The House Ways and Means Committee is moving to prevent developers from gaining multiple tax breaks when they team up with localities to renovate historic properties.
Under current law, developers often can obtain below-market financing through use of tax-exempt industrial development bonds, add on a 25 percent tax credit for their renovation costs, and then take deductions for depreciation and interest costs.
The total tax subsidy can reach "up to 40 percent" of a project's costs, according to Rep. J. J. Pickle (D-Tex.), who is sponsoring a bill that would allow a developer to choose bond financing or a tax credit but would not allow him both.
Financing of this sort is becoming commonplace, particularly in older cities with large stocks of older buildings. Alexandria's widely acclaimed Torpedo Factory, completed this spring, was financed using this sort of approach.
The issue of these "tandem" tax benefits is part of a larger controversy that has arisen over so-called "sale-leaseback" arrangements by which tax-exempt entities, such as cities, colleges, even the Navy, sell assets to investors--who take the tax breaks--and lease them back for their normal use.
Bennington College in Vermont is planning to sell its campus to investors and lease it back.
Administration and congressional officials have become alarmed at the growth of this device. The Congressional Budget Office estimates that tax-exempt entities hold as much as $2 trillion worth of assets that would be eligible for sale-leaseback treatment.
Developers, however, argued before the Ways and Means Committee this week that Congress has specified a national policy of preserving historic buildings and that the tax benefits are necessary to carry out that policy.
They said that renovation of older buildings is costlier than new construction, and involves additional risks, both because an old building can present unexpected construction problems and because many of these projects are in declining areas where there are security problems and where tenants may be hard to find.
"This legislation will kill . . . deals in marginal areas," said Jay Schochet, head of a Boston development company, who testified on behalf of the National Housing Rehabilitation Association.
William G. MacRostie, a preservation consultant with Washington-based Langelier Historic Properties, said, "Due to the convergence of certain negative forces in a significant number of . . . projects, we believe that prohibition of the tandem use of IDBs industrial development bonds and the ITC investment tax credit would cause many of them to be economically infeasible. . . .
"The negative forces to which I refer include situations where a developer is unable to obtain conventional debt financing due to the high-risk nature of his project, as well as situations where the high cost of conventional debt financing creates a negative cash flow so large" as to discourage investors, he said.
Washington attorney Charles L. Edson, appearing on behalf of the National Leased Housing Association, contended that, at a time when federal housing production subsidy programs have disappeared, these tax benefits provide a means of making rental housing construction feasible.
"One incentive that has existed to make such inner city rental housing possible is the combination of the historic preservation 25 percent investment tax credit with tax-exempt financing," he said. "Working in tandem, the historic ITC and the lower debt service resulting from industrial bond financing has produced needed rental housing in inner city areas" across the country.
He added that, while the 25 percent credit does not apply to housing, housing nonetheless has "indirectly benefited from the combination of the rehabilitation credit with tax-exempt financing, as it leads to overall community revitalization. . . . " Industry spokesmen also complained that Pickle's bill contains a date--May 23--after which all tandem fiancing not under firm contract would be disallowed. They said that inclusion of that date already has "chilled" such investment, thus achieving Pickle's goal even if the measure is not enacted.
Several added that they understood the panel's desire to curb such things as cities selling their city halls and leasing them back, but pleaded with the members to keep the multiple tax breaks for situations where all parties are fully taxable.
Others argued that there are benefits when tax-exempt institutions set up leasebacks. Suzanne B. Albani noted that Smith College has an old building that it cannot afford to renovate, but could sell to a renovator and then lease back. This not only would bring the building back into service, but put it on the Northampton, Mass., property tax rolls, Albani said.
Pickle did not seem convinced. "At least now I know what you want," he told one panel. "I thank you all for testifying. Pray for it."