Tax incentives help developers revive historic buildings

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January 4, 2013
By: Ben Johnson
Ben Johnson

As the apartment construction boom continues in Minneapolis, developers are turning to historic tax credits to help turn old buildings into new apartments.

Three out of the four buildings in Minneapolis that were approved for the National Register of Historic Places in 2012 will become apartment buildings. The 430 Oak Grove building, formerly headquarters of the Northwestern Life Insurance Company, opened in December in Loring Park. The former Buzza Company building, located at 1006 W. Lake Street, and the top seven floors of the former Lincoln Bank building at 730 Hennepin Avenue, will be opening later this year after recently obtaining historic designation.

The explosive rise in demand for apartments in Minneapolis seen over the last year already has developers on the lookout for large buildings that can be renovated into residential units. The sizable tax credit offered by both the state and federal government can make obtaining a historic designation the deciding factor in moving forward these residential renovations.

“Without the historic tax credits a lot of these types of projects wouldn’t happen,” said Michael Korsh, director of real estate for Kraus-Anderson, the company that built 430 Oak Grove. “It can be a pain to get through the process, but the building is worth saving.”

Through historic tax credit programs developers can recoup up to 40 percent of qualified rehabilitation expenses — which include major costs like HVAC upgrades and electrical and structural work. Half comes from the federal government, which has been offering the credit since 1976, and half comes from the state. Minnesota became the 31st state to offer its own historic tax credit program in April of 2010.

Minnesota’s historic tax credit program has been largely successful in creating economic activity, according to a study published by the University of Minnesota in November 2011. The study found that in the first year after the bill was passed, Minnesota awarded $49.1 million in tax credits to 14 projects, and those projects’ projected collective economic impact was over $450 million. The study went on to state that “for every state dollar of tax credit or grant allowed, $9.20 in economic activity is generated in the State of Minnesota.”

Obtaining historic designation is time-consuming and expensive, however. Hess Roise Historical Consultants was employed by developers to help both 430 Oak Grove and the Lincoln Bank building gain historic designation. The process can take years, especially if the application is denied initially, according to Charlene Roise, president of Hess Roise.

That was the case for the Lincoln Bank building, whose application put forward by Everwood Development was denied once. They ended up spending over two years working to get their application approved. The Buzza Company building had two studies conclude it was not fit for historic designation before it was approved in 2012.

“We did, thank God, obtain historical designation,” said Elizabeth Flannery, a project partner for Everwood Development, which hopes to begin construction in February on City Place Lofts, a 55-apartment renovation of the old Lincoln Bank building. “It was a long, drawn out process and now we're excited to get started.”

Preserving a historic building can also present challenges to builders looking to make their structures energy efficient. The 430 Oak Grove building has beautiful, 12-foot tall bay windows. They are made of single-pane glass, however, and 12 feet of single pane glass is far from energy efficient.

“The windows had to stay,” said Korsh. “You sit down with the requirements for the energy efficiency you’re looking for and what the preservation society is requiring, and what is cost-effective, and you hammer out how to make it work.”

Installing interior storm windows, sealing up cracks in old walls, rather than building new insulated walls, and tuck-pointing were cited as examples of compromise in historically designated buildings by Kim Havey, principal with Sustology, a sustainable energy consulting firm.

But on the whole, there isn’t a lot of compromise between the need for energy efficiency and the requirements of the historical society. “The more areas you are looking for compromise, the longer the process is going to take,” said Havey.

All of the newly-designated buildings have gone through several different stages of development and redevelopment. The Buzza Company building was originally occupied by the Self-Threading Needle Company, then it was headquarters for the Buzza Company, which made greeting cards, and was later leased to Honeywell to make periscopes druing World War II.

The tenants of the historic buildings reflect the nature of the neighborhood during different eras. Minneapolis is going through an apartment building boom, so they are being converted into apartments. Apartments that Korsh hopes will be cool to live in.

“Getting into a historic building, a building with some character and history, I think that’s something people are looking for. Something different,” said Korsh.