Tax code steers private funds to Cedar Rapids projects

Work has begun now to restore and renovate two flood-damaged, city-owned buildings in a way that is possible, in part, because of a section of federal tax legislation that was a piece of President Ronald Reagan's job-creating, economic stimulus program back in 1981.

The tax legislation of that year, which built on earlier tax legislation from 1976, provided investors credits against their tax liabilities if they invested in historic preservation projects.

Those very historic tax credits, which today are available on the federal and state levels, are providing about $9 million of the money now going into the $35 million renovation of the city's Paramount Theatre and they are expected to provide about $3.5 million of the funds going into the nearly $19 million project to convert the former federal courthouse into the city's new City Hall.

“These tax credits enable the city to make improvements to two, very valued resources of the community that we wouldn't have the resources to do normally,” said Jeff Pomeranz, Cedar Rapids' city manager.

Helped by revenue from tax credits, the renovation of the theater is requiring no local tax dollars, reports Jim Hoffman, a member of the board of directors of Orchestra Iowa and the head of a City Council-appointed citizen committee overseeing the theater renovation.

And on the project to renovate the former federal courthouse, only about $900,000 of the almost $10 million renovation budget will come from local property taxes if tax credits being sought are secured. The courthouse project actually is nearly a $19 million one because the U.S. General Services Administration spent an additional

$7.2 million in the building to repair flood damage before handing it over to the city as part of a property swap for land for the new federal courthouse.

As complicated as any part of the funding for the renovation of the Paramount and the former courthouse, though, has been securing the revenue from tax credits for the two historic, city-owned buildings.

For starters, the tax-credit programs prohibit governments from directly obtaining revenue from historic tax credits.

City Council member Kris Gulick, the chairman of the council's Finance and Administrative Services Committee, said such a prohibition is not a mystery: Governments don't file income-tax returns, so they can't get credits to offset income taxes, he points out.

The problem that the prohibition creates, said the Paramount committee's Hoffman, is that many of the historic buildings across the country in need of preservation are owned by government.

Bill Prowell, an attorney with Shuttleworth & Ingersoll PLC in Cedar Rapids, is advising the city of Cedar Rapids on tax credits, and Prowell said public entities have come to use two basic approaches to qualify to secure revenue for the renovation of historic public buildings via historic tax credits.

The first, he explains, is to transfer ownership of a property to a for-profit entity or a non-profit entity and the second is to create a lease arrangement between the public entity and a newly created one. In the case of the Paramount and the former federal courthouse, the city of Cedar Rapids is using the second option.

As Prowell explains, in each instance the city is agreeing to lease the building to the newly created entity, which is called Courthouse II LLC for the courthouse project and which is an entity without a name at this point for the Paramount project. The city, “for tax purposes,” transfers ownership, Prowell said.

Two other leases are then created, one which allows the city to continue to occupy and use the building without lease fees and one which facilitates an arrangement so the private-sector investor steers money to the renovation project and, in return, receives credit against the investor's tax bill.

The investor receives its tax credits over five years at the completion of the renovation, at which time, the lease arrangements vanish and the buildings revert to the city.

Hoffman and Prowell say similar tax structures have been set up many times across the country over the life of the tax-credit program so that historic government buildings can be preserved.

The National Park Service signs off on the federal historic tax-credit program and the state of Iowa's State Historic Preservation Office manages the state program of historic tax-preservation credits.

“The entire (reason) for wanting to do this is to preserve these great historic buildings and bring them back to their original splendor,” Hoffman said.

Jeff Morgan, spokesman for the State Historic Preservation Office, points to renovation projects of courthouses in Davis, Jasper and Madison counties as examples of other government buildings in the midst of historic preservation and currently using or seeking historic tax credits.

A May 2011 report for the Historic Tax Credit Coalition - an advocacy organization, the members of which represent participants in the historic tax credit program - by the Rutgers Center for Urban Policy Research concludes that the historic tax credit program is a “good” investment for the nation, states and local communities.

Tax revenue steered to historic preservation via historic tax credits has encouraged five times more money being spent on historic preservation. The investment has created 2 million new jobs and billions of dollars of economic gain from 1978 through 2010, the report concludes.