Originally appearing in the Tax, Audit and Consulting Services for Tax Incentive Transactions issue of the Novogradac Journal of Tax Credits.
Written by Brad Stanhope, Senior Editor, Novogradac
The Michigan state historic preservation office (SHPO) opened applications for its resurrected Michigan State Historic Tax Credit (HTC) at 9 a.m June 15.
At 10 a.m., the application period closed for large commercial projects because there were requests for 40 times the credit allowance for the year. Four hours later, the state closed the small commercial project portal for similar reasons.
“We were communicating with the IT department about what applications were coming in and what we were seeing,” said Martha MacFarlane-Faes, deputy state historic preservation officer for the SHPO. “As soon as we got back a report that the allotted credits would be used–that it was way, way, way beyond what we could put out [in credits]–it had been an hour. [The actual time] may have been shorter because it took time to get a report done.”
It was a dramatic reaction to the return of the state credit, 11 years after the previous state HTC was eliminated.
“There’s a lot of pent-up demand for this credit and the construction industry has been down for a little bit now for the pandemic,” said MacFarlane-Faes. “People are ready to do the work.”
Mike Phillips, director of public policy at the National Trust Community Investment Corporation (NTCIC), which is both a leading tax credit investor and advocate for the HTC, wasn’t shocked.
“It’s not surprising, but it’s demonstrative of the need to plug financing gaps these days,” Phillips said. “Ten years ago, the pricing was a dollar of equity for a dollar of credit. Now, you’re seeing the loss of value on historic tax credits and financing gaps that you didn’t have. People are giving their best shots to plug the [financial] holes in their projects. If some of them don’t get a state credit, their project won’t make [financial] sense.”
Michigan HTC, Explained
Michigan’s new state HTC–after the elimination of the previous version in 2011–was signed into law in late 2020 by Gov. Gretchen Whitmer. The credit is for 25% of qualified rehabilitation expenditures (QREs), with a $5 million annual statewide cap ($2 million for large-scale commercial developments, $2 million for small-scale commercial projects and $1 million for owner-occupied residential projects) and a taxpayer cap of $2 million.
It took nearly 18 months from the bill’s signing until the first credit period opened, largely because of a complex rulemaking system. Draft rules were approved in December 2021, the application portal was built and then came the June 15 opening.
The credit is noncompetitive, but MacFarlane-Faes said there is a competitive portion to the awards: Speed. “Once people hit submit, the applications started pouring in and were time-stamped. That’s the race,” she said. “If you’re first in the door and have a qualifying project, you get the credit.”
MacFarlane-Faes said her agency reviews applications, provides feedback and ultimately provides a letter reserving the credit. Recipients have eight years from that time to complete their development.
2011: A ‘Punch in the Gut’
Before 2011, Michigan had one of the nation’s most popular state HTCs. The uncapped credit was worth 15% of QREs for properties eligible for the federal HTC, 25% for others. During the final few years, Michigan added an additional 10% to 25% for “significant projects.”
Then-Gov. Rick Snyder signed legislation in 2011 to eliminate virtually all business tax credits, including the HTC.
“We tried to convince him to keep the historic tax credit,” said Nancy Finegood, director of Michigan Historic Preservation Network from 2002 through 2019. “The NTCIC was with us and a lot of other organizations and partners worked together, but he was determined to eliminate all of them.”
The effect was brutal.
“I’ve been with the SHPO for 24 years and when the credit went away, it was devastating for Michigan communities,” MacFarlane-Faes said. “Homeowners were at a loss–there was nothing for them to utilize.”
From a distance, Phillips agreed.
“I know that when the credit was repealed 11 years ago, the community development industry [in Michigan] felt like they were punched in the gut,” Phillips said. “They had a critical tool that was taken away.”
The Road Back
The repeal of the credit began a decade of lobbying for its return.
“We tried for a lot of years and we had several friends in the state Senate,” Finegood said. Despite the state HTC’s absence, historic preservation continued in the state, mostly because of the federal HTC.
“I think there is fortunately a real preservation ethic among a lot of developers in Michigan,” MacFarlane-Faes said. “We have amazing infrastructure in cities like Detroit, Grand Rapids and smaller communities. … Despite population loss in our state, people have been moving to cities. People want to live in authentic communities with interesting things to see and experience.”
That kept larger HTC developments active, but the absence of the state credit was challenging for smaller renovation projects.
“I don’t think it affected the larger projects as much. They were still going on,” Finegood said. “It really did affect the smaller, Main Street projects. Those didn’t get done.”
That Michigan’s neighboring states (Ohio, Indiana, Wisconsin) have state HTCs was a factor in lobbying for the return, Finegood said.
“Absolutely. We would say that over and over [to legislators],” Finegood said. “There are Michigan developers who can get a tax credit right across the border.”
Phillips said that is a successful advocacy strategy.
“Watching investment and developers go into a neighboring state because it has a strong historic tax credit has to be eye-opening,” Phillips said. “To show state legislators the steady increases in projects in Wisconsin and in Ohio over the past 10 years is an important picture to paint to show where investment goes.”
Phillips said state HTCs are a key driver to where historic rehabilitation takes place. A National Trust for Historic Preservation analysis shows that the top 10 states for the number of HTC projects over the period of 2001-2021 all have robust state-level HTCs.
After many efforts, the Legislature and Whitmer approved the return of the credit in 2020.
Phillips said it’s unusual for a state to have a HTC, lose it and then regain it.
“It’s very rare,” he said. “Usually, it’s renewed, expanded, ramped down or expired then renewed or replaced with a diminished or expanded credit shortly afterward. To have a credit eliminated and have nothing in place for a decade, then bring it back? I don’t know of a comparison.”
Road to the Launch
The 18 months between bill signing and launch day wasn’t easy. MacFarlane-Faes said the expired credit didn’t make a difference in creating the regulations for the new credit.
“This is a completely new credit with a new set of rules,” MacFarlane-Faes said. “In the time between the earlier credit and the current credit, the state rulemaking process changed, so we had to go through a complicated process to get this together before launching the program. It took over a year to get those rules done, then we had to create a web portal and have IT support to get the program launch.”
MacFarlane-Faes said it’s no surprise that demand was overwhelming.
“We haven’t had a tax credit for more than 10 years, so I know there’s a lot of pent-up demand,” she said. “You could argue that it’s the first year and there’s pent-up demand, but even if you reduced [HTC requests] by 75%, it’s more than we have.”
Finegood said she talked with developers who aren’t applying for the state credit because of the fierce competition and small cap. She pointed out that many smaller developers don’t have the wherewithal and team to compete for a credit.
Next Steps
The plan among Michigan historic preservationists is clear.
“It’s a great first step and hopefully can be a building block to a larger, more robust credit to bring Michigan across the finish line,” Phillips said. “It’s a time to celebrate, but it’s back as something you can build on.”
Finegood said it’s crucial to continue.
“I think it’s going to be critical because legislators need to continue to hear from preservation advocates,” Finegood said. “With turnover [in the Legislature], you’re always getting someone new who needs to be educated about the credit. It’s critical that the lobbying begins almost immediately.”
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