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Historic Center City court rehab 'on life support' after tax-law change, developer says

The new changes the handling of the tax credit for historic renovation projects. In addition, costs to convert the vacant Family Court building at 1801 Vine St. into a 199-room luxury hotel have soared.

The former Family Court building on the Ben Franklin Parkway at 1801 Vine St.
The former Family Court building on the Ben Franklin Parkway at 1801 Vine St.Read moreDAVID SWANSON / Staff Photographer

Plans to rehabilitate the 76-year-old Family Court building near the Benjamin Franklin Parkway into a luxury hotel are at risk of unraveling due to federal tax law changes enacted last week that diminish the value of a popular write-off for such historic renovation projects, the developer behind the proposal said.

The legislation signed into law last Friday by President Trump reduces the upfront advantage of the Federal Historic Preservation Tax Incentives program by forcing users to spread the write-off over five years, a shift from rules allowing it to be used in its entirety in a single year.

The change to how the tax credits can be applied under the new legislation "significantly reduces their value and thus increases the gap" in the project's finances, R. Donahue Peebles, chairman and chief executive of the Coral Gables, Fla.-based Peebles Corp., said in a statement. "The project is on life support."

Costs to convert the vacant Beaux Arts court building at 1801 Vine St. into a 199-room hotel have soared from an initial estimate of $85 million, when Peebles was selected for the project in 2014, to as much as $110 million, due to delays in getting government approvals for the credit and to environmental issues with the structure, Peebles said.

The developer had requested a $10 million grant from the state Redevelopment Assistance Capital Program to defray those costs but was informed on Friday that it had received only $1.5 million.

Peebles is now working with the Philadelphia Industrial Development Corp., which has been coordinating the redevelopment of the city-owned building, "to explore options to save the project," the developer said.

PIDC president John Grady said his agency is monitoring the impact of the tax law changes and what the Family Court project's final cost will be. Both are expected to become clearer in about a month.

When Peebles was awarded the project after a competitive bidding process, Philadelphia officials described the court building's renovation as a vital step toward further enlivening the Parkway. The developer's plan called for a hotel under the Kimpton Hotel & Restaurant Group that would include a 3,500-square-foot ballroom, meeting and board rooms, a spa and fitness center, and a restaurant and bar.

The proposal encountered headwinds last year, when officials with the National Park Service, which vets projects for historic tax credit support, ruled that Peebles' plan would "severely downgrade" the building's historic character. The decision disqualified the project from the incentive program.

Plans to develop the project with Kimpton, which operates Center City's Monaco and Palomar hotels, also evaporated around that time, with the hospitality chain saying that it never formalized an agreement with Peebles.

By the start of this year, the Park Service had cleared a revised version of Peebles' plan for tax credit support, but the delay, along with "significant environmental issues with the building," had caused construction costs to skyrocket, Peebles said.

The developer said that he expected to be awarded tax credits worth $18 million in write-offs to apply toward those costs, but that their value has taken a major hit from the law change.

Historic tax credits are valued at 20 percent of a project's eligible expenses, which exclude items such as finance fees and some infrastructure costs. Developers frequently "sell" those credits to entities such as big financial institutions with hefty tax bills, often for a little bit less than their face value.

The new rules force such investors to parcel their savings from the tax credits over five years rather than using them all at once, which diminishes their value because the tax savings can't be immediately put to some other profitable use.

"The credits will be less valuable if they're spread out over five years," said Steven P. Berman, a partner with Philadelphia law firm Berman Indictor LLP who specializes in tax credit deals. "If the investor was going to pay 90 cents on the dollar, maybe now they'll be willing to pay 70 cents on the dollar."

Under the new law, projects at properties already owned by developers seeking historic tax credit support should not be affected by the change if they are completed by around 2020, Berman said. Peebles is under contract to purchase the building but "has not yet been able to complete the design, financing and entitlements necessary to complete the acquisition," the PIDC's Grady said.

Paul Steinke, who as executive director of the Preservation Alliance for Greater Philadelphia tracks projects involving historic tax credit support, said he was unaware of any other proposals in the city that may be similarly affected.

But he said he was relieved that the final legislation kept the tax credit at all, after an earlier version advanced by the House of Representatives did away with it entirely.

"It's still an incentive for preservation," Steinke said. "But it's somewhat less lucrative."