TAR & FEATHER YOUR BUILDING - OR REHAB IT: Putting your Downtown on the National Register Won’t Limit Your Options
I am a building owner and I don’t want anyone telling me what I can and cannot do with my building.
Really, I am. Over the past 7 years I’ve bought and rehabbed 35,000 sf of downtown buildings, as part of two LLCs. I also work directly with dozens of building owners on their buildings. It’s a rare thing to find an owner who welcomes additional government regulations limiting their autonomy. It’s even rarer to find an owner who would not like 40% of their money back on a major project.
If only there were a way to create a voluntary, honorific designation that was all carrot and no stick… One with a serious cash benefit for those who wanted to follow some rules but that otherwise placed no limits on anyone…
Well, guess what? That program exists and it’s called the National Register.
Now here’s the secret of a National Register Historic District designation. Just being in the district places no restrictions on your building. Let me put it differently: You can blow up your building up, tear it down, paint it pink, or tar and feather it. If you were allowed to do it before a National Register district was formed, you can do it afterwards. This is not a local preservation district. There is no local law or local review board. The designation is honorific.
But, if you are investing more than the building’s current value and agree to follow certain preservation standards – proper brick re-pointing, sensitive window repair and replacement, restored historic elements where they exist– then the entire rehab costs of the project become eligible for a total of a 40% tax credit (split between state and federal income taxes).
If your building becomes part of a National Register Historic District, you have two big advantages. First, if you want to renovate it, you will certainly get more money back via the tax credit than the extra cost of following those standards and the cost of filing for the tax credit. Second, if you want to sell it, your building is worth more to a potential buyer if it comes with tax credit options attached.
Getting on the National Register is also a great tool for addressing that anchor building in town that’s too big for any one owner to tackle. Several major buildings in downtown Batavia come to mind that would benefit from being part of a National Register district, especially if combined with a broad-based investment group I call a “Main Street LLC”. Let me illustrate. You form an open investor group – an LLC – to buy and rehab a contributing building to a newly formed district in downtown Batavia. The cost of the rehab is $1,000,000. The LLC raises $400,000 from citizen-investors and finances the rest. If it helps, the seller retains an ownership interest as part of the LLC, thus bridging a seemingly unbridgeable chasm in negotiations. You personally put in $20,000 and therefore you’re a 5% owner of the building (Congratulations!).
Thus you would receive – passed through to your personal income tax return – 5% of the total $400,000 tax credit that your LLC earns. That’s right – you just got a $20,000 tax credit, which fully replenishes your coffers from that initial investment. And, you still own a piece of a newly rehabbed building. Now the building needs only to cash flow enough to pay off its debt and grow as an asset – which it can do, thanks to the significant generational investment you just made. Meanwhile you’ve turned one of downtown’s greatest potential liabilities into a huge asset, building momentum for broader reinvestment and increasing your quality of life and pride in place.
One thing is self-evident. Knowing how to rehab a building isn’t enough. You also have to know how to make it pay. There is no stasis – buildings are in a constant state of devaluation and decay. Without regular maintenance and generational re-investment, these assets over time are worth less, supporting fewer tenants, at lower rents, until they are shuttered completely. Like a bank account on which you only make withdrawals and never replenish, you will soon zero-out your equity. The only alternative is periodic – or generational – reinvestment.
Those LLC’s I’ve been involved with have done this. We helped write the application to create a National Register district and bought anchor buildings in the district. We shepherded the construction through the preservation standards needed to qualify for the tax credits. And we distributed the tax credits to all the investors.
All carrot, no stick. That’s an incentive I can recommend. And as a downtown building owner who doesn’t like being told what he can’t do with his buildings, I have one piece of advice for Batavia and its building owners: Get downtown on the National Register.