You Win Some, You Lose Some: HB 1118 Passes; SB 516 Fails

The 88th Session of the Arkansas General Legislature is through the short rows, and at this point the fate of the slate of proposed sustainalaws seems clear.

 

HB 1118 – The Arkansas Central Business Improvement District Rehabilitation and Development Investment Tax Credit Act. PASSED, and sent to Governor Beebe for signature. This Act is designed to encourage economic development within the central business districts of Arkansas cities by providing tax incentives for the rehabilitation and development of structures in those districts.

 

Unfortunately, the HB 1118 that passed is not the same HB 1118 that this sustainablawger wrote about back in February. As originally conceived, HB 1118 provided for a tax credit equivalent to 20% of the first $1 million in qualified expenditures on a project. The tax credit program would have existed for 5 years, and there was no cap on the total amount of credits that could be issued. The tax credits could also be bought and sold one time – a problematic limitation.

 

The pertinent differences between HB 1118 as proposed and HB 1118 as passed are:

• The value of the available tax credits is limited to $1 million per fiscal year, and the credits are issued on a “first come, first serve” basis.
• The value of the individual credits has been reduced to 25% of either the first $500,000 of qualified expenditures for income-producing property or the first $200,000 of qualified expenditures for non-income producing property.
• Once effective, the program will last for two years, not five.
• The tax credits can still be bought and sold, but still only one time.

Assuming Governor Beebe signs HB 1118 into law, and the expectation is that he will, an additional – and significant – hurdle remains. One of the last minute amendments to the bill requires the Chief Fiscal Officer of Arkansas to certify that there sufficient funding for the tax credits are available in the General Improvement Fund. When that will happen is anyone’s guess.

 

I had previously questioned whether a credit of 20% of $1 million would be sufficient incentive to foster the type of development and investment required to make real changes to the downtowns of Arkansas, and to do so using sustainable business practices. Evidently, it was too much to pass legislative muster. Regardless, some incentive is better than no incentive, and certainly some central business districts – Little Rock immediately comes to mind – are poised to benefit from HB 1118 once it becomes effective.

 

SB 516 – The Property Assessed Clean Energy Act. DID NOT PASS. SB 516 would have enabled counties to create “Property Assessed Clean Energy” (or PACE) districts. PACE districts would have been able provide bond-financed loans to property owners to make energy efficiency improvements, and for other clean renewable energy projects. This bill was two years in the making and did not pass by a close vote of 48-44. The jury is still out on why SB 516 failed, but the initial indications are that a misperception that SB 516 required the creation of PACE districts and the issuance of bonds led to its downfall.

 

Here are the thoughts of one of the primary proponents of SB 516, Mark Robertson:

 

I am encouraged through all your efforts we were able to make a dramatic change in the position of SB516 in less than 24 hours. Yesterday this bill had a rough day and we were solidly in a minority position after the vote due to a lack of understanding the bill. Through great leadership from many legislators and through your efforts the bill was brought back to the floor today in the waning hours of the session and won a close and bi-partisan majority vote of 48-44. However, we were 3 votes shy of the 51 needed to help make a real difference in the many communities of Arkansas. We came very close and further than I think many thought possible in such a short time. Good policy should not fail for lack of effort and I know we gave it every effort and used every option available to try and have a successful income.

 

You all should be commended and pat yourself and your network of friends on the back for such a valiant effort. This shows me when we unite we can make a significant difference in our State and our communities. It does not matter if it is energy, environment, social justice, economic development, poverty, education, health or just the well being of our communities, we can collectively continue to move Arkansas forward to becoming the community we all envision when we act together.

Worthy sentiments. Assuming that sustainability is a result, it is a result that can only be accomplished by giving the stakeholders in the Arkansas sustainasphere the wherewithal to adopt sustainable building practices and to take a chance with renewable, clean energy projects. SB 516 would have enabled counties to move toward providing private, small-scale financing for these projects, and would have filled an important gap between legislation such as HB 1118, which is clearly focused on large scale urban investment and development, and the private stakeholder. Let’s hope the substance of SB 516 finds new life in the 89th General Assembly.

 

The Case for HB 1118

Last week, the Main Street Revitalization Committee of the Little Rock Downtown Partnership voted to endorse HB 1118, which, if passed, would establish an investment tax credit for the rehabilitation and development of central business districts.


I’ve discussed the key elements of HB 1118 in previous posts. In short, HB 1118 would create an investment tax credit equal to 20% of the first $1,000,000 of qualified rehabilitation or development expenditures incurred for a qualified project. Any unused tax credits could be carried over for seven consecutive taxable years, and the credit can be transferred, sold, or assigned one time.

 

A “white paper” distributed to the Main Street Revitalization Committee highlighted the benefits of HB 1118:

 

• The return ratio on the HB 1118 tax credit is 1 to 5. In other words, $1,000,000 in tax credits generates $5,000,000 of development or rehabilitation expenditures.
• Every $1.00 of income tax credits returns between $2.19 and $2.22 in income to Arkansans.
• The tax credit should spur economic development not only in central business improvement districts, but in the areas adjacent to the districts.
• Downtown revitalization is a key part of the push for higher paying jobs and a higher quality of life in Arkansas.
• By stimulating the rehabilitation of existing structures, the tax credit will help return non-productive downtown areas to income producing and tax generating areas. This, in turn, will stimulate the tax base through new sales and payroll taxes, as well as by increasing the tax base.
• The tax credit will help attract new businesses to their downtown business areas by creating a significant marketing and economic incentive for municipalities to include in their development packages.

 

As I’ve previously observed, HB 1118 could also be improved. For example, the provision that the tax credit can only be sold, transferred, or assigned limits the utility of the credit as an investment tool and effectively prevents the establishment of a secondary market.

 

HB 1118 is on the deferred agenda for the February 15, 2011, House Revenue and Taxation Committee meeting. I will be tracking the bill. Stay tuned.

 

Arkansas Legislative Update: HB 1118 and Tax Credits for Sustainable Developers (Part II)

HB 1118 does present some practical concerns.  I’m most troubled by the fact that it does not provide for judicial review of decisions denying qualified project status, and makes no provision at all for review of whether an expenditure qualifies as a  “rehabilitation or development expenditure.”  This is not just because I’m a lawyer and stand to profit from another chance to go to court, but because if improvement districts do not come up with consistent, credible criteria for evaluating proposed qualified projects and apply those criteria fairly, we have a system susceptible to abuse and manipulation.

Second, is a tax credit of 20% of up to the first million in qualified investment enough to encourage significant development?  Consider that the Clinton Presidential Library, which holds a LEED Platinum certification, cost in excess of $125 million.  I recognize that the Clinton Library is not representative of the types of projects that we are most likely to see in a central business improvement district, but the fact is that in this day and age a million-dollar development is relatively small scale – particularly when you are talking about providing Class-A office, retail, and residential space while meeting the demands of historical preservation and some form of sustainable certification. 

HB 1118 also provides that “a taxpayer who receives an investment tax credit under this section shall not claim any other state or local tax credit or deduction based on the qualified rehabilitation or development expenditures except for the deduction for normal depreciation of the eligible central business improvement district property.”  I can envision some problems enforcing and applying this provision.  What if a developer purchases HVAC equipment that would normally be tax-exempt as the purchase of renewable resource equipment (see HB 1036/1037)?  Must the developer insist on paying the sales and use tax to preserve the tax credit? 

Last, as an advocate of sustainability, I note that HB 1118 is not, per se, a sustainalaw, since it treats green projects and non-green protects the same.  Why not fashion a law that rewards sustainable development?  The easiest way would be to provide for expedited consideration and increased tax credits for sustainable projects.

  

HB 1118 is headed for the House Committee on Revenue & Taxation.  Stay tuned!

Arkansas Legislative Update: HB 1118 and Tax Credits for Sustainable Developers (Part I)

HB 1118 goes by the too-long title “Arkansas Central Business Improvement District Rehabilitation and Development Investment Tax Credit Act.”  While it is not a sustainalaw per se (it treats all projects the same), it is nonetheless an important addition to the slate of proposed sustainalaws before the Arkansas Legislature.

The proposed Act builds on the Central Business Improvement District Act (found at Ark. Code Ann. § 14-184-101 et seq.), which was designed to assist Arkansas cities in rescuing their deteriorating downtowns by empowering municipalities with more than 500 residents to create central business improvement districts.  (For an idea of a central business improvement district, envision the Main Street corridor in Little Rock or Cherry Street in Helena.)

The idea behind HB 1118 is simple: anyone who incurs costs and expenses in connection with a “qualified project” in a previously established central business improvement district is eligible for an income tax credit equal to 20% of up to the first million dollars of “qualified rehabilitation or development expenditures” on the project.  The tax credit would be available for five years, from January 1, 2012, to December 31, 2017, and, significantly, the credit may be sold, transferred, or assigned one time.

Lets unpack this a bit.  To be a “qualified project,” the property to be rehabilitated or developed must be located in the improvement district, must meet all applicable zoning and building codes, must meet any design and planning guidelines applicable the improvement district, and must involve “qualified rehabilitation or development expenditures” of more than $50,000.  The board of commissioners of the improvement district will decide whether a project is a “qualified project”.  Adverse decisions the board can be appealed to the “governing body of the municipality.”  (If HB 1118 passes, this is one spot where a lawyer will come in handy.)

 “Qualified rehabilitation or development expenditures” are defined by what they are not – namely, they are not the cost of acquiring the development property, any associated realtor’s fees, taxes, insurance, costs of landscaping, or sales and marketing costs.  Otherwise, “qualified rehabilitation or development expenditures” are, essentially, whatever the improvement district will approve.

If it passes, HB 1118 will give some financial teeth to the Central Business Improvement District.  Since that Act's passage, municipalities have been able to offer developers some incentives and special treatment to get them to to downtown projects, but not a $200,000 income tax credit that can be bought and sold.   

This is very reason HB 1118 would be important to the Arkansas sustainasphere as an important incentive to green builders and developers.  As shown by the currently ongoing revitalization and anticipated LEED-certification of the building located at 315 Main in Little Rock, the aging downtowns of Arkansas cities are loaded with dark and architecturally interesting but neglected buildings that can and should be rescued, repurposed, and greened. This program would empower Arkansas cities to offer a significant financial incentive that will make projects that once looked good only as sketches of sustainability look good on the balance sheet as well.

HB 1118 is not all green skies, of course, and in Part II I will address some practical concerns about the proposed Act.

Stay tuned!

Arkansas Legislative Update: Sustainability Bills Before the 2011 Arkansas Legislature

The 88th General Assembly of the Arkansas Legislature convenes on January 10, 2011.  While the dominant characteristic of the 2011 session is that it contains the largest incoming class of legislators in the State’s history, the 2011 Arkansas Legislature will also consider several pieces of legislation with the potential to significantly impact the Arkansas sustainasphere.

HB 1027: The Sustainable Energy-Efficient House Program.  This ambitious bill is designed to promote energy conservation in private residents.  It proposes to set green energy efficiency standards for all new residential construction, and for “major renovations” to existing homes.  The cornerstone requirement of the bill is that all new construction and major home construction shall be certified by the Arkansas Energy Office to show at least a ten percent reduction below the baseline energy consumption.

HB 1050: The Energy Efficiency and Conservation Financing Act.  This bill would allow electricity and natural gas providers to finance energy efficiency improvements to private residences and rental properties.  If it passes, residential consumers finance a wide variety of “energy efficiency and conservation measures” with a long-term, low-interest loan from their electricity or natural gas provider.  Eligible improvements include insulation systems, storm doors and windows, HVAC modification or replacement, and the installation of solar- and wind-powered systems.  Energy audits are also covered. Notably, consumers could arrange to repay loans received through an additional charge on their utilities bills, and repayment obligations stay with the improved property, not the consumer.

HB 1036 and 1037: Tax Exemptions and Credits for Purchases of “Renewable Resource Equipment."  This bill tandem would give make purchases of “renewable resource equipment” exempt from sales and use tax, and would give purchasers a tax credit of 20% of the purchase price against the purchaser’s income tax.  “Renewable Resource Equipment” is defined as “a system, component of a system, mechanism or series of mechanisms, support service, or a combination of these items that use a renewable resource as a source of energy or that offset or replace the consumption of a traditional energy source, including without limitation, electricity or natural gas.”

HB 1043: The Reusable Shopping Bag Act.  This bill would require most supermarkets and similar retailers to stop using plastic shopping bags.  See my previous post on this bill, "Will Arkansas Ban Plastic Shopping Bags" (December 6, 2010). 

Viewed together, it is difficult to consider these five pieces of proposed law as much of a sustainable legislative package.  But these bills are all in the very earliest stages of legislative gestation.  They are all flawed for various reasons, but they also all have the potential to drive interesting and significant innovation in the Arkansas sustainasphere.  I will be tracking these, and similar bills, as the legislative session progresses.  Stay tuned.