The multi-purpose antidote

By David A. Smith
October 13, 2014 4 min read

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Among investment tax credits for real estate projects, the historic rehabilitation credit is a multiple anomaly. It is the oldest (enacted 1976); not capped and allocated but available as-of-right; payable at once on completion; and justified by physical heritage, not by reference to use.

The historic tax credit is so old that many of us have forgotten the ways in which this tax investment tax credit – different from all the others – positively affects urban development public policy.

By accident or design, the historic tax credit is the multi-purpose antidote to:

1. NIMBYism. With the continuing, slow demise of as-of-right zoning, due to increasing density, we now have a national housing policy that can be thwarted by entrenched NIMBYists. In the guise of defending wetlands or green space, championing obscure birds or insects, or decrying traffic congestion, any affordable housing development and most mixed-income/use properties can be assured of opposition by “people who have nothing better to do,” as American economist Paul Krugman once told me. The resulting procedural delays increase costs and reduce the number of properties developed. Historic rehabilitation changes the odds. Because the shell already exists and is usually vacant, often derelict, and frequently a health or safety hazard, potential opponents can’t credibly argue anti-development NIMBY when the property is already IMBY.
2. Exclusionary zoning. Cities love economic development because it promises new jobs, new taxpaying businesses, and the prospect of higher municipal revenues that elected officials can pledge to “to help the ordinary working folks who have made this city the great place it is.” But when out-of-town developers and the city redevelopment authority get together, economic considerations predominate, affordable or workforce housing usually gets short shrift, and the result is de facto exclusionary zoning. Shortchanging affordability is harder, on the other hand, with historic properties. Generally built before the use of steel beams and glass panels, these structures – warehouses, schools, factories, mills, YMCAs – tend to be of solid brick and stone construction with thick walls and numerous windows. When their exterior elements are preserved, the resulting floor plates often work very naturally and cost-effectively for housing, and in fact, housing is probably the most common adaptive reuse of historic properties, creating a nexus for inclusionary zoning – essential for healthy modern cities.
3. Runaway eminent domain. The value of a down- town or center-city property generally increases proportionate to the potential vertical development on the site. And while redevelopment authorities may have visions of sugarplum high-rises, cities often declare a neighborhood to be blighted so that they can introduce a redevelopment plan that (pure coincidence!) forces out small business owners and the jobs they provide. After all, “those people” can pick up and move their boxing club, pawn shop, or halal grocery store to some other lower-value neighborhood, can’t they?

I’m all for urban redevelopment – but against “economic development” eminent domain that shoves aside small neighborhood businesses. For the rule of law, owning property needs to mean something and, for the health of cities, also preserves economic diversity. As author and urban guru Jane Jacobs once noted, cities are inherently messy. Today, we rue the dead public spaces (like Boston’s Government Center) created when 1950s-era urban redevelopment campaigns sought to expunge old messes by eradicating swathes of older cities, and wish we could get back those brick townhouses and brownstones that were demolished back then.

Historic properties can’t be torn down. They are the immovable grit and defense against the wipeout of neighborhoods in the name of progress. They serve as a constant reminder of our past, and that heritage is worth preserving.

Historic properties check our urge to wipe out the past rather than to reinvigorate it. That makes the historic credit, perhaps, the antidote to urban unreason.

David A. Smith is Chairman of Recap Real Estate Advisors, a Boston-based real estate services firm that optimizes the value of clients’ financial assets in multifamily residential properties, particularly affordable housing. He also writes Recap’s free monthly essay, State of the Market, available by emailing dsmith@recapadvisors.com.