Alabama historic tax credit score program fuels development, sparks debate

The Lyric Theater and The Pizitz in downtown Birmingham. The Admiral Hotel in Mobile. Old schoolhouses, grocery stores, car dealerships, office buildings and a bus depot.

If a building is old and has been re-energized since 2013 in Alabama, chances are the developers have benefitted from the state’s historic preservation tax credit. The program fueled 52 projects and $334 million in investments during its first iteration, which ran from 2013-2016. The program was renewed through legislation in 2018, and state officials estimate another 93 programs will receive the incentive by the end of 2021. Those projects will fuel more than $500 million in historic building renovations in 15 counties.

The program expires again at the end of the year. But legislation awaits a vote in the Alabama Senate that would renew Alabama’s historic tax credit program another five years, taking it to 2027. The Alabama House, with only one “No” vote, approved the legislation – HB281 — late last month.

Despite high praise from preservationists and local officials, some have criticized the historic preservation tax credits as benefitting wealthy white investors in large cities instead of rural, lower income and predominantly Black communities.

“There have always been questions about tax credits, and the values of tax credits,” said state Rep. Victor Gaston, R-Mobile, the bill’s sponsor. “But (the historic tax credit) has satisfied everyone and (studies) show it’s a good investment. The investments have been significant. I don’t expect any problems.”

Said Stephen McNair, a historic preservation tax credit consultant based in Mobile, “The program stands as a rare win-win incentive that creates jobs and tax revenue while also preserving the historic character of our ‘Main Street’ communities.”

The program is credited with fueling the pre-COVID-19 renaissance in downtown Birmingham and Mobile, which have the largest stock of old and abandoned buildings. Projects have resulted a host of new mixed-use buildings showcasing contemporary office spaces, chic apartment complexes, industrial buildings transformed into lofts and trendy restaurants, coffee shops and bars.

Officials representing downtown interests in Birmingham and Mobile, along with historic preservation experts in each community, speak glowingly about the program as even more iconic buildings are poised for a facelift.

In Mobile, the former Gayfers department store across from historic Bienville Square and the Barton Academy school building are included in the latest round of tax credit applications. Barton Academy, once a hospital serving Union soldiers in 1864, is set to get $3.4 million in state tax credits. The request for the Gayfers building is around $3.5 million, though an allocation has yet to be made. The developers of Birmingham’s Greyhound bus station, where the Freedom Riders arrived in 1961 as part an effort to end busing segregation, are getting $1.6 million in state tax credits to rehabilitate the old station into an office building.

“They are energizing the communities,” said Merrill Stewart, president and founder of Stewart/Perry and a longtime general contractor in the Birmingham area. “You take a part of the city that are not seeing the best times for years, and then you have these projects, and people believe anything can happen. They are very leveraging in bettering people’s lives that goes beyond the building itself.”

He added, “But you need this extra juice to make things happen. Sometimes people not familiar with (the historic tax credit) see them as free money. It’s not free money. You also need equity to do the project, and the historic tax credit is helping you get over the hurdle in getting the project done.”

‘Predominately urban centers’

A view from Birmingham’s skyline from the Roof at the Redmont, the Redmont Hotel’s rooftop bar as seen on Wednesday, December 29, 2016. The hotel’s renovation was included in the early wave of state historic tax credit approvals. (Tamika Moore/tmoore@al.com)

Alabama is one of about 30 states in the U.S. with its own historic tax credit program. The state’s program allows the developer or owner of a property that is at least 60 years old to be eligible for a state tax credit of 25 percent of qualified rehabilitation expenditures.

No one project can receive more than $5 million, and the overall amount of tax credits disbursed per year by the state is capped at $20 million.

The state credits can be in addition to a 20 percent historic tax credit offered for income-producing properties through the federal government’s National Parks Service. Federal tax credits are provided to a project’s developer equally over a five-year period once the project is placed into service, McNair said. The state tax credit is refundable, which means it’s a cash refund on qualified expenses through the Alabama Department of Revenue.

Criticism exists over the tax credit, even as its poised to be extended for another five years. Chief among the concerns is it still provides an uneven benefit to larger cities with an abundance of aging structures, like Birmingham and Mobile.

In 2017, when the entire program was under scrutiny by former Senate President Pro Tem Del Marsh, concerns were raised about its lack of support for small towns. A change was made in the 2018 version that required 40 percent of the state tax credits to be reserved for counties with 175,000 or fewer people. That excluded Jefferson, Mobile, Madison, Montgomery, Baldwin, Shelby, and Tuscaloosa counties.

The current law, and HB281, puts a time frame for developers of a project in a small town to act. If a state tax credit application is not received and credits are not allocated for projects within the first two quarters of a fiscal year, then any project – regardless of location – can compete for the remainder of the tax credits for that year.

Statistics provided by the Alabama Historical Commission show that the rural investment is still lacking. Of the tax credits reserved since 2018, 16.6% (or $16.6 million) are for projects in 21 rural counties while 57.6% (or $57.7 million) are reserved in non-rural counties.

State Rep. David Standridge, R-Hayden, said while the law now mandates a rural component, “it’s still predominately used in our urban centers.”

Standridge, chairman of the Alabama House Rural Caucus, said the rural areas are at a disadvantage in that smaller cities tend not have the resources to afford a full-time economic development director, or another professional who “stays on top of those things.” He said there are likely instances of small cities in Alabama having historical structures that would qualify under the program, but “no one knows about it.”

Standridge said he would like to see a staff member in the Alabama Department of Commerce assigned to rural matters.

“It could be helpful in getting the word out to the towns, the county commissions, and the chambers of commerce and things like that who can say that this is available and could be used,” said Standridge. “In most rural areas, and most our towns where we have our county seats, there are historical buildings that would be great to see restored. This might be a way to do that.”

Stewart said the reason that urban centers experience the greatest benefit of the tax credit is because there is simply a higher density of buildings that qualify for the benefit.

That doesn’t mean smaller cities are not getting in on the tax credits. Projects in Wetumpka, Heflin, Atmore, Camp Hill, and Monroeville are all listed in the latest round of tax credit allocations. The Howell School renovation in Dothan occurred because of $1.6 million in state tax credits that were allocated. The $12.5 million project took a 119-year-old building – Dothan’s first elementary school – and renovated it into a 55-unit senior living facility, increasing its market value from $247,300 to $3.1 million.

‘Restoring homes’

400 Charles St.

The exterior of the renovated 400 Charles St. in Mobile, Ala. The home was renovated thanks in large part to historic tax credits. But legislation in Montgomery would remove residential properties from future eligibility of the tax credit money. (John Sharp/jsharp@al.com).

Another criticism of the HB281 is that it removes residential properties from state tax credit eligibility.

That means projects like 400 Charles St., within the Oakleigh Historic District of Mobile, would no longer be eligible for renovation. That project, as of March 5, was one of nearly two dozen on the state’s waiting list for a tax credit allocation.

Sam Winter, a Mobile-based Realtor and supporter of the historic tax credit program, said the property provides an “excellent example” of utilizing historic tax credits to renovate blighted residential houses.

“It was totally blighted,” Winter said. “No doors. Windows busted out.”

The house, built in 1886, is “one of Oakleigh’s oldest and most beautiful” cottages, maintaining its original fireplace and 13-foot ceilings. The state tax credit “gives the homeowner the benefit to restore a home like this one.” But even without the tax credit option, Winter said people will continue to restore older homes.

“We’d like to see residential as part of the (state legislation), but I think it’s good for (the entire bill) to move forward,” he said.

State Rep. Sam Jones, D-Mobile, also believes the legislation needs to allow for residential renovations. He said there could be instances in which residential home is rehabilitated and eventually transformed into an income-producing bed and breakfast.

Jones, the city’s former mayor, was one of only two House members to vote against an amendment that requires the tax credits be spent on only commercial or business purposes.

“A bed and breakfast could be considered commercial, but it’s also residential,” said Jones. “I was concerned on whether it would have a negative impact on people who are really restoring homes.”

McNair, of Mobile, said bed and breakfast operations would be eligible for the credit since they produce income.

Jones did vote for the final version of the legislation. The only lawmaker to vote against the final bill was state Rep. Mary Moore, D-Birmingham, who said the program supports only “wealthy white people” in Birmingham as opposed to assisting the restoration of Birmingham’s Black neighborhoods.

“I’m just sick and tired of it,” said Moore. “It’s for big business or big Realtors. I came here to help the people who I represent, and they don’t put anything in there to help the established communities. I am talking about predominately Black communities, but also poor white communities as well.”

Moore said she would like to see Alabama institute low-income housing tax credit (LIHTC) program that would provide incentives for people to rehabilitate inner city homes. She said the state doesn’t offer a program that incentivizes rehabilitating neighborhoods, like other states such as Arkansas and Missouri.

“For those cities to survive, we need to redo our neighborhoods, too,” she said. “It just doesn’t seem like anyone is thinking on behalf of the taxpayers.”

Stewart said the state’s historic tax credit program is not the place for it.

“The leverage of a single-family home in a historic tax arrangement benefits one small group and does not have the same impact … where you have 100 jobs or 40 additional jobs created,” he said. “It doesn’t impact the tax base. When we do these projects, they increase the ad valorem taxes for the community as well.”

‘Smart incentive’

Stewart and other proponents of the historic tax credit legislation say there are economic rewards from the incentive program, as well as added jobs: State figures show that the most recent program played a role in 641 jobs created during the rehabilitation phase and 239 jobs added after the projects were completed.

The rehabilitated are also adding market value, while helping spur new commercial neighborhood redevelopment. In Mobile, for instance, the $7.4 million reconstruction of an old car dealership on St. Louis Street involved $1.1 million in state historic tax credits. The project creating an office building for a 70-person engineering firm, increased the building’s fair market value $100,700 to $7.6 million. St. Louis Street, meanwhile, has seen a growth in activity after years of being a quieted street littered with abandoned buildings. The newer additions include a microbrewery and the forthcoming opening of a grocery store.

“The smart incentive created by the state historic tax credit meant the difference between vacancy and possible demolition versus vibrancy with economic benefits lasting decades,” said Elizabeth Stevens, president & CEO with the Downtown Mobile Alliance.

In Birmingham, the Family Service Building – originally built as a bakery in the 1920s – was redeveloped into a bright, airy office structure at Five Points South. The $11.3 million rehabilitation project was boosted with $1.7 million in state tax credits.

“While we celebrate the new life breathed into irreplaceable buildings over the past few years, there are still valuable historic buildings that are threatened and sometimes lost, damaging the fabric of our city,” said David Fleming, president and CEO With REV Birmingham, an economic development agency. “Too many historic buildings continue to be torn down, and we need every incentive possible to encourage a different approach.”