Tax-credit limit felt downtown

Some developers reassessing LR building-rehab projects

4/21/15
Arkansas Democrat-Gazette/STEPHEN B. THORNTON
Construction worker Shane Kelley, bottom right, grabs a tool belt as he works on a streetscaping project in front of the Main Street Lofts project in the former Arkansas Building, top left,  Tuesday in the 500 block of Main Street in downtown Little Rock.
4/21/15 Arkansas Democrat-Gazette/STEPHEN B. THORNTON Construction worker Shane Kelley, bottom right, grabs a tool belt as he works on a streetscaping project in front of the Main Street Lofts project in the former Arkansas Building, top left, Tuesday in the 500 block of Main Street in downtown Little Rock.

Summer is coming, marking another year of unfinished work on some key Little Rock Main Street building-rehabilitation projects. Making matters worse is that state tax credits -- widely used by developers to help pay for renovating those downtown historic gems -- were limited under a bill passed during this year's legislative session.

Act 567 of 2015 limits Arkansas Historic Rehabilitation Income Tax Credits to one allocation of up to $125,000 per eligible property in a two-year period, rather than multiple credits issued for one property, which had been the practice. The bill's author, state Sen. Bill Sample, R-Hot Springs, contended that some downtown Little Rock developers had snagged the greater part of the state's annual $4 million pot.

"My intent was to spread the money around," Sample said. He said some project owners were receiving tax credits for each floor of multilevel buildings and that was never the intended purpose of the credits.

"If all the money is going to go to one city, we just need to rename them the Little Rock Historic Tax Credits," the senator said.

Act 498 of 2009 created the Arkansas Rehabilitation Tax Credit Act to fuel revitalization efforts in Arkansas' historic downtowns and neighborhoods, but it did not provide specific guidance on the multiple use of credits for a single property. The Arkansas Historic Preservation Program certifies what properties are eligible for the state credits. The credits are overseen by the state Department of Finance and Administration. Credits can also be obtained for private residences.

"We were afraid that this $4 million was going to be used up very quickly to the detriment of some projects around the state that were hoping to take advantage of it," said Melissa Whitfield, communications director for the Historic Preservation Program.

Developers and property owners from outside Little Rock have applied for and been certified to receive credits. The only ones rejected were those whose projects did not meet the prerequisite federal Secretary of the Interior's Standards for Rehabilitation. Applications are processed in the order in which they are received, but some projects are more complex than others, and additional information may be required to process them, she added.

There's only about $94,000 of the $4 million still available in the state's current fiscal year, which ends June 30, said Whitfield. Another $4 million will be available on July 1.

The federal government has its own tax-credit program for historic rehabilitation projects and its own rules.

Information provided by the Arkansas Historic Preservation Program shows that the Gus Blass Wholesale Co. Building at 315 Main St. in Little Rock, now called K Lofts, was issued nine tax-credit certifications. The Pfeifer Brothers Department Store at 524 Main St. and the Pfeifer Brothers Department Store Annex at 514 Main St., now Main Street Lofts, got four tax-credit certifications each.

K Lofts and Main Street Lofts are owned by Reed Realty Advisors LLC, which includes Scott Reed of Portland, Ore., and Arkansan Josh Blevins. David Robinson, once managing director of Reed Realty, has left the firm but still has an equity interest in it.

Reed and his partners have been working on K Lofts, the group's first reclamation project, since 2011. Blevins said the 32-unit building needs only appliances installed before lofts will be ready for residential leasing. Rebuilding the entire back wall of the building, which fell off in 2013, has been the project's biggest setback, he said.

Two blocks away, Main Street Lofts is languishing. Street-level tenants are to include the Arkansas Symphony Orchestra, the Arkansas Repertory Theatre and Ballet Arkansas, plus some smaller users, such as advertising firm Cranford Co. and a fine-art gallery for artist Matt McLeod. Some tenants, such as Kent Walker Artisan Cheese, signed up early for space and then had to scramble to find suitable space elsewhere to stay in business when construction slowed at Main Street Lofts.

"Getting Main Street back from a dead stop to a thriving part of the city is not like flipping a switch," Reed said.

"People don't understand we're not building a building; we're building a district," he added. "That's not going to happen in 12 months, especially with the tax credits going away." The loss of future credits has caused the partners to readjust financing.

Blevins said he and his partners have owned up to seven downtown Little Rock buildings and planned to rehabilitate them all, but because of the loss of the state tax credits, they are considering selling some of the buildings, including the majestic 1930s MM Cohn Department Store building.

"It's not for certain that we'd sell ... but we would entertain offers," Blevins said. "We have the capital to finish those buildings if we decide we'd like to ... but if we can go somewhere else that's more receptive to private investment and historic properties, we'll do that."

He remains optimistic about finishing Main Street Lofts, with first-floor tenants scheduled to move in this summer.

Also ongoing is development of a 140-room Aloft Hotel and upscale restaurant in the former Boyle Building at 501 Main St. Construction on that project, undertaken by the Chi Hotel Group of Little Rock, is taking longer than anticipated because of "the nuances of working with a 106-year-old building," said managing partner Jacob Chi. The Chi group owns other hotel properties in the area, though all of those were built new.

What was planned as a rooftop pool has been moved to the second floor, where the pool will overlook Capitol Avenue. Progress has slowed as crews work painstakingly with parts of the building that the owners want to preserve, such as the facade, the lobby and pathways within.

The Chi group received a state tax credit for work on the building, Chi said, but "not as a funding mechanism." He said he doesn't believe that the new legislation affects the Aloft project.

Some investors, including Bob Kempkes and Anthony Taylor with Taylor Kempkes Architects in Hot Springs, are getting a loan to renovate the Thompson Building in Hot Springs into a boutique hotel, and tax credits are part of the group's financing plan. They own another five-story building in downtown Hot Springs for which they are counting on tax credits to help finance the renovation. A third project, by a client who was looking to renovate a historic bathhouse in Hot Springs, will also use tax credits, Kempkes said.

"I think it's a positive step," Kempkes said of Sample's modification of the legislation. "It's the way it was always intended to be."

Kempkes' firm has used the state tax credits in the past, including to remodel its own offices, and has found them to be helpful, especially when there are so many variables with rehabilitating historic structures.

"Anything you can do to help your equity position is huge," Kempkes said.

Arkansas developers are allowed to claim portions of their investments in historic properties as credits on their state income-tax documents. Eligible properties include those listed on the National Register of Historic Places or those that are listed as "contributing" within a historic district on the National Register.

The credits can go to any individual or firm that pays personal or corporate income taxes in Arkansas. Individuals or firms that lack sufficient tax liability to take advantage of the credits are allowed to sell their credits to a second party, such as a bank. That option exists for any property owner once an application has been certified.

Under the law, owners of income-producing properties may claim up to $125,000 per project. Property owners may claim up to $25,000 per project for work on their private residences. In both cases, owners must invest a minimum of $25,000 to claim credits.

"Act 567 was not intended to punish or discourage any property owner from rehabilitating historic properties and receiving credits due," Whitfield said in a statement prepared by Arkansas Historic Preservation Program.

"While we are enthusiastic supporters of the redevelopment of any historic property, multiphased projects drain the credits currently available," she said. "The state rehabilitation tax-credit program was designed to be of statewide benefit to income-producing and nonincome-producing properties alike. We believe that the amended language will allow for a more equitable distribution of limited state resources."

One credit each was appropriated for the former Gus Blass Dry Goods Annex Building at 310 Main St. and the former Gus Blass Department Store at 320 Main St., both owned by Moses Tucker Real Estate and Doyle Rogers. One credit is for the seven-story Mann on Main building, anchored by Samantha's Tap Room & Wood Grill. The other is for the three-story Mann Lofts, home of Bruno's Little Italy at the street level.

Moses Tucker President Chris Moses did not wish to comment on why he and other investors chose to seek and use only one historic tax credit on the aforementioned projects.

Also, one credit was obtained for the 2012 rehabilitation of the Exchange Bank Building at 421 Main St., which has been discussed as being in a group of buildings that will make up the future Technology Park in Little Rock. Financier Warren Stephens owns the building. A contact for Stephens also declined to comment when asked about the use of only one state tax credit on the Stephens-owned property.

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