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Historic tax credit sunset spurs jump in NC renovation proposals

Mike Hubbard, one of the owners of the Clayton Spinning Mill walks through the inside of the historic building as it awaits restoration, set to begin in 2015.  North Carolina's expiring historic tax credit has some projects rushing to be completed by the end of the year and others worried about whether they will be able to be financed in the future without the credit.
Mike Hubbard, one of the owners of the Clayton Spinning Mill walks through the inside of the historic building as it awaits restoration, set to begin in 2015. North Carolina's expiring historic tax credit has some projects rushing to be completed by the end of the year and others worried about whether they will be able to be financed in the future without the credit. tlong@newsobserver.com

A building that once hummed with the whir of more than 100 people operating 10,000 spindles now lies dormant, a relic of a time when cotton was king and trains were the lifeblood of Southern commerce.

More than a century old, the 55,000-square-foot Clayton Spinning Mill closed in 1976. Its faded brick facade shows its age, but its owners believe it has some life in it yet.

They hope to turn the building and the surrounding land into a sports and retail complex with the help of the state mill rehabilitation tax credit they were awarded earlier this year, which will offset the cost of renovating the historic structure.

“You can’t do a project like this without the tax credits unless you’re walking around with $10 million in your pocket,” said Michael Hubbard, who owns the mill with fellow Clayton resident Steve Yauch.

The mill credit will expire at the end of the year for properties that haven’t been approved to receive it. With a month and a half left to apply for eligibility, dozens of developers are scrambling to get approval for rehabilitation projects like the Clayton mill, massive undertakings that often can’t be completed without the state incentive.

Tim Simmons, federal rehabilitation tax credit coordinator and senior preservation architect at the State Historic Preservation Office, said the number of applications submitted this year began to rise during the summer.

“I know that this year, mill projects are up,” he said.

The mill credit is one of three historic preservation tax credits that the state legislature chose not to renew this year. The 20 to 30 percent credits for residential and commercial properties will expire Jan. 1, while the 30 to 40 percent credit for mills will expire only for projects that haven’t received state approval before the year’s end.

Enacted in 2006, the mill credit can be used in addition to the 20 percent federal historic preservation tax credit for the rehabilitation of properties on the National Register of Historic Places. To date, the incentive has aided in the completion of 28 mill projects — more than half of them in Durham and Winston-Salem — and 43 more have been proposed in counties across the state.

But not all potential projects will be deemed eligible before the deadline. Myrick Howard, president of Preservation North Carolina, said any mills not yet listed on the National Register may not receive the credit because the listing process usually takes about a year to complete.

“These projects are going to be really hard to do without any tax credits, and there is a good chance we’re going to see mills like that being deconstructed for materials,” he said. “That’s taking an economic development opportunity and taking it apart and throwing it away.”

On Friday, the N.C. Department of Cultural Resources announced that 17 properties in the state had been added to the National Register, including the Merrimon-Wynne House in Raleigh.

The decision not to renew the historic preservation program aligns with the goals of the 2013 Republican overhaul of the state tax code, which reduced income tax rates for individuals and businesses and eliminated other tax credits. Between 2006 and 2012, mill rehabilitation projects qualified for about $128 million in credits, according to State Historic Preservation Office data. The tax credits for commercial and residential properties, available since 1998, have cost the state more than $230 million since their inception.

Economic benefits

In his 2015 budget proposal, Gov. Pat McCrory included a less expensive version of the historic preservation program that reduced tax credit percentages and capped eligible rehabilitation expenditures at $20 million. The modified program would reduce its cost to the state by $10 million to $15 million annually, according to State Historic Preservation Office data.

The House supported the less expensive program, but the Senate did not. Sen. Bob Rucho, co-chair of the Senate Finance Committee, did not respond to several requests for comment.

“Tax credits are not an acceptable part of tax reform, so it hit a wall in the Senate,” Howard said.

He said he expects the legislature will consider implementing a version of the tax credit or an alternative incentive next year.

Proponents of the preservation program argue the economic benefit of rehabilitating historic mill structures far exceeds the initial cost to the state. The 28 mills rehabilitated with the help of the tax credit cost a total of $563 million to complete, and each supplies more jobs and tax revenue than it did before its renovation.

The American Tobacco Campus in Durham, a $167 million investment, stands as the largest project completed with the use of the mill credit. Capitol Broadcasting, which owns the campus, hired Durham-based Belk Architecture to transform the million-square-foot former cigarette production complex into mixed-use space home to shops, restaurants and office space.

The mill credit also allowed Belk Architecture to repurpose Durham’s Golden Belt complex, a seven-acre campus with an $8,000 tax value before its renovation. After it opened as a commercial and residential space in 2011, its tax value rose to $16 million.

The Chesterfield Building in Durham was also approved to receive the mill credit. The $100 million project, which will turn the former Liggett & Myers Co. cigarette production facility into commercial and office space, began earlier this year.

Retaining history

Eddie Belk, owner of Belk Architecture, said most mill rehabilitations aren’t possible without the help of the credit because the cost of preserving and repurposing a heritage building generally exceeds the amount of revenue the structure will generate while new tenants take root and build a customer base.

“The only way you can make a profit on these very large structures on many occasions is to invent a new enterprise and give it a new start,” he said. “The credits develop equity up front to help get the project done, and then it becomes a viable asset to the community.”

Though less extensive than many projects completed with the use of the tax credit, rehabilitation of the Clayton mill will cost $3 million to $5 million. The building’s 150 arched windows are bricked over, and restoring their original design could cost as much as $7,500 per window, Hubbard said.

Hubbard is looking to use both a 30 percent state mill credit and a 20 percent federal credit. If the project ends up costing $3 million, Hubbard estimates it could qualify for about $1 million in tax credits. While North Carolina buildings that are later added to the National Register will be able to apply for federal credits in the future, those often aren’t enough to make a project economically viable.

Renovating the Clayton mill without retaining as much of the original architecture would cost less and might not require the mill credit to complete. But Hubbard said he and and his team opted to preserve the integrity of a small-town fixture, a goal that resonates with some Clayton residents.

“When you find a new purpose for older buildings, you’re saving the history,” said Pam Baumgartner, historian at the Clayton Library and longtime resident. “Cotton was one of the first big industries here, and (the mill) really did have a big impact.”

Construction is expected to begin next year. Hubbard said he hopes the development will fill a need in Clayton, a town of nearly 18,000 whose population has increased by a third during the last decade.

“Clayton has boomed in its own right, and for the most part it’s starting to burst at the seams,” he said. “That’s why we’re looking at this project. It can be a destination for the town.”

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