Historic Tax Credit Compromise:

Lawmakers find common ground and reach agreement to ensure job creation, continued housing development, and a strong economic future

Since its inception in 1998, Missouri’s historic tax credit program has been recognized nationwide as the national model for its ability to generate jobs and spur housing growth across every region of the state. This year, historic tax credits faced strong pressure from some legislators who sought to greatly restrict its use through the economic development bill. Opponents argued for more limitations on the amount of credits issued through the state program, which faces more stringent requirements than those of the federal historic preservation tax credit. Advocates of the historic tax credit emphasized the immense economic benefit of the program, which, according to the Missouri Department of Economic Development, generated nearly 5,000 jobs in fiscal year 2007 and, as stated by Donovan Rypkema, leading preservation economist, has produced over 40,000 jobs throughout the life of the program. 

In response to legislators’ attempt to cap and sunset the historic tax credit program, the Coalition for Historic Preservation and Economic Development led an educational grassroots effort to connect legislators with concerned constituents, labor groups, and small businesses throughout the state. Missouri Preservation also rallied its members to inform legislators about the harmful effects on jobs and communities that would result from cutback proposals circulating in the Capitol. 

The historic tax credit found widespread support in the Missouri legislature, which grew as session came to a close. Senator Jeff Smith (St. Louis City) was a persistent advocate whose commitment to the historic tax credit program was elemental to the ultimate proposal. Also, later in session, Senator Jason Crowell from Cape Girardeau, a city which is just beginning to utilize historic tax credits on their downtown commercial buildings, fought shoulder-to-shoulder with Smith to preserve the credit. Senators Joan Bray (St. Louis County), Eric Schmitt (St. Louis County), Jolie Justus (Kansas City), Jane Cunningham (St. Louis County), and Tom Dempsey (St. Charles County) also took their voices to the Senate Floor, highlighting the proven job creation and community benefits of the historic tax credit. 

In the House, Speaker Ron Richard (Joplin) spoke out early in support of the program and helped to make the case for a fair compromise. Critical players also included Representatives Steven Tilley (Perryville), John Diehl (St. Louis County), and Bryan Pratt (Blue Springs), who made important contributions to the final bill. And, playing an important role in the crafting economic development components of the final bill was Representative Timothy Flook (Liberty), chairman of the House Jobs and Economic Development Committee. 

In the early hours of Friday, May 15th, a compromise bill was crafted which struck middle ground between Missouri Senators who had spent months gridlocked over the historic tax credit issue and economic development. Senator Brad Lager (Maryville), who pushed for a cap and other limitations on the historic tax credit, agrees that the language achieves the necessary budget certainty which he sought throughout session. According to Senator Smith, “now that the critics have gotten the 'budget certainty' they sought, the program will have the stability to flourish in the years ahead.” 

Working throughout session for the preservation of the credit were longtime advocates Jerry Schlichter, attorney, and Eric Friedman of Friedman Group Realtors, along with Coalition staffer Anne Suggs. Coalition representatives Peter Noonan of Commerce Bank, lobbyist Jim Farrell of Policy Solutions, and Deb Sheals of Missouri Preservation worked alongside legislators until early last Friday morning to ensure the session ended with a workable compromise. Husch Blackwell Sanders, LLP provided key legal expertise to draft language capturing the details of the legislation. 

A testament to the success of the compromise was the distance between the various positions at the start of the legislative session. Although he worked against the initial Coalition position, ultimately, Senator Lager agreed with Senators Smith and Crowell on the necessity for a bill which would ensure that the project financing process remain feasible and efficient. Together, these lawmakers found common ground through Senator Lager’s final proposal, which maintains predictability and certainty in the historic tax credit process. Such collaboration ensures that a variety of needs were met in the final proposal and that the historic tax credit program rests on sure footing for future years. 

The culmination of Senators Smith, Crowell, and Lager’s efforts to find compromise on historic tax credit language resulted in the following:

• A per-project residential cap of $1,000,000 in qualified rehabilitation expenditures (QREs) for owner occupied single family homes;
• A small project exemption for projects with $1.1 million in qualified rehabilitation expenditures (QREs) (these do not count toward a cap);
• $140 million cap on historic tax credits (existing projects do not fall under the cap); and
• An effective date of January 1, 2010.

Senator Smith states, “We struck a compromise to protect the historic preservation program for years to come. The $140M cap is high enough to give lenders confidence that deals will go through. Delaying the effective date for the cap until next year will give many developers the time to line up financing and apply before caps take effect. Most important, the exemption I negotiated for smaller projects will ensure that rehabbers go to the front of the tax credit line and will never have to worry about a cap.” Historic tax credit advocates outside of the legislature also find the compromise agreeable. Preservationist Michael Allen of Landmarks Association of St. Louis, Inc. believes that “the compromise won’t stop the wave of job creation and community development that started when the credit was created in 1998.” 

The small project exemption, first proposed by Peter Noonan of Commerce Bank, will allow smaller-scale projects to continue redevelopment without the cap. Based on historical data, it will allow around 75 percent of all deals to be unaffected by the cap, toward which their dollars will not count. Jacob Sanders, a Springfield, Missouri CPA, believes that “the small deal exemption is key. It’s those small developers right now that are having such a hard time. Plus, the large percentage of projects we have, especially outside of Saint Louis and Kansas City, will fall into that category.” And, the $140 million cap allows room for large projects while providing the restriction sought by some lawmakers. It is likely that the new provisions will have very little effect on future redevelopment. Missouri Preservation’s Deb Sheals explains that, “based upon past use, the $140 million cap, paired with the critical small project exemption, should allow the program to function close to the level it has in the past several years.  In FY08, for example, just over $161 million was issued in historic credits, and of that, a little more than $20 million went to projects that would be covered by the small project exemption.” 

The passage of the economic development bill and the continuation of the historic tax credit program signals economic stability and infuses confidence into the financing markets, labor, industries, business, and individuals who will sustain Missouri’s economy for years to come. Commerce Bank’s Peter Noonan explains, “We set up the language with the development and finance community in mind – we want folks to be able to confidently buy the buildings, and then work with their lenders with the surety that the credits will be there for them for the life of the rehabilitation, how ever long that may be. We also fought hard, to some heavy resistance, to allow a safety valve to ultimately get additional credits above the allocation level in the case of cost overruns or increases in project scope. That is key for this to work effectively.”  

The compromise communicates to Missouri citizens that the historic preservation tax credit will continue producing jobs and stabilizing communities on local main streets and in urban neighborhoods. With a legislative agreement that shelters both small and large projects while fostering a sense of predictability in the housing market, historic tax credit advocates have deemed the compromise workable. Jerry Schlichter, who spearheaded the passage of the original state historic tax credit language in 1998, believes that “the Missouri tax credit remains the model of success for economic and residential development in small towns and cities of all sizes throughout the state.”