For those concerned with recent proposals to overhaul the nation’s tax code, it can feel like they’re dealing with a giant pile of what-if and if-then scenarios. The proposals from the House and Senate aren’t winning over everyone, but do they ever? But within the tax bill lie a few key components that are important for the commercial real estate industry in Chicago. This includes changes to the New Markets Tax Credit program and the federal Historic Tax Credit program.
On Nov. 16, the House passed a significant tax overhaul, just two weeks after the bill was unveiled. Eyes are now on the Senate, where members will attempt to move ahead with their own proposal. There are significant differences between the House bill and the Senate bill, but what’s important for many Republicans is to deliver the first major legislative victory for President Trump.
In the House bill, the new markets tax credit, the federal historic tax credit and the non-historic rehabilitation credit would be eliminated after 2017. The HTC program is an important tool for incentivizing the redevelopment of older buildings—something that developers, planners and preservation advocates value greatly. The NMTC program was initiated to incentivize community development and economic growth through tax credits that attract investors to distressed communities.
Losing these programs will make it more challenging for the city of Chicago to get developers and investors interested in rehabbing older buildings and choosing to build in low-income areas.
“The amount of deals done in Chicago in the past 10 years using these tax credits is incredibly huge, and the absence of these is worrisome. The average developer in Chicago isn’t going to maintain a historic building. It’s cheaper to tear it down and build something new. And the new markets tax credit is important, too. It provided a way to find money where it can be tough to get,” said Darryl Jacobs, an attorney specializing in tax and corporate law at Ginsberg Jacobs, LLC.
Looking at the Senate’s proposal, the provisions do change regarding these particular incentives. The legislation preserves the new markets tax credit until 2019, which is what the current law states already. The historic tax credit would be retained at 20 percent, but requires the credit to be claimed over a five-year period instead of one. The non-historic rehabilitation tax credit for pre-1936 properties would be repealed.
“Simplification is a good thing, and without these credits there would be a drastic reduction in saving historic buildings in the city,” said Jacobs. “What I would like to see is a permanent extension of the new markets tax credit and historic tax credit. These are wonderful tools and necessary tools.”
For Illinois, preserving the HTC is critical, according to Landmarks Illinois President and CEO Bonnie McDonald. From 1978 to 2016 the credit has resulted in $291.7 billion in economic output to the national economy, and Illinois has ranked first in credit usage twice in the last seven years.
“We’re disappointed that the House eliminated FHTC, but encouraged that the Senate values the program and is willing to maintain the discussion,” said McDonald. “The focus of FHTC is helping key properties that are neighborhood anchors. Properties are often in neighborhoods that don’t draw new development, so without this credit nothing new gets built.”
When historic buildings come to mind, often the first-place people think of is downtown. Buildings such as the Old Main Post Office, Lathrop Homes, Chicago Athletic Association and the Pullman Artspace have all used the HTC. But this tax is also crucial for the rest of the state, McDonald said. It can act as a catalyst for the community and acts as an incentive for developers and investors to put capital into an area where it wouldn’t otherwise happen.
A project currently at risk is Belleville’s redevelopment of the former Meredith Home into Hotel Belleville. The property has plans to be turned into commercial space and affordable senior apartments on the upper levels. The federal affordable housing and historic building tax credits account for the majority of the financing in this project, which is upwards of $8 million. However, McDonald noted that these credits aren’t paid out until the project is completed, so the responsibility falls on the developer.
“The FHTC pays for itself. The push for tax reform should focus on ways to reduce deficit. Losing FHTC will be a huge loss, for every dollar allocated there is about $1.25 given back,” said McDonald.
Whether or not the federal tax credits remain the same, it does appear at least that the city of Chicago has encouraged development with incentives from the transit-oriented development reform ordinance, which has transformed parts of Milwaukee Avenue, and most recently two ordinances focused on increasing affordable housing. Regardless of how the tax overhaul moves forward, there will be new provisions to navigate for developers and investors.