Extreme makeover: rich edition-- State program benefits those who need it least

Ask most preservationists what they think of Virginia's Rehabilitation Tax Credit Program, and you'll hear them proudly say it's one of the most generous, if not the most generous, programs in the country, leading to the rehabilitation of thousands of historic properties. Indeed, since the program's inception in 1997, the state has awarded nearly $700 million in tax credits to homeowners and developers.

"This is free money," writes Charlottesville architect Brian Broadus, who has specialized in historic building projects for over 20 years. "Why don’t more homeowners come and grab it?"

Unlike the rehab tax credit's federal counterpart, a property does not have to be income-producing– it can be home sweet home. As long as an owner can spend more than 25 percent of the most recent assessment on restoring an old house (sorry, sweat equity doesn't count, just cash), he or she can win a 25 percent credit for the restoration's “qualifying" expenses.

What qualifies as an expense? Just about everything. Furniture and window treatments, additions, and kitchen appliances are about the only things that don't. The old house doesn't even have to be on the Virginia Landmarks Register or contribute to a historic district to qualify. If a registered architect deems it “register eligible," it's in. An owner can even paint the old house any color she wants, sell the tax credits, or sell the old house itself– and still keep the tax credits.

Understandably, the Virginia Department of Historic Resources is proud of its rehab tax credit program, which has been in place since 1997. According to a Virginia Commonwealth University study, the program– aptly called "Prosperity through Preservation"– has led to $1.5 billion in private investment that has ostensibly saved approximately 2,000 Virginia landmark buildings, created more than 10,000 jobs, and generated $46 million in state revenue.

What's more, Virginia has led the way among the 50 states in the number of historic districts and individual properties added to the national register. In 2008, Virginia ranked second overall in that category.

"I think that Virginia's rehabilitation tax credit program, like the Federal counterpart, is excellent public policy," says Broadus. "The idea is to bring a sad asset back into the open stock of buildings."

Like most things that sound too good to be true, it comes with a catch: you need to spend money to get money.  And according to records obtained from the VDHR, only 12 property owners in Charlottesville and Albemarle County have taken advantage of the program since 2005.

"The difficult issue with state and federal tax credits is that you have to spend quite a bit of money in order to benefit from them," says Eryn Brennan, an architectural historian who sits on the Charlottesville Board of Architectural Review, "so this does not help the average homeowner."

For Preservation Week this year, event organizers had wanted to feature a selection of modest historic rehabs that had used the tax credit program. But according to Steven Meeks, president of the Albemarle Charlottesville Historical Society, there weren't any.

"It appears in this area only the bigger projects are applying for tax credits," Meeks says.

Indeed, of those 12 historic rehabs, only two could be described as modest, and even they cost their owners at least $100,000 or more. In fact, many of the rehabs were so extensive that the amount of tax credits the owners received were more than most people could dream of paying for a house.

Investor Robert D. Hardie, a member of the UVA Board of Visitors (he was appointed by former Gov. Tim Kaine), received over $600,000 in rehab tax credits for fixing up his home at 8 Dogwood Lane in Farmington.

That's no surprise to some.

"I'd be willing to bet that in most cases the biggest share of historic tax credits go to those who already have a lot of money and could afford to remodel or renovate on their own without taxpayers helping them," says former Albemarle teacher Mark Crockett. "In that sense, those credits constitute welfare for the rich. Pure and simple."

Crockett is no fan of the equally generous state conservation easement tax credit program either, which rewards mostly wealthy landowners for preserving open space, even if you were an investor in, say, Biscuit Run hoping to turn a profit on a massive development, but later decided to "donate" the land to the state for use as a park when the real estate market went south, collecting million in state tax credits in the process.

Crockett has called that program "socialized capitalism for the rich" and  points out that roughly 60 percent of the land in the County is also under a local land use program, the Land Use Valuation program, which reduces the amount of local taxes landowners must pay. 

But whoa! Welfare for the rich? Asked to respond to that characterization of the historic tax credit program, Hardie's wife, Molly, who secured a historic eligibility designation of the couple's house (designed by a relatively unknown architect named Marshall Swain Wells, who, according to the survey,
was "deserving of more than a passing note.") from the VDHR in 2009, declined to comment.

Brennan, however, thinks it's overly simplistic to say that the program benefits only the rich. Technically, it's available to everyone, she points out, and it has helped to restore public treasures like the Paramount Theater.

"Renovating historic properties has a community benefit and value for both adjacent neighbors and the larger community," she says.

Still, Crocket notes and VDHR officials confirm that homeowners like the Hardies bear no obligation to open their supposedly historic homes for community scrutiny, despite the community tax subsidy support.

Of course, others think it's simply naive to expect tax credit programs to be "fair."

"When government offers tax credits, it's always the rich who take advantage," says political activist Randolph Byrd. "Want it to be fair? Then do away with all tax credits. The way it is now, it's not a sin; it's just the way the government set it up."

Still, if the purpose of the program is to encourage the preservation of historic structures, creating hurdles for typical homeowners to participate seems to run counter to the spirit of equal opportunity.

Rehab credit fan Broadus admits that navigating the process can be confusing and requires paperwork to demonstrate compliance with the standards imposed by the Virginia Historic Resources Department. Rich folks can hire lawyers or accountants to help handle such matters.

For instance, the most modest rehab on the local list, the renovation of the Nimmo House on Hartman's Mill Road, wouldn't have received historic tax credits if Preservation Piedmont hadn't stepped in to help the owners by surveying the historic property, guiding the owners through the application process, providing a grant for legal fees, and even helping them find a contractor willing to take on the historic renovation.

Ironically, the couple who owned the dilapidated structure had purchased it for the land (it cost a mere $18,000 in 1994), on which they hoped to build a house for their daughter. But their application for a demolition permit was denied because the building was one of a handful of historic residential properties individually protected by city preservation ordinance.

In fact, it was Preservation Piedmont that emerged to oppose the demolition. The couple said they did not have the means to renovate the old structure, an unusual Gothic Revival house built in 1870 by an enterprising carpenter named James D. Nimmo. So they decided to put the house on the market. Under Charlottesville ordinance, if they didn't get a buyer within a year, they would be allowed to demolish.

Today, the house stands beautifully restored (by Lithic Construction), after the couple received nearly $25,000 in historic tax credits.

Unfortunately, the same cannot be said for many other historic houses in Charlottesville and Albemarle County, including the Compton House at 124 Maury Avenue, more commonly known as Beta House, now home to the Jefferson Scholars Foundation.

Like the couple on Hartman's Mill Road, Foundation executives had not purchased the property to save the house– a Eugene Bradbury-designed residence-turned-fraternity. Because it was unprotected by law, they didn't have to.

Considering the fact that the Foundation amassed $21 million to spend on the new headquarters, it might have netted a bundle of historic tax credits by going that route. The demo was a blow to the preservation community, and prompted the city to develop regulations that have strengthened oversight of historic properties.

Indeed, some think regulations, not tax credits, are the way to really preserve our stock of historic structures. While the 12 local properties were rehabilitated under the rehab tax credit program in the last five years, seven times that many have been lost.

As Mary Joy Scala, the city's preservation planner, told City Councilors after the Compton house affair, "A successful historic preservation program must rely on regulation to prevent worst-case scenarios like destruction of the Beta House."

The Historic Resources Department reports that over 50 significantly historic properties have been demolished since the mid-1970s, a trend that has picked up in recent years. According to photo-documentation from historic resources staff, since 2004, demolition of over 50 historic or potentially historic structures has occurred in the County– where policies to prevent it are virtually non-existent– and over 26 in the City.

In the City's Fifeville district alone, seventeen 100-plus-year-old properties have been demolished since 2006, including two in January of this year. Some notable losses include the Frank Ix building, the Terrace Theater, Belmont Hall, and the Charlottesville Lumber building on Avon Street.

In surrounding Albemarle County, notable losses include several turn-of-the-nineteenth-century houses in the Free State Community on Rio Road, one of the earliest free black communities in the state, and the place where Sally Hemings' sister Critta was supposed to have lived (the former Community is now the site of the Dunlora and Belvedere developments).

Looking at photos of historic structures that County preservation staff have manged to collect, a reporter is struck by the beauty of some of the places, like a 1920s farmhouse on Wildon Grove Road, or the old Town & Country Motel, an icon of popular roadside architecture and one of local architect Stanislaw Makielski's last designs.

Unfortunately, Broadus says, there's no political will to simplify the process of obtaining rehab tax credits because of a fear among cultural resource professionals that the credit might be removed or reduced.

Indeed, the state of Virginia loves its Rehabilitation Tax Credit Program so much that officials have been shaken by a March 2011 4th U.S. Circuit Court decision concerning the program. In that complicated case, the court ruled that the IRS was correct in arguing that the tax credits investors received were income and should be taxed as such. (The Virginia program allows developers/property owners to form investment partnerships for a rehabilitation project for which they receive tax credits worth more than the dollar amounts of their investments, essentially a fixed rate of return.) As the court pointed out, the arrangement allowed investors to avoid "true entrepreneurial risk."

State officials claim the tax credit program is now "under siege" and that the court ruling has "created a firestorm" in the business and preservation communities by having a "paralyzing effect" on existing and new projects; i.e. investors will be less inclined to invest if they have to report their tax credits as income. In fact, as the numbers have already suggested, preservation is big business in Virginia.

"I have heard from people all over the country regarding the decision,” said DHR Director Kathleen Kilpatrick. “It is damaging here and also in other states. It will have a profoundly chilling effect on investment in historic rehabilitation and thus on our ability to achieve our policy goals for stewardship in Virginia.”

In other words, no more "free money" for investors.

Of course, the program itself created a firestorm recently when a Richmond developer was found to be stealing millions from investors and taxpayers through the program. Justin Glynn French– recently sentenced to 16 years in jail– inflated the rehabilitation costs of his projects, thereby receiving unwarranted tax credits, which he turned around and sold to investors.

Still, you don't have to commit fraud to make a killing in the rehab tax credit game. You just need to have made a killing already: the list of 12 rehab tax credit recipients reads like a who's who of the local rich and powerful. In addition to the Hardies, Biscuit Run investor Coran Capshaw, who, along with fellow investor Hunter Craig, received millions in conservation tax credits for donating the failed development to the state for use as a park, received nearly $100,000 in tax credits to spruce up his Seven Oaks estate.

L.F. Payne, the former Fifth District congressman who was the first to inform former Gov. Tim Kaine of Craig and Capshaw's desire to donate the Biscuit Run property, received nearly $200,000 in rehab tax credits for his home at 2447 Ivy Road. (As husband of Susan Payne, Craig’s PR representative and fellow board member at Virginia National Bank, L.F. was in a unique position to suggest the deal.)

Octagon Partners, the development group that built the Gleason condominiums, received nearly $900,000 in rehab tax credits for renovating the Hardware Store building on the Downtown Mall.

In addition, four of the 12 properties went up for sale or lease after receiving rehab credits, including the William Hall Goodwin House on Rugby Road, a Eugene Bradley-designed residence whose owners, hedge fund manager Kevin Sidders and his wife Beverly, received $463,000 in rehab tax credits and then sold the house for $4 million last year. Over in Greenwood, the owners of Blue Ridge Farm, a 12,000-square-foot private estate, received nearly $200,000 for rehabilitating a show barn and an ice house.

The owners of two historic Court Square office buildings currently for lease, who received nearly $300,000 in state tax credits, also tout the program in advertisements for the space. Further south, rehab tax credits are used as a selling point for Monticola, a Greek Revival mansion in Howardsville currently on the market for $2.9 million, whose owner received $266,552 in taxpayer money. In all, local owners have reaped $3.1 million in just the past five years.

While there's no doubt that 12 beautiful properties have been preserved thanks to the program, was it worth the $3.1 million?

"The bottom line is still that other taxpayers are subsidizing these renovations," says Crockett. "And what do they get out of it? They don't get to use the homes. I guess, like conservation easements and the county land use tax subsidy program, people can drive by and enjoy the view."

CORRECTION: An earlier online version of this story referred to the ACE (Acquisition of Conservation Easements) program, which is specifically designed to prohibit development and protect natural resources, but it should have been the Land Use Valuation program.