How a Minnesota tax credit has saved historic buildings

Three of the most sleep-inducing words in the English language are surely "historic tax credit."

But please, remain awake. This is important, because tax policy details have a sneaky way of dictating how our cities look and function, and they can underscore how we regard our past and preserve it for the future.

Rehabilitating historic buildings can be a financially risky undertaking for private developers. Fortunately, this is one instance where government intervention has proved to be a positive force. The federal government's historic tax credit legislation is more than 40 years old, and Minnesota followed with a similar program in 2010.

Here's how it works: Both the state's and the federal government's historic tax credits land at 20% of the project's total cost. If a developer is engaged in a $1 million rehabilitation on a qualifying property, they can receive a $200,000 tax credit from the state, plus a $200,000 federal tax credit, when the project is completed.

The largest development to take advantage of the state's program is the Dayton's Project, the $214 million remake of the mammoth downtown Minneapolis department store into an office-retail complex.

"I can say pretty resoundingly that the project wouldn't have happened without the state and federal historic tax credits," said Cailin Rogers of Chicago-based Telos Group, one of the project's partners. "The building has been completely reworked, from top to bottom. That's not possible without time, expertise and resources, and you can't possibly do that without state and federal tax credits."

This being the government, there are reams of rules. The building has to be income-producing, so it doesn't apply to private residences. The building also must be listed on the National Register of Historic Places — or applying for a place on the register — although it can be part of a district that's on the register. And the rehabilitation has to be substantial, enough to pass certain measurable criteria.

"We refer to it as a 'tax incentive program,' " said Natascha Wiener, historical architect at the State Historic Preservation Office. "It's meant to be an incentive to do work that respects the historic character of the building, respects historic materials and makes compatible modifications."

Over the past 10 years, the state's historic tax credit has been applied to more than 100 projects all over Minnesota, and they run the gamut. The NorShor Theatre in Duluth was restored, a woolen mill in Faribault was refurbished and a Moorhead potato warehouse and a New Ulm school have been converted to housing.

In the Twin Cities, projects include the complicated remakes of the Schmidt Brewery in St. Paul and the Pillsbury A Mill in Minneapolis. Both feature housing, and Schmidt has a substantial retail component.

But not all historic tax credit projects are high-profile restorations of beloved landmarks. Some can be small apartment buildings requiring new boilers, or Main Street storefronts receiving much-needed upgrades.

"There's a domino effect," said Meghan Elliott, founder of New History, a Minneapolis consulting firm. "One building owner does it, and then their neighbor asks, 'How did you do that?' Once one project gets started, people start seeing the opportunity."

Jobs, jobs, jobs

There's just one problem with the state's historic tax credit program, which is officially known as the Minnesota Historic Structure Rehabilitation State Tax Credit: It's set to expire June 30.

Please, legislators: Don't allow this happen.

And not just because preservation helps communities tell their stories, or because preservation is ecologically smart. Currently, a coalition of interested parties is taking a savvy lobbying approach by packaging a renewal of the historic tax credit as a jobs bill. Which it is.

"Preservationists have learned to talk more in terms of the economic benefits," said Wiener. "In most new construction projects, the expenses come down to about 60 percent materials and 40 percent labor. But with preservation, it's the reverse, which means that 60 percent of the money goes to the trades, to the people who live next door."

Those wages get filtered back into the economy in myriad ways. According to an analysis of the state's 2020 historic tax credit program conducted by University of Minnesota Extension, every dollar awarded through the program generates $9.52 in economic activity.

The numbers add up. There were 11 projects that qualified for historic tax credits during the state's 2020 fiscal year — six in the Twin Cities, plus ones in Duluth, Fergus Falls, Mankato, Owatonna and Winona. Those projects involved $119.1 million in private developer investment and supported 720 jobs.

Over the past decade, the historic tax credit has accumulated $1.9 billion in private developer investment in Minnesota, supporting 18,660 jobs.

"If we lose this tool, we will lose projects and we will lose potential jobs," said Elliott.

Smart public investment

Over time, the historic tax credit pays for itself, according to research from University of Minnesota Extension.

One example is the First National Bank-Soo Line Building in downtown Minneapolis. In 2014, the century-old office building was converted to luxury apartments, and the $76.4 million project was awarded $11.5 million in state historic tax credits ($57.7 million qualified for the tax credit).

The process of revitalizing historic buildings generates tax revenue in the form of sales and income taxes — from purchasing materials and paying wages — and because property values rise post-rejuvenation, the reborn buildings generate more property tax revenue.

The construction portion of the Soo Line project triggered nearly $6 million in state sales and income tax revenue, and post-construction, the building's annual property taxes rose by nearly $900,000. Do the math: Over the course of seven years, the cumulative taxes generated by the project will have outpaced the state tax credits it received.

What happens if the state House and Senate don't act, and the historic tax credit expires?

"It would really be a shame," said Erin Hanafin Berg, policy director of Rethos, formerly the Preservation Alliance of Minnesota. "With so many people out of work, this is an economic stimulus that cannot be discounted. We are one of 38 states that have a historic tax credit of some sort, which means that most states recognize that this is excellent policy."

Economic impact aside, think of the historic buildings that could fall into disrepair or meet the wrecking ball. The clock is ticking. The Legislature adjourns May 17.