquette Hotel project, to generate the roughly $350,000 in federal tax credits.

We have to have an economic interest in that partnership, Bowman said. We cant just buy the tax credits. The Internal Revenue Service wont let us do that. That cash flow is based on the money we have invested into the project.

At the end of five years, the programs compliance period, developers buy out the Small Deal Funds interest at 15 percent of its invested capital. The entire ownership goes back to the developer, Bowman said.

In the end, developers are able to build equity in their buildings.

It allows the developers to get some of their equity out of the project on the front end, instead of having to wait five years for the compliance period, Bowman said. We provide that capital to them. We get what we need, which is tax credits, and they get what they need, which is equity.

Springfield impressions

Since the Small Deal Funds inception, Bowman has closed 11 deals nationwide totaling nearly $10 million in tax credits. He expects to finalize 10 more deals, including Scotts project, by the end of the year.

The Small Deal Fund is one of six funds available through Tax Credit Capital LLC, its parent company. Tax Credit Capital has headquarters in New Orleans.

Bowman was impressed with what he saw in Springfield. I toured the city and saw what was going on. The people of Springfield should be very proud, he said. I was very, very impressed with redevelopment of downtown. And I travel all over the country; I see the good and the bad.

He noticed the public investments in Jordan Valley Park and said that is encouraging because new construction helps revitalization efforts. They work together. Its kind of like sunshine and rain. You have to have both to grow a crop.

But in light of the new public/private investment for new downtown housing, office and parking, dubbed the Market Avenue redevelopment project, Bowman offered a subtle warning: The key is not to do too much at one time. Thats your biggest fear. When cities want urban infill theyll throw a lot of government resources at the problem, such as donating land and parking, he said. Then a developer comes in and does this huge project thats too big for the market and the market doesnt support it. Then youre right back to where you started with another empty building. The market needs to control whats built and whats not built. Only the market can tell you when there is demand.