The program is praised for sparking the revitalization of blighted buildings, but lawmakers question if the credits are cost effective.

08:38 AM EDT on Wednesday, June 16, 2004

BY MICHAEL CORKERY
Journal Staff Writer

Journal photo / Ruben W. Perez West Warwick's vacant Royal Mills complex will be turned into housing with the help of tax credits. A ceremony yesterday at the site inaugurated the $85-million project.

PROVIDENCE -- A proposal to halt the granting of new historic preservation tax credits for one year is drawing sharp criticism from developers who say that move could slow the greatest boom in urban development in years.

State lawmakers proposed the one-year moratorium as part of the budget that is heading to a House floor vote on Friday, amid concern that the popular credits are depleting state tax revenue.

The tax credits have been praised for sparking the revitalization of the state's blighted buildings and attracting millions in investment to Rhode Island.

At the same time, the state has given out many more tax credits than lawmakers anticipated when they established the program, said House Finance Committee Chairman Steven Costantino, D-Providence. "It grew bigger than we expected," he said.

Costantino said the moratorium would give lawmakers time to analyze whether the state is indeed achieving the golden returns on the credits that developers have predicted.

Costantino said the moratorium would last one year and would not affect the dozens of development projects that have already applied for the credits.

When former Gov. Lincoln Almond signed the credits into law in 2001, state officials predicted it would cost the state $16 million in income taxes over five years.

The state now plans to give out an estimated $134 million in credits over six years.

In theory, the state would make up for lost income tax revenue with spinoffs from the development which generate jobs, housing and higher property values.

Developers and preservationists insist projects such as the planned conversion of the Masonic Temple into a Marriott Hotel and the rebirth of Providence's downtown corridor, along Westminster Street, would not have happened without the credits.

On the other hand, Costantino points out that the exclusive Hope Club on the city's East Side has also applied for state tax credits. "Let's just slow it down, don't stop anything in the pipeline, and look at the issue on the state side, but also what it's bringing us in the local economy," Costantino said. "I don't think anyone wanted to eliminate the program completely.'

In an interview yesterday, Governor Carcieri called the moratorium "short-sighted."

"It's a great program that's taking properties that were just doing nothing, turning them into showcases in communities and putting them back on the tax rolls," he said.

Developers sell the credits to companies and individuals looking to reduce their incomes taxes. In return, they receive cash to fund their construction projects.

Developers can use the state tax credit to subsidize 30 percent of the eligible costs of restoring a historic structure, excluding such things as legal fees and property acquisition.

They can also qualify for federal historic credits that cover 20 percent of eligible costs.

If a building is one of about 16,000 Rhode Island properties on the National Historic Register or in a historic district and it will be used for what the state considers an "income-producing" venture, than it can qualify for the state credit. There are no caps on the number of credits the state can give out.

Developers say that the credits are necessary to offset the high cost of rehabilitating old buildings. And they predict dire consequences if the credits are put on hold for a year.

Under the moratorium, the state will not accept applications submitted after June 3 of this year.

Ranne Warner said the main reason she decided to build 60 new condominiums in a Pawtucket mill buidling was because she could receive a $3.6-million historic tax credit from the state.

Warner said the moratorium would sink other deals she's looking to secure in Pawtucket and scare away other out-of-state investors interested in developing historic properties in Rhode Island.

"The cardinal rule of investing is that you go where it's stable," said Warner. "If you look at a state that makes it possible to invest in them and a year later they put a moratorium, people just go away."

Edward Sanderson, the executive director of the Rhode Island Historic Preservation & Heritage Commission, which gives out the credits, said the moratorium caught him by surprise.

"I think it's awful," said Sanderson. "It's a program that has been doing a lot of good. The idea that once you find something that works and then stop doing it, doesn't seem like the right approach."

B.J. Dupre, a principal at the Armory Revival Company said the moratorium would scuttle a possible deal he's negotiating in Providence's Promenade District. The Armory has plans to team up with Struever Bros, Eccles and Rouse, of Baltimore, on that and other historic preservation projects, Dupre said. "If the moratorium goes through, it's stopped dead," he said.

Both companies have previously applied for millions of dollars in state tax credits.

Dupre spoke by phone yesterday from a ceremony celebrating the proposed $85-million rehabilitation of the Royal Mills complex in West Warwick. Struever, the developer, is planning to use state tax credits to subsidize part of that massive project.

The governor also attended the West Warwick ceremony. Later, at the State House, Carcieri said he believes the market can only support so many hotel rooms and apartments. He's confident the number of new developments applying for credits will eventually slow down.

"The market is only so large. And so what I'm trying to say to them [legislators] is it's sort of self-correcting," Carcieri said.