In 2005, the state of Kentucky began offering Historic Tax Credits (HTCs) for investments made to save, rehabilitate or reuse qualified properties.
At the time, the thinking in many quarters was that this was kind of nice for some old, historic-looking buildings but antithetical to real progress and development – to say nothing of being just another unnecessary cost to the commonwealth.
Like hugging a tree to save it from being cut down, a fussy movement to preserve some interesting but financially impractical structures that gave many industries obstacles to build what they wanted to build.
In 2014, the legislature took it a step further, passing a bill that enhanced the tax credits on historic properties for construction projects begun prior to July 1, 2015.
And so went the outcry: “Where are the jobs from all this? Where is infrastructure development? Where’s the return to Kentucky on this sappy investment?”
Earlier this year, we found out. In 2015, the Louisville Downtown Partnership hired Baker Tilly Virchow Krause, a Milwaukee-based accounting and advisory firm, to examine where this money went and what, if anything, it returned.
What it returned, said Baker Tilly, was jobs, tax revenue, economic enhancements – and, did we say, jobs?
The report concluded that, cumulatively, the seven projects analyzed had estimated total project costs of $305.2 million – of which $205.09 million qualified as rehabilitation expenses – resulting in $33.8 million in tax credits.
For that $33.8 million investment, Baker Tilly estimated that the construction portion of the seven projects would create 2,375 direct jobs – 1,058 jobs as a result of the construction activities and, subsequently, 1,317 permanent jobs in the state. There also would be what the report maintained were “an additional 1,100 ripple-effect jobs, with 666 additional construction-related positions and 431 added permanent full-time equivalent positions.”
The report further stated: “The construction spending from the HTC award properties is anticipated to support a total of $97.0 million in labor income, with $63.2 million in direct wages. Indirect and induced construction spending accounts for an additional $33.9 million spent on wages within Kentucky’s economy.”
Once construction was completed, Baker Tilly estimated that tenant operations in the seven rehabilitated facilities would produce 1,748 full-time positions. “The annual labor income from operations is projected to contribute a base of $64.9 million to Kentucky’s economy,” said the report, “with $44.5 million originating directly from employment located within the seven projects. An additional $73.18 million in labor income is added to Kentucky’s economy through secondary catalytic effects.”
At the time of the report, more than $42.4 million of direct state tax revenue was projected to be collected and offset against the $16.9 million in claimed tax credits. That’s a return of 2.5-to-1.
“Overall, taxes from direct operations that are eligible for state collection are estimated to bring more than $12.97 million annually to the State of Kentucky, as of project stabilization,” said the report. “By Year 10, it is estimated the State of Kentucky will have received more than $164.8 million in direct tax revenue from these seven projects.”
Baker Tilly explained the tax income as coming from property taxes, payroll tax on wages, sales tax on output, corporate income tax, income tax on labor and the taxes from increased assessed property values. Additionally, since one of the projects is a hotel, there’s room tax revenue.
And that’s all to say nothing of enhancing the state’s economy.
“The approved projects are anticipated to contribute more than $190.69 million in total output to Kentucky’s economy in Year 1 of operations,” according to the report.
So an investment of $33.8 million in tax credits is anticipated to yield an overall economic impact of $430.6 million within the first year of stabilized operations, based on direct spending alone –more than 12.7 times greater than the original investment.
Of the seven projects that were evaluated in the study, five are in Louisville:
• 111 Whiskey Row, at 111 W. Main St., is a mixed-use development, part of the block-long rehabilitation of historic distillery buildings;
• Germantown Mill Lofts, at 946 Goss Ave., was a block-long mill building (previously home to Goss Avenue Antiques) that’s being turned into apartments;
• Bradford Mills Lofts, at 1034 E. Oak St., is a 1921 mill building that was converted into 150 loft-style apartments;
• Starks Building, at Fourth Street and Muhammad Ali Blvd., is the 1913 Daniel Burnham-designed office building currently undergoing a mixed-use renovation in the heart of downtown Louisville;
• The Edison Center, is the former LG&E service building at 1258 S. Seventh St. along the western edge of Old Louisville, that will now house some government offices plus retail.
The other two are in Lexington:
• Old Fayette County Courthouse, an 1898 structure that will house a restaurant, office space, Lexington visitor center, event space, bourbon bar and maybe Breeder’s Cup corporate offices;
• 21c Museum Hotel Lexington in the 103-year-old First National Bank Building.
These seven projects are projected by Baker Tilly to generate $180.45 million in direct economic output, and $75.1 million in secondary output, for a total impact on Kentucky’s economy of $255.5 million by the end of the first year of stabilized operations – in other words, after the properties have achieved economic sustainability.
“Overall, taxes from direct operations that are eligible for state collection are estimated to bring more than $12.97 million annually to the State of Kentucky, as of project stabilization,” says the report. “By Year 10, it is estimated the State of Kentucky will have received more than $164.8 million in direct tax revenue from these seven projects. By Year 20, it is estimated the State of Kentucky will have received more than $364.7 million in direct tax revenue.”