Historic renovation tax credit has pumped billions into state economy, study says

The Minnesota Legislature, in rare bipartisan fashion, in this session might pass a multiyear extension of the state's 20% historic-building tax credit that has helped save underused and abandoned structures from Ely to Minneapolis and Winona.

The tax credit, first enacted in 2010 and renewed twice, generates some of the best returns on tax expenditure of any state program.

It also has spurred employment and neighboring investments, according to proponents and a January study.

"I'm optimistic that the legislation will be included in the House and Senate tax bills,'' said Joe Bagnoli, a Winthrop & Weinstine attorney who represents nonprofit preservation groups. The League of Minnesota Cities and trade unions also support the bill.

A 2021 study by University of Minnesota Extension found the 170-plus projects done over the last decade under the credits generated an estimated $5 billion in economic activity, 28,480 jobs and $1.9 billion in related labor income.

That boils down to an estimated $11 return on every $1 in state tax credits.

A related mapping project showed 53% of projects located in Minneapolis, St. Paul and Duluth are in older, low-income neighborhoods.

Developers say most of those projects would not have happened without the tax incentive.

"The report by the University of Minnesota helps," said Rep. Cheryl Youakim, DFL-Hopkins, who is chief author of the legislation in the House. "We have tax expenditures that never get reviewed."

Besides the return, the review also showed that 85% of construction budgets went to labor, not building materials, she said. "There's less energy and waste involved."

Gov. Tim Walz has signaled his support, as have several key Republicans and Democrats in both chambers.

The House bill will soon to be joined by a similar Senate measure sponsored by Republican Dave Senjem of Rochester and DFLer Kari Dziedzic of Minneapolis. Both would extend the sunset date to 2030 and allow the credit to be taken in one lump sum, instead of over five years. The proponents were successful last year with only a one-year extension due to budget constraints.

Sen. Jeremy Miller, who leads the Republican caucus, is also a proponent of the historic-revitalization credits and is from Winona, which has benefited from them.

The economic analysis shows the value of the expenditure is recouped within a few years thanks to rising property values and increased state and local taxes, said Erin Hanafin Berg of Rethos, formerly the Preservation Alliance of Minnesota.

The projects, in aggregate, pay for themselves through increased property taxes within seven years, the extension study found.

For projects in progress in fiscal 2021, developers reported spending $890 million, including $693.4 million in labor wages that supported 9,660 jobs. The $124 million in tax expenses for the credits last year generated overall related economic activity of $1.4 billion in Minnesota, the study said.

The projects cover Minnesota.

The overhauls have included an old grade school renovated into housing in Winona, an abandoned high school and a YWCA that were renovated into apartments in Duluth, as well as the Faribault Woolen Mill.

The abandoned Ely State Theater building sold for $2,750 in 2014. By 2021, following redevelopment, the building's assessed value had increased to $162,900.

The U Extension estimates the $2 million investment by the developer generated total economic impact of $4 million. The project was awarded slightly less than $400,000 in tax credits.

The biggest tax-credit project so far is the $375 million renovation of the former Minneapolis downtown Dayton's department store building. That project has received about $70 million in state-federal tax credits.

The state-federal historical certification enables developers to sell up to 20% of the value of the project as federal and state tax credits to limited partners, typically financial institutions. The credits offset taxes over five years, and the credit-derived funds can only be used for materials, labor and services that preserve historic features.

Developers generally consider historic projects risky because the buildings often are in poor shape and require pricey investments — from structural reinforcement to new windows, HVAC systems and technology, as well as painstaking restoration touches.

"Without a significant extension of Minnesota's historic tax credit, we stand to lose billions of dollars and tens of thousands of jobs," said Meghan Elliott, founder of New History, a historic-project tax-credit consultant since 2011. "There are dozens of projects that will come to full stop if the Legislature does not act to protect the historic credit.''