The Big Break is an occasional series about Oklahoma tax credits and business incentives.
Each year, one bank in Missouri buys and sells millions of dollars worth of Oklahoma tax credits intended to spark the restoration of historic buildings.
The credits are an attractive way for many businesses and wealthy individuals to offset their tax liability.
Kansas City, Mo.-based Commerce Bank is the largest buyer and seller of Historic Rehabilitation Tax Credits in Oklahoma.
The bank has acquired and re-sold the bulk of historic rehabilitation tax credits in the state over the past several years, according to The Frontier’s analysis of data from the Oklahoma Tax Commission.
Between 2012 and 2017, Commerce Bank acquired more than $22.2 million in Oklahoma historic rehabilitation tax credits. During the same period, the bank transferred $28.3 million in historic rehabilitation tax credits to clients who want to offset their tax liability
In Oklahoma, there’s no cap on the program and real estate developers can sell their excess credits after all tax liability has been extinguished.
Although a Legislative task force and a state commission tasked with evaluating the states’ business incentives have recommended scaling back and reforming Oklahoma’s Historic Rehabilitation Tax Credit program, state lawmakers have never followed through.
How it works
Amanda DeCort, executive director of the Tulsa Foundation for Architecture, believes that much of the redevelopment of downtown Tulsa over the past decade would never have been possible without the help of historic preservation tax credits.
Many rehabilitation projects, like the recently reopened 11-story Tulsa Club hotel, would never be financially viable without the tax credits, DeCort said.
The Tulsa art deco hotel sat vacant for decades before a $33-million renovation partially financed by Historic Rehabilitation Tax Credits.
“Now it’s a shining jewel that everyone wants to see and will remember,” DeCort said. “The tax credits are what really closed the gap to give the banks the comfort they needed to help finance these projects.”
The Federal Historic Preservation Tax Incentives Program gives developers a credit for up to 20 percent of qualifying costs for renovating a historic building. Oklahoma offers an additional matching 20 percent state tax credit.
Changes to federal tax law contained in the 2017 Tax Cuts and Jobs Act altered the federal program and now requires taxpayers to spread the credit out over five years beginning in the year they placed a restored building into service.
While the federal credit isn’t transferable, real estate developers can sell their surplus state tax credits at a discount. Sometimes, the credits are also sold up front in order to help finance development projects.
According to one 2016 report commissioned by the Tulsa Foundation for Architecture, the credits typically sell for between 65-75 cents on the dollar.
But Oklahoma’s tax credits “far outperform the national market,” the report said. Oklahoma developers were receiving between 80-90 cents on the dollar for their tax credits in 2016.
“The wisdom of the Oklahoma Legislature in including a transferability provision in the law has made the State credit one of the most efficient in the country,” the report said.
Where the credits go
Often, the credits end up in the hands of people and businesses that have nothing to do with restoring old buildings.
Between 2014 and 2016, Oklahoma taxpayers offset more than $19.1 million in state income taxes with historic rehabilitation tax credits, according to the Oklahoma Tax Commission.
Insurance companies frequently like to buy the credits, because they can be used to offset corporate income taxes, as well as state taxes on insurance premiums, said Michael Kaufmann, a policy analyst for the Oklahoma Tax Commission.
In 2017, Blue Cross Blue Shield of Oklahoma purchased $4.4 million in historic rehabilitation tax credits from Commerce Bank and its parent company, Health Care Service Corp., purchased $8.7 million of the credits, according to Tax Commission records.
In 2016, Blue Cross Blue Shield of Oklahoma purchased $2.4 million in credits.
Blue Cross Blue Shield of Oklahoma did not respond to an interview request or any of The Frontier’s questions about the tax credits.
Commerce Bank did not respond to questions about tax credits
At the end of 2018, Commerce Bank was the 63rd largest commercial bank in the United States and had branches in five states, including Oklahoma.
The bank’s parent publicly traded company Commerce Bancshares has market capitalization of $6.5 billion.
Commerce Bank did not respond to repeated interview requests. The bank also did not respond to an emailed list of questions about its tax credit business.
According to a 2018 regulatory filing, Commerce Bank frequently purchases various state real estate development tax credits.
“These credits are either resold to third parties or retained for use by the Company,” the bank said.
No limit on amount of credits that can be awarded
A state legislative committee recommended capping many incentives and doing away with all transferable tax credits in 2011.
In 2016, the Oklahoma Incentive Evaluation Commission also recommended capping the amount of Historic Rehabilitation Tax Credits the states gives away each year.
In a report to the commission, a consultant found that although the state’s Historic Rehabilitation Tax Credit does generate new property tax revenue from increased property values, the program creates fewer than direct 900 jobs a year—mostly temporary construction jobs.
The report found that more than half of states that offer the credit had already put annual caps in place.
“Without an annual cap or a program cap in place, the cost burden on the state could continue to grow beyond the point of desirability,” the report said. “Other states, such as Missouri, have experienced growth in this program far beyond the initial predicted utilization levels.”
In 2017, Republican legislative leaders, acting on the commission’s recommendation, introduced House Bill 2352. The legislation would have put a $7 million annual cap on the Historic Rehabilitation Tax Credit. The bill successfully passed out of committee, but never made it to a vote on the House floor.
Lyle Roggow, chairman of the Oklahoma Incentive Evaluation Commission, said the commission is limited to only making recommendations to state leaders about the effectiveness of incentive programs.
“Beyond that, all we are is a recommending body — we don’t really have the power to try and push them to do something,” Roggow said. “It’s up to the Legislature to take action.”