Mr. Tess

Architecture & Design

The Value of Preservation Consultants to Historic Hotel Developers

By John Tess, President & CEO, Heritage Consulting

This affinity for "character" has led to the rise of boutique hotels, defined not only by size, but by design - typically historic in nature. One of the pioneers was Bill Kimpton, whose foresight created the Kimpton Group. Others leaders in the field include Ian Shrager and Andre Balazs. This affinity for character has also prompted larger projects, such as Sage Development's proposed Marriott Renaissance in a redeveloped Portland, Oregon department store which will have 330 rooms.

As a result of the success of these and other pioneers, hotel developers are often on the prowl of unique opportunities, thinking about the hotel potential of transforming warehouses, office buildings, Masonic temples, train stations and more.

In one very large way, government policy supports this practice. Tax laws allow 20% of the costs of a "certified" rehabilitation of a "certified" historic structure to be used in the form of a tax credit. Under the right circumstances, that credit can also be transferred and sold, thereby bringing money into the rehabilitation project itself. Complementing this federal program often are state and local incentives that use many of the same rules, guidelines and even reviews. All are designed to make the re-use of old buildings financially viable.

Before running out and buying the closest white elephant, however, developers need to temper their temptation to use these incentives. The rules and reviews governing the tax credit process are intricate and in some cases run contrary to what may seem like common sense. The key to success lies with due diligence and in hiring the right preservation professional.

Before we can understand the challenges, it is important to understand a bit more of the tax credit program. As I mentioned, the program requires a "certified rehabilitation" of a "certified structure". In general terms, a "certified structure" means the building is either listed on the National Register of Historic Places or listing as a contributing structure in a National Register historic district.

While there are some exceptions, the baseline for whether a building might be listed on the Register is that it must be at least 50 years old. The individual building itself does not need to be nationally important or even architecturally distinguished. It may be locally significant, and maybe significant for its association with an important person. It may even be important as an example of how a design has responded to development in the community - say a 1954 motor court reflecting the changing nature of hotel design in response to the automobile.

Many cities, particularly in the downtown, have established historic districts. In this instance, collections of buildings are important as an ensemble. Again, the ensemble need not be important beyond the local level. Within these districts, a building that is over 50 years old and is largely intact should qualify for the tax credits.

To find out if a building is listed individually on the National Register, developers may check the National Register database at the National Park Service (www.cr.nps. gov/places.htm). That said, it is easier and perhaps more advisable to consulting a historic preservation professional. Historic buildings often have several names and the names used in the official listing sometimes are not the commonly accepted name. And if the building is not listed, a preservation professional can also provide guidance on its potential for listing. When a building is listed specifically for purposes of securing the tax credit, how it is listed is often as important as whether it is listed.

The process for listing on the National Register is time consuming. For privately owned buildings, it can only be done with the owner's consent and it involves staff reviews on the state and federal levels. If often also involves public reviews at the local landmarks commission and at a state advisory review committee. A year is not unusual.

That said, the tax credit process offers something of a short cut. A property owner may seek a "preliminary determination of eligibility." Such a determination takes 60-90 days with review on the state and federal levels. And while it does not guarantee listing, it does represent a strong bellwether. In those instances where a property developer has used the preliminary determination, it is important to remember that the property still requires the National Register listing eventually.

The second portion of the formula is that a building needs to have a "certified rehabilitation." This phrase means that the building is rehabilitated according to the "Secretary of Interior's Standards for Rehabilitation." Rather than a specific guide, these standards are ten philosophical constructs. Much like case law has defined our legal system based in the constitution, development precedents over the past three decades have defined the Secretary Standards. And as case law sometimes reinterprets, so too do current reviews.

The short answer however on rehabilitation is that character-defining features need to remain and be rehabilitated appropriately. Trouble however arises with the definition of what is and what is not character defining. A developer may look at corridor walls as being inconveniently located and not that noteworthy. Similarly, single pane windows tend to not be energy efficient and new windows of nearly identical form maybe considered a superior solution. He or she may look at a large open warehouse and see the need to insert floors, or a blank wall and see the need to cut in new windows. All of these thoughts would be a challenge in securing the appropriate approvals.

Muddying the waters is the often misconception where an older property has used a treatment, such as changing windows. Typically, these situations arise when a nearby property has not used the tax credits but simply secured local design review approval. The developer may fail to recognize that the tax credits demand a higher standard.

Again, here is where the preservation professional can provide guidance as to potential issues. The preservation professional can review the plans with the knowledge of acceptable treatments and alert the developer to potential issues and potential solutions. A good preservation professional will guide the development to an "as good" acceptable solution. Then too, sometimes, the preferred treatment is doable, but requires a process of documentation and review.

A common misperception is that the tax credits require restoration work. Rehabilitation begins with accepting the building in its current state. Often an architect or reviewer may argue for a specific treatment in the name of preservation, suggesting that the program requires such restoration work. Again, the preservation professional can provide guidance to the owner which outlines the acceptable options. A good preservation professional is the owner's advocate.

Finally, the most critical element in any tax credit work is the recognition of the time required for reviews. State and federal reviews typically require 30-45 days on each level. When plans are value-engineered, and changes made during construction, problems may arise. The changes may affect the state and federal approvals and endanger the tax credits. Here too a preservation professional may be able help. These professionals typically have ongoing working relations with state and federal reviews and are able to help speed the review forward by understanding the materials needed.

At the end of the day, most of the pitfalls of tax credit work can be avoided by securing the services of preservation consultants familiar with the tax credit process. This professional can provide the guidance in determining whether the building is certified and if not, how to best secure the certification. In the due diligence stage, this professional can also provide guidance as to issues that may be of concern to the Park Service in review of the potential project. Finally, he or she may serve as a knowledgeable advocate on behalf of the owner in protecting those tax credits through the design development and construction stages. Admittedly, using a preservation professional may add to the project's bottom line, but when successful, the preservation person can help the developer secure one-fifth of the construction costs back in the form of credits!

John M. Tess is President of Heritage Consulting Group, a firm that assists property owners, attorneys, accountants, financial institutions and investors maximize the value of historic real estate assets through the use of federal tax incentives and other tools. Heritage has represented projects totaling more than $1 billion. Heritage specializes in linking developers with corporate and institutional investors active in historic tax credits. Heritage Consulting Group is headquartered in Portland, with offices in San Francisco and Washington, D.C. Mr. Tess can be contacted at 503-228-0272 or jmtess@heritage-consulting.com Extended Bio...

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