Expiring state historic tax credit could hinder future development, including in Duluth
A 20% state tax credit is set to expire in June.
A tax credit used by developers on qualified historic redevelopment projects, including those in Duluth, is expiring next year — eliminating what some say is an important source of project funding and incentive.
The Minnesota Historic Structure Rehabilitation Tax Credit will expire at the end of June unless legislative action is taken to renew the 20% tax credit. With renewal not likely in the Minnesota Legislature due to an increasing focus on coronavirus legislation, sources said, time will soon run out for the credit that often serves as an incentive to rehabilitate old buildings.
One Duluth project that’s facing the potential to lose leveraging the historic tax credit is Historic Old Central High School in downtown Duluth.
The Duluth School Board has a special meeting regarding a property sale scheduled for Tuesday, Oct. 13, according to its schedule. It's unclear what property is being considered for a sale.
However, this meeting follows a special closed-door meeting in late September to “develop or consider offers or counteroffers for the purchase or sale” of Historic Old Central. No votes were taken during the meeting and it adjourned the meeting in a closed session, according to News Tribune reporting .
The board also held a meeting Tuesday, Oct. 6, about the possible closure of Historic Old Central. During the meeting, eight people spoke and were split over the decision to close the building. This included Duluth Preservation Alliance President Mike Poupore, who voiced his concerns about the expiring tax credit, the News Tribune reported .
Duluth School Board Chair Jill Lofald said in an interview that if a developer was interested, they would prioritize one who wants to preserve the building’s historic integrity and has experience working on older building projects.
“Our community is asking to make sure that it's, historically, the right fit for Duluth,” Lofald said.
Lofald said the expiring tax credit hasn’t put pressure on the board to quickly close a potential sale.
The Duluth School Board first put Historic Old Central up for sale without a list price in January to gauge interest from the private sector. According to a third-party assessment done by three companies, it would cost an estimated $48.5 million to fix the building’s needed repairs and upgrades.
The tax credit, which can only be used for specific expenditures, is meant to incentivize the rehabilitation of certified historic structures buildings, said Natascha Wiener, a historical architect with the State Historic Preservation Office.
“That incentive is meant to incentivize you to maintain the historic character of the property – to repair the building rather than replace portions of it,” she said. “It can be anything from the marble of the flooring at a swanky hotel, all the way up to some trim in a historic building.”
Redevelopment is also not only better for the environment, but it also directly supports a higher number of local jobs, Wiener said.
Besides the Twin Cities, Duluth is one of the top cities in the state that uses the credit, she said.
Their office has held conversations with a developer who is “very serious” about using the historic tax credit for Historic Old Central. But, considering the average length of application time and needed response time, they likely need to submit a complete application by January, Wiener said.
“There have been very general conversations about it. We have encouraged them to apply as soon as they can,” she said. “We will be excited to see that project come in.”
Wiener noted that a similar federal tax credit isn't expiring.
Although the city of Duluth isn’t responsible for administering the grant, it helps developers connect with the grant because it often helps fill project funding gaps.
The grant can be paired with other funding sources, like Opportunity Zone funding and tax increment funding . Multiple funding sources increase the confidence of private investors that the project will be financially successful, said Adam Fulton, the city’s deputy director of planning and economic development.
“As we work on a very complicated project ... we're trying to put together a bundle of funding sources that are going to help fulfill what's needed to help make the project proceed,” Fulton said.
However, developers are sometimes reluctant to use the historic tax credit because of its specific standards that dictate numerous aspects of development, Fulton said.
A handful of Duluth projects in recent years have used the tax credit, including the Board of Trade building , the old City Hall building and the historic NorShor Theatre.
Board of Trade developer David Dubin said he wouldn’t have pursued his downtown project if it wasn’t for state and federal historic tax credits.
Around 15% of the Board of Trade’s project was financed by the state historic tax credits, Fulton said.
With the upcoming expiration, Dubin said he’s concerned about Historic Old Central's timeline.
Based on his experience with the Board of Trade project, he doesn’t believe a developer has enough time to complete the historic tax credit application process. Dubin is president and CEO of Dubin Guru Group.
Guidelines for rehabilitating old buildings are far more complex than those of normal structures, he said.
“Could I do it? Yeah, because I've got people in town that I know, I can hit the ground running and I know what I'm doing. But it would still be tough,” Dubin said.
Fulton said the expiration of the tax credit will have an impact on future projects in Duluth, but he wasn’t certain that it would be widespread.
“It may be that for a given development, it's very, very important. Or for another development to start building it's not that important at all,” Fulton said.
The city hasn’t heard anything from the developer. But the building is designated as a heritage landmark by the city and it’s likely that development proposals would need to be considered by the Heritage Preservation Commission.
“It is an important building for us that we care a lot about. And we are looking forward to learning more, and we want to try to prioritize this preservation consistent with the local preservation plan,” Fulton said.
This story was updated at 11:47 p.m. on Oct. 9 to correct Adam Fulton's title. It was originally posted at 8 p.m.