Written by | Patrick Sullivan
I often wonder where Richmond would be right now without the Historic Tax Credit programs.
No one can reasonably deny that the HTC’s impact on our city has been transformative. What do you think Richmond would look like today if we did not have access to the programs? I shudder to think how many buildings would still be vacant and blighted if the development community had not mastered the use of the credit programs.
A Double-Edged Sword
That said, everything comes at a price, especially government programs, and the HTC programs are no different. By offering such a powerful incentive to redevelop existing structures according to increasingly strict interpretations of historic guidelines, we are mortgaging much of our future in an effort to protect the past.
I fully acknowledge that significant modification of historic structures needs to be undertaken with the greatest care. But in doing so, we are not only limiting how these buildings could contribute to our lives today, but simultaneously providing a disincentive to redevelop non-historic structures and vacant lots.
Penalizing New Construction
So why does offering credits on redevelopment of historic properties hurt the construction of new ones?
When you look at the cost of building from the ground up, without credits, and trying to make the numbers work, you quickly realize the value credits bring (or don’t bring, comparatively.)
A properly structured credit deal means close to 50¢ back for every $1 a developer spends (yes, this is a gross oversimplification). And when you layer in the city’s Abatement Program, the financial model becomes 2 – 3x more feasible to renovate historically.
So when a historic property is redeveloped and brought online, it comes to market with a far lower cost basis than that of the newly constructed one. Risk decreases, capital requirements are lower, and financial feasibility increases. Rarely does foregoing the credits associated with a qualified historic structure make sense when compared to the ground-up model.
The Optimal Risk Free Model
So what is the optimum model with the lowest risk?
The safest path is that of small residential units, albeit well-appointed with granite and stainless kitchens, tile baths and outdoor space when it could be provided. Developers quickly figured out that 1 bedroom apartments rented better than 2 bedroom apartments and that their commercial spaces at street level tended to sit empty far longer than the apartments did — so the safest model called for 70-80% 1 bedroom apartments and as little commercial space as possible.
In 2010, this made a great of sense as there was so much to be done … but now, not so much. The incremental value of the next 10, 50 or 200 apartments is decreasing and we need to build the next generation of structures to solidify Richmond’s next collective housing need.
Any healthy housing market offers choice. We need to diversify sizes, shapes and ownership structures to allow those wishing to exit small one bedroom apartments to stay at or near the urban core in spaces that are nicer, larger and that they can own if they so choose.
The Next Generation of Development
So how do we create a more balanced set of incentives to encourage more diverse development?
The first and obvious step would be to expand the city’s abatement program to cover new construction — and not in a nominal way, but in a way that makes new construction far more feasible.
The second would be to create incentives to build properties that are ‘For Sale’ and not just ‘For Rent.’ The city has captured the first phase of downtown residents … but tenants are only invested in the city for the term of their lease. An owner’s interest in issues confronting the city is far higher than that of a tenant bound to their current location only by the penalty for early lease termination.
Diverse Development Brings Stability
The HTC and abatement programs have proven to be invaluable in the redevelopment of Richmond in the past decades. Hopefully, those who have the power to drive the next generation of development look to create a more diverse model and grasp the impact of the the incentives on what, specifically, gets developed.
Development is a good thing — but diverse development, balanced in such a way as to allow wide variety of choice — is best. Hopefully, the growing demand for the urban experience will drive developers to diversify their product offerings and create a mix of options heretofore not seen en masse in RVA.