Md. may cap development tax credits

THE BALTIMORE SUN

An obscure state historic tax credit program initially intended as a modest effort to boost aging properties and neighborhoods has exploded in the past year into a generous font of government subsidies for commercial projects, mostly in Baltimore, at a cost to the state of tens of millions of dollars.

The program has become so popular and expensive, in fact, that budget-conscious legislators have introduced bills to put strict limits on the tax credits, troubling Baltimore leaders and developers who say the subsidies have helped fuel a rebuilding boom in the city.

City officials and developers say the program is essential to projects worth hundreds of millions of dollars that are revitalizing neighborhoods and business districts, from the Howard Street Corridor to the conversion of the former Montgomery Ward building in Southwest Baltimore to the redevelopment of the American Can Co. building in Canton.

"Very simply, without the historic tax credits, you wouldn't see Montgomery Park, you wouldn't see the Can Company, you wouldn't see Tide Point," said Janet Marie Smith, vice president for planning and development at Struever Bros., Eccles & Rouse Inc. "There are an endless number of examples."

Struever Bros. is by far the biggest beneficiary of the program. Its ventures alone have qualified for about $30 million in tax credits, more than half of the $52.5 million awarded so far in the program's five-year history, according to the latest figures available from the Maryland Historical Trust.

But others have come to rely on the program for less-heralded projects and are worried about the prospect of new limits being imposed: "It's a development-killer," said Anthony J. Ambridge, a developer and former city councilman.

The powerful chairwomen of the General Assembly's two tax committees, Sen. Barbara A. Hoffman, a Baltimore Democrat, and Del. Sheila E. Hixson, a Montgomery County Democrat, say they must rein in the program.

Approved applications for tax credits have skyrocketed from $2.4 million in 1997, the first year of the program, to more than $74 million last year, making it by far the largest tax credit program in the state, though only a portion of those credits have been cashed in so far.

"The state was taking, really, a big hit, a big loss," said Hixson, who, like Hoffman, wants to limit the credits to $20 million or $25 million a year. "Of all the tax credit programs we have, this one went crazy."

The mushrooming tax-credit debate pits a city hungry for economic development against a state hungry for cash. It also sheds light on a little-understood way that the public subsidizes the business of commercial development, especially in the city, benefiting not only developers but also their financiers.

Developers like Struever Bros. have mastered the art of winning millions of dollars in state and federal tax and loan subsidies for ambitious renovations of abandoned warehouses, factories, department stores and apartment buildings - projects the developers and city officials say wouldn't be economically feasible without public dollars. Often, in fact, the financing summary of large commercial projects in the city reads like a checklist of government programs.

Here's how Maryland's historic tax credit, one of the most generous of its kind in the nation, works:

A developer or homeowner is eligible for a credit of 25 percent of the cost of a renovation project, subject to the approval of the Maryland Historical Trust.

To help finance a commercial project, a developer typically sells the credit, often to a financial institution or other investor, in exchange for a smaller amount of cash up front. The financier pays about 55 percent to 65 percent of the dollar value of the credit.

Once the project is complete, the credit can be converted into cash. For instance, if the owner of a $10 million credit owes only $1 million in state taxes, the state writes off the tax debt and pays the owner the difference - $9 million, tax-free.

On commercial projects, the state tax credits are always combined with federal historic credits equal to another 20 percent of the cost of the renovation. Virginia developer David H. Hillman, who plowed an estimated $20 million into the Hecht Co. Building on North Howard Street, fondly calls that project "the house that tax credits built."

Although the credits are available statewide to help anyone rehabilitate an eligible home or building, most of the money flows into commercial projects in the city, home to the state's largest concentration of historic buildings and neighborhoods.

"It's probably been one of the most important tax incentives to redevelop historic buildings in Baltimore in the last 10 or 20 years," said Mayor Martin O'Malley, who said the program was in line with the governor's desire for Smart Growth investments in older communities.

"It encourages developers to come and preserve historic buildings, reuse historic buildings and go to areas of our state that already have the infrastructure there instead of encouraging them ... to pave a cornfield."

Hoffman and Hixson don't argue the merits of the program. In fact, in the past five years they and their colleagues have changed the program several times to make it more generous. They increased the size of the credit from 10 percent of renovation costs to 15 percent, then to 25 percent.

Last year, they made the credit "refundable," meaning that if the credit exceeds a person's or company's tax owed, the state pays the difference in cash.

Then, last summer, Hoffman and Hixson learned that the tax credit was far more popular than they had hoped or believed the state could afford. Though only $13 million of those credits have been cashed in so far, about $40 million more could be cashed in as soon as this year, with tens of millions more to be claimed in future years.

Hoffman was particularly displeased that the Maryland Historical Trust had not told her earlier that the tax credits were becoming so costly. But though she wants stringent new limits, she said, she is still an advocate of the program.

"The demand is amazing. It's wonderful," Hoffman said. "We're just trying to hold the state's exposure down."

Supporters of the tax credit say they recognize the state is facing a budget crunch. But they argue that the program pays off in new jobs and tax benefits to the state and the city - a frequent refrain of businesses pursuing tax breaks.

A report paid for by the nonprofit group Preservation Maryland states that in the past two years, $38.9 million of the approved tax credits has resulted in an estimated $20 million in new taxes collected - $13 million for the state, $7 million for local governments.

In addition, according to the report, prepared by the real estate consulting firm Lipman, Frizzell & Mitchell, the tax credits helped create an estimated 2,454 jobs, half of which were on-site construction at the 247 rehabilitation projects included in the study.

O'Malley and others in the city say they fear that curtailing the popular tax credit would stall that growth.

"It's going to have a chilling effect on projects on the drawing board," said Tyler Gearhart, executive director of Preservation Maryland. "We'll see a drastic reduction in the number of historic rehabilitation projects in Baltimore and across the state."

Officials say a number of tax-credit-supported projects in the pipeline could be threatened, including the conversion of the American Brewery building on North Gay Street into office space; the office and retail redevelopment of the Hendler Building in Jonestown; and an $8.9 million low-income apartment development in Reservoir Hill.

"There are a handful of developers in a really precarious position, having put out a lot of money based on the [credits]," said Catherine Caskey Fennell, head of the Baltimore office of Pennrose Properties Inc., developer of the Reservoir Hill apartment project.

Fennell is one of many developers, lobbyists and city officials descending on the Annapolis offices of Hoffman and Hixson to defend the tax credits. "They're all over us," Hixson said.

Pennrose's rehabilitation of a Druid Park Lake Drive apartment building is largely dependent on public financing, including $1.9 million in state historic tax credits. Hoffman's and Hixson's proposed legislation would cap the credits at $1 million per project.

"It would effectively kill my deal," Fennell said.

C. William Struever of Struever Bros. has far more at stake. In addition to the credits his company has used to help finance projects such as the renovations of the Can Co. in Canton and the Procter & Gamble building in Locust Point, he and his partners are counting on tens of millions of dollars more in credits to support new projects.

Among them are the roughly $11 million American Brewery project, the $7 million conversion of the Mayfair Theater into apartments and retail, and an estimated $100 million redevelopment of two former breweries into an office, retail and housing development in Canton that would be supported by a credit of as much as $15 million.

Struever has lobbied Hoffman on the issue, and developers and city officials are expected to show up in force at the legislative hearings on the bills, which are scheduled for next Wednesday in Hixson's Ways and Means Committee and March 13 in Hoffman's Budget and Taxation Committee.

But in the end, Struever and other developers might find legislators who think they have been too successful at finding public dollars for their projects.

"They obviously have the know-how and the ability to get every piece of funding that they can find, and so they have all kinds of federal money and state money going into these projects," Hixson said. "They haven't missed a trick on any of them."

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