Developers, city wrangle over tax incentive

Louis Salomonsky’s Canal Lofts project moved a pump house in an abatement bid. (Photo by Burl Rolett)

After a five-month review of Richmond’s tax abatement program, changes to the widely used real estate development incentive are being hammered out between the development community and city council.

The two sides met Friday at City Hall to review a draft ordinance presented by council members Parker Agelasto and Kathy Graziano. In the room were some of the power players of the local real estate development scene: Robin Miller of Miller & Associates, David White of SWA Construction, Tom Papa of Fountainhead Properties, Sam McDonald of Property Results and Walter Park of Walter Park Architects.

The proposed ordinance was written in an attempt to clarify a 30-year-old city code and to eliminate a loophole of sorts that allows developers to build an addition of any size onto an existing – even if crumbling – structure and still qualify for a break on future property taxes.

Read the proposed ordinance [PDF]

“It’s not a rehabilitation if you build off of one wall,” Agelasto said last week.

Graziano and Agelasto led a committee that reviewed the program over the past five months. The resulting new ordinance proposes to repeal the current tax abatement code and replace it with a completely new section.

Discussion of the issue has heated up since developer Louis Salomonsky moved a 220-square-foot pump house from an older property on Cary Street and built it into his new $24 million Shockoe Bottom apartment complex in a bid to have the project qualify for abatements.

The proposed changes sponsored by Agelasto and Graziano would disallow abatements on multifamily renovations or demolitions and replacements that increase the square footage of an existing building by more than 30 percent.

The draft also dictates that, in order to qualify for a tax abatement, a structure must been in place at its current location for at least 20 years with 80 percent of its original exterior walls intact.

Developers under current rules cannot demolish an entire building and build another building that is 30 percent larger in its place and qualify for an abatement. But the code does not impose the same limits to renovations of existing buildings.

The current abatement code also does not require a structure to sit at its previous location for any period of time.

Tax abatements encourage redevelopment by offering developers the opportunity to renovate or replace structures that are at least 20 years old without paying an increase in the property’s tax values for seven years on the resulting improvements.

The program has been crucial to downtown development, developers say. They argue that the tax abatements have been just as important as historic tax credits in spurring projects and that rolling back the program would slow the pace of redevelopment.

Tom Papa

“This has been a very successful program,” Papa said. “But it feels like it keeps getting chipped away at.”

There is $1.8 billion worth of taxable assessed properties in the city that cannot be taxed next year because of they qualify for abatements. That accounts for about 9 percent of the city’s total real estate tax book. At the current property tax rate of $1.20 per $100 of assessed value, the abatement program will cost the city $21.6 million for 2014.

That figure will not take into account the end value of several multifamily renovations that are under construction.

An abatement holds the assessed value of a property for tax purposes at its pre-renovation level, which can save developers millions of dollars on larger projects over a decade.

After a renovation is completed, a property owner does not pay taxes on the increased property value for the next seven years. In the eighth year, the owner is on the hook for 25 percent of the difference between the current assessment and the pre-rehab assessment. That amount increases 25 percent in each successive year until the full improvement value becomes taxable beginning 11 years after the original redevelopment.

If, for example, a warehouse-turned-apartment project adds $10 million to a property’s assessed value, that property’s owner would save slightly more than $1 million on property taxes over a 10-year period.

Richmond has seen an increase in downtown redevelopment in recent years, as developers have targeted the city’s rundown buildings for new apartment complexes. Developers say these projects might not have been possible without the tax abatement program.

“The entire Plant Zero,” Papa said, referring to a Fountainhead apartment and art studio development in Manchester, “it just wouldn’t be there.”

Developers also maintain that the city recoups abatement money through other avenues, including restaurant and retail taxes supported by new apartment buildings and increases in non-abated, taxable surrounding real estate.

“The value of everything around us goes up,” architect and developer Walter Parks said. “The advantage to the city is huge. It is not a one-way gift.”

Several questions remained after Friday’s meeting, including whether interior build-out should count in determining square footage additions. Also up in the air is whether it makes sense to require 10 percent of the square footage in buildings 10 stories and taller to be commercial space in order to qualify as a mixed-use development.

See how the abatement program evolved [PDF]

Both the council members and developers agree that a new ordinance will help clear up ambiguities within the tax abatement program code, which has been modified several times since its implementation in 1979.

“What we’re looking for is clarity and consistency,” Papa said. “Uncertainty is not a favorable environment to make a business decision.

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