The conversion of the old Sonesta Hotel in downtown Hartford into nearly 200 much-needed apartments could have been underway by now, if it wasn’t for one piece of financing that doesn’t normally draw a lot of attention: federal historic rehabilitation tax credits.
Investors – ranging from corporations to wealthy individuals — are usually lining up for the chance to help finance rehabilitation of historic structures in exchange for the credits used to reduce their federal taxes. But since last fall, after a federal appeals court ruling in a New Jersey case denied an investor the right to use the credit, investors have been scurrying to the sidelines until the implications are sorted out.
The tightening of the spigot is causing headaches for developers of projects like the Sonesta across the country, who depend on the historic tax credits to pull together often complex financing packages. In Connecticut alone, it is estimated that dozens of projects could be affected, according to Daniel Forrest, the state’s deputy state historic preservation officer.
Historic rehabilitation is especially critical in Connecticut – and throughout the Northeast – where a vast inventory of old buildings, especially outdated industrial properties, could be converted for new uses, Forrest told me.
The court ruling does not impact the state’s historic rehabilitation tax credit program.
“This is not just in Connecticut, but on a national level,” Forrest said. “It’s a very difficult circumstance. If no one knows what this means, they are not going to go down the road and invest.”
In August, the U.S. Court of Appeals for the Third Circuit ruled in favor of the Internal Revenue Service in a case involving the redevelopment of the Historic Boardwalk Hall in Altantic City, N.J. into a new conference center. The court ruled that a tax credit investor — Pitney Bowes — wasn’t entitled to the credit even though it had invested $16.4 million into the project.
The court ruled that Stamford-based Pitney Bowes was not really a true partner in the project because its tax credit agreement insulated it from any risk, even if the development went awry.
The ruling is being appealed to the U.S. Supreme Court, but it is not yet known if the court will accept the case. Meanwhile, the federal appeals court ruling did not shed any light on how tax credit investments should be put together and, as of yet, the IRS had not provided guidance.
“Many investors are sitting on the sidelines while the attorneys and the IRS try to figure this out,” Thom Amdur, executive director of the National Housing & Rehabilitation Association in Washington, D.C., told me.
Amdur estimated that as many as half of the investors in rehabilitation projects nationwide have put closings on hold.
Major corporations such as Chevron, Bank of America and Capital One have been active in the federal historic tax credit program.
In an email to The Courant, a spokeswoman for the U.S. Treasury Department, said the IRS “is working on this guidance and hope to release it soon.” The IRS offered no specific timetable, but one expert said with the myriad of tax issues the IRS is dealing with “soon” could mean anywhere from a “few weeks to a few years.”
The $24 million financing package for the Sonesta project factored in $4 million from federal historic tax credits.
“If you drop one piece of the puzzle, then the whole puzzle falls apart,” said Jeffrey D. Ravetz, president of New York-based Girona Ventures, a partner in the conversion of the hotel on Consitution Plaza.
The Capital Region Development Authority is so concerned about the potential for delays that it is considering adding to its role in the Sonesta conversion. The authority may approve a temporary “bridge” loan of $2 million to cover the portion of the tax credit financing that is needed for construction.
“To move Sonesta, we may have to step in as bridge role,” Freimuth said. “It has been eight months since the ruling, and we’ve got to get Sonesta going.”
Forrest said a quick resolution is needed and he hopes a push by historic preservationists in the nation’s capital will speed up the IRS’ work.
“This has been a remarkably successful program,” Forrest said. “These types of projects need to go forward.”