A few days before restoration work was to start on the Divine Lorraine in 2015, hundreds of people lined up on North Broad Street for a final peak inside the iconic ruin. Gutted and graffitied, the eccentric 19th-century hotel had become the poster child for the the city’s decades-long decline. Its renovation marked the latest victory in Philadelphia’s improbable comeback.
The Divine Lorraine, which has been turned into apartments by developer Eric Blumenfeld, would never have been salvaged — never mind restored to its original architectural splendor — without the help of a federal incentive called the Historic Tax Credit. A tax write-off for people who invest in historic preservation, it was introduced in 1984 by President Ronald Reagan, who saw it as an economically sensible way to make America’s cities and towns beautiful again.
Little did Reagan realize that this modest tax program would become a catalyst for the urban revival that is transforming cities big and small around the country. The preservation tax credit gave developers a financial incentive to restore derelict factories and early-20th0century office buildings in the ’80s and ’90s. As they filled up with residents, hollowed-out neighborhoods began springing back to life. New construction followed, along with small businesses and jobs. The National Trust calculates that more than 40,000 buildings have now been restored, creating jobs for 2 million people in the process.
You can guess where this is going. Congress is now considering a proposal to kill the Historic Tax Credit as part of its sweeping tax overhaul. It’s certainly not the only cherished tax break that has been caught in Congress’ crosshairs. But the Historic Tax Credit is different from many of the targeted deductions. Instead of benefiting individuals directly, the Historic Tax Credit helps us collectively, by making towns and cities more livable.
If you wanted to date the beginning of Philadelphia’s recovery, you would have to start with the 1984 tax credit, argues developer Carl Dranoff. Although today he mostly builds glassy condo towers, he got his start in the mid-’80s, running a company called Historic Landmarks for Living. Spurred by the preservation tax credit, the company began buying up Old City’s abandoned 19th-century cast-iron factories and converting them to apartments, like the Wireworks. At the time, he says, the population of Old City was just a few dozen. Today, it’s among Philadelphia’s liveliest neighborhoods.
Because Pennsylvania has such a big inventory of historic structures, it has more to lose than most states from the elimination of the preservation write-off, John Leith-Tetrault of the National Trust told me. Between 2002 and 2016, the tax credit helped underwrite the renovation of 613 buildings in the state, about half of them in Philadelphia. Although the benefits are particularly visible in the state’s two big cities, the preservation credit has also been a lifeline for smaller ones, such as Wilkes-Barre and Bethlehem, that are struggling to keep their downtowns alive.
Even with the tax credit, Philadelphia faces a major preservation crisis. Besides the regular, high-profile losses of churches and theaters, hardly a week goes by without demolition notices being posted on those vernacular, 19th-century buildings that give Philadelphia its unique texture and rhythm. Last week’s victims included three buildings that were occupied and fully intact: the Catfish Cafe on Ridge Avenue in East Falls, two once-elegant townhouses owned by Jefferson Hospital on Ninth Street, and an ornately trimmed corner store at Fifth and Passyunk.
Killing the federal tax credit would accelerate the destruction. For all our chest-thumping about being a World Heritage city and a National Treasure, the city still doesn’t offer any direct financial assistance to property owners who restore historic buildings. It’s one reason that people sometimes feel burned when their buildings are listed on the city’s Historic Register and subjected to extra regulation. Other than a puny tax credit offered by the state, the Historic Tax Credit is the only meaningful financial support for preservation available in Philadelphia.
Some might argue that the city’s 10-year property tax abatement counts as a preservation tool. As regular readers of this column know, I’ve written that the abatement has unfortunately become one of the causes of the current demolition spree. The economics of construction now make it more profitable to replace an older building with a bigger, more efficient new one. Preservation is viewed as a headache.
The real difference between the two incentives is that the Historic Tax Credit specifically rewards developers for saving old buildings. What’s more, those projects are more likely to be in some of the city’s struggling neighborhoods, a recent Rutgers University study found. In contrast, the tax abatement projects are concentrated in Philadelphia’s affluent core. And, unlike the abatement, the federal tax credit doesn’t siphon money from the city’s cash-strapped school district.
Although tax credit projects come in all shapes and sizes, they are crucial to salvaging white elephants that have stood blighted for decades, says David Waxman of MM Partners, who has been transforming factories like Pyramid Electric in Brewerytown, next to the SEPTA rail line. “The credit allows you to go into edge neighborhoods where the rents wouldn’t be enough to cover your costs,” Waxman said.
Those tax credits aren’t handed out lightly. The National Park Service, which oversees the program, does an extreme vetting of applicants. Buildings that qualify must be brought back to their original appearance before they can receive the credits. In the case of the Liberty Title & Trust Co Building at Broad and Arch, which was just turned into an Aloft Hotel, that meant recreating all the art deco detailing in the lobby.
All that work creates jobs, says Leith-Tetrault of the National Trust. The trust calculates that the Historic Tax Credit makes money for the federal government, a hefty 25 percent return on its investment. But it takes times for the restored buildings to start paying taxes. Leith-Tetrault says the credit has been targeted because the initial saving will offset the loss of revenue for the proposed tax cuts. The problem, he says, is that the GOP doesn’t see the preservation community as an important constituency.
Perhaps they should reconsider. Eliminating the Historic Tax Credit will kill the revival on main streets around the country. That affects pretty much everybody.