Tax Credits Key to Saving City’s Vintage Buildings

Historic preservation, once the domain of “little old ladies in tennis shoes screaming about saving buildings,” has today moved into corporate board rooms and offices of small companies, where officials decide how best to use an array of government-approved bonds, loans, grants and lucrative tax incentives to turn a profit.

From Los Angeles’ main library renovation to Seattle’s Pioneer Square to San Diego’s downtown, history has become good business.

“It is good business,” says Dan Pearson, managing partner of San Diego’s Gaslamp Quarter Enterprises, a firm involved in the $12-million reconstruction of the Horton Grand and Grand Saddlery hotels downtown. “We’d never have undertaken this without the credits . . . it didn’t pencil out.”

Although the Historic Preservation Act of 1966, approved by Congress at the urging of President Johnson, provided a small amount of financing for some restoration, it wasn’t until the 1976 Tax Reform Act, which offered investors accelerated depreciation incentives for renovating historical structures, that developers began jumping on the historical rehabilitation bandwagon.

But the program that has had the most impact and the one most often praised by both developers and preservationists is the Economic Recovery Act of 1981, which provided developers with a one-time tax credit of up to 25%.

Together, these two acts have led to the renovation of 13,800 structures nationwide--including about 1,000 in California--worth $9.35 billion, according to Ward Jandl, head of the Technical Preservation Services Division of the National Park Service, which administers the acts.

And, not surprisingly, the 25% tax credits have become powerful money magnets. Wealthy investors looking for tax write-offs have formed syndications solely for the purpose of buying surplus credits from developers.

Such is the case, for example, with the U.S. Grant Hotel, the huge 75-year-old structure on Broadway across from the Horton Plaza Park and shopping area which is in the final stages of an $80-million restoration project. Its developers sold $100,000 shares to more than 300 investors.

Said Steade Craigo, restoration architect with the state Office of Historic Preservation: “The tax credits have had a significant impact on historical preservation. It has been a good marriage between developers and historical preservationists.”

The credits, however, are under fire both from critics who say they are a bastardization of the original Historical Preservation Act and a Reagan Administration seeking to balance the federal budget. Depending on the final form of tax-reform legislation now pending in Congress, the credits may be scaled back or even eliminated.

But regardless of what happens in Congress, supporters of the credits say that without them much of the renovation that has occurred in American cities this decade--as evidenced by San Diego--would never have taken place.

Estimates compiled by Ron Buckley, the San Diego city planner in charge of evaluating historical renovations, show that since 1981 more than $100 million worth of historic rehabilitation work, in more than 20 buildings, has been done or is planned because of tax credits.

“This is incredible economic growth,” Buckley said, noting the projects have led to about 2,000 permanent jobs.

“Historic preservation is labor intensive and a great creator of jobs, both during construction and after a building is open for business,” Craigo says. “And it’s all private investment. The way it used to be, the incentives for new construction placed historical structures at a disadvantage. Now it’s probably tilted the other way by a little bit.”

Without the credits, many of the buildings targeted for restoration would otherwise have been destroyed or sat vacant, preservationists say.

“What we’ve had is a whole evolution of historical preservation as a public policy issue,” says Art Skolnik, executive director of the Gaslamp Quarter Council. “What we had before was little old ladies in tennis shoes screaming about saving buildings. But they had no effect.”

“Now, decisions have gone into the private board rooms . . . where people look at the bottom line. The end result is a melding of cultural conservation and economic development.”

This melding is not as easy as it may sound. First, a developer must get his building qualified, which means admission to the National Register of Historic Places. Local officials, such as Buckley, the San Diego city planner, go out and evaluate the building.

Next, the state Office of Historic Preservation takes the local recommendation, studies it and makes its own recommendation, which is then forwarded to the National Park Service. The park service then makes the decision whether or not to place a building on the National Register.

Part of the qualification procedure requires that developers adhere to strict restoration requirements so that a building indeed maintains the major qualities that made it historically important.

While such constraints sometimes make a project more expensive because of hidden construction difficulties--particularly when compared to new construction--the tax credits can make up the difference, according to developers.

Such construction uncertainties haven’t stopped the flow of projects to the National Park Service. For the 1985 fiscal year, 136 projects with a combined worth of $146 million applied for historic designation in California, according to Holly Bundoc, spokeswoman for the park service in San Francisco.

Across America during the same period, hundreds of projects worth $2.1 billion qualified for the tax credits.

Some of the projects in San Diego which have qualified for tax credits are the Samuel Fox building, located at 531 Broadway; the Granger Building at 964 5th Ave.; the Grand Pacific Hotel at 437 J St.; the Onyx Building at 852 5th Ave.; the Simon Levi Co. building at 715 J St.; the McClintock Storage Warehouse at 1202 Kettner Blvd.; San Diego Hardware, 840 5th Ave. and the Chart House (Rowing Club) at 525 West Harbor Drive.

But critics of the tax credits say such incentives are nothing more than indirect subsidies to developers at the cost of cheating the government. One such critic is Richard Goodwin, a former special counsel to President Kennedy and special assistant to President Johnson, who now, among other things, writes on tax matters from his Concord, Mass., home.

“We’re not talking about Fanueil Hall (in Boston) or the Liberty Bell,” Goodwin says. “We’re talking about an enormous kind of gain for investors who are simply out to get the credits. They aren’t interested in historical preservation. In fact, they may not know anything about the building or even care. This is nothing more than a tax boondoggle for real estate interests.”

From Goodwin’s perspective, decisions about renovation and restoration should be made in a competitive market free of any incentives such as tax credits. “This is a severe drain on the treasury because investors take a huge tax loss against their income. That wasn’t the purpose of the original Historic Preservation Act,” he said. “It has spread far beyond what anyone envisioned.”

The revenue loss to the U.S. Treasury because of the tax credits amounted to about $325 million in the 1985 fiscal year, according to Jandl of the National Park Service. In fiscal 1984, the loss was $255 million, and in fiscal 1983, the tax credits were worth $195 million.

In California, the amount of tax credits claimed in fiscal 1984 was about $29 million, according to the state Office of Historic Preservation. In fiscal 1983, the credits were worth about $10 million, and in fiscal 1982, they amounted to about $13 million.

But, supporters reply, without the tax credits, historic rehabilitation--especially involving large-scale projects--will end.

“If these credits are taken away, the game’s over,” says Pearson, the San Diego developer who is using tax credits to help finance his $12-million restoration of the Horton Grand and Grand Saddlery hotels.

“Development doesn’t occur in a vacuum. If all cities had property valued like New York City’s, then we could talk about such projects competing on their own merits in the open market,” Pearson said. “But downtowns, where most of these historical buildings are located, are different. As soon as La Jolla, Tierrasanta and Del Mar start taking the homeless, the Rescue Mission types and all the rest . . . then we can talk about” an even playing field.

“In my opinion, this (the tax credits) is the single most successful program for the urban core in decades. Private money is subsidizing downtown in a way government money never could,” Pearson said. “Look, Gaslamp was nothing, it was going nowhere. But since the credits were instituted, things have started to happen.”

Pearson, who has been involved in 19 restoration projects in San Diego, used a syndication of investors to help finance his hotel project. By selling tax credits, Pearson attracted about 70 investors who paid a combined $2 million. The $2 million was then used as his equity to land a low-interest loan processed through the city but financed by a bank.

“Some of them were no doubt intrigued with the tax credits as a good investment,” Pearson said. “But in all honesty, others wanted to take part because history is in . . . it is the chic thing to do.”