Craig Potts

This administrative regulation provides the framework to implement the Kentucky Historic Rehabilitation Tax Credit program. It was anticipated that a new regulation reflecting significant changes made to the corresponding KRS during the 2021 legislative session would be adopted in advance of the current KAR’s expiration in February 2022. That deadline could not be met. Included within this regulation is a fee structure that has not been increased since the program’s implementation in 2005. Addressing this problem along with updates to the program’s implementation and management is the focus of this proposed administrative regulation change.

This emergency regulation reinstates and updates a long-standing but outdated (and recently expired) version. If not corrected, the newly expanded/enhanced Kentucky Historic Preservation Tax Credit Program’s implementation will remain at risk. Kentucky currently has one of the lowest fee structures for state historic tax credit review in the United States. This is largely because we have not revised our rates in many years despite a wide variety of changes in the marketplace and the actual financial cost to the agency. The Kentucky Historic Preservation Tax Credit program has become very popular since the program was adopted in 2005, and the amount of work required for staff reviews (particularly for multi-million-dollar rehabilitation projects) has increased dramatically. Furthermore, the Kentucky Legislature increased the program cap from $5M per year to $100M per year in the 2021 legislative session which is anticipated to significantly increase the size and complexity of the workload in future years. We therefore propose to raise our review fees to be more in-line with industry standards and peer states and to account for the financial burden it places on the agency.

The basic structure of the administrative regulation remains largely unchanged in this proposal. It is slightly simplified in that it provides one tiered fee for all property and applicant types instead of two. KRS 171.397 provides that the Kentucky Heritage Council can impose fees for processing applications for tax credits, not to exceed the actual cost associated with processing the applications. The proposal is based on 1) staff time/cost 2) direct expense related to travel, mailings, technology infrastructure, software, etc. 3) fees charged for Federal Tax Credit review (federal counterpart program), and 4) fees charged by other states. Estimated cost to the Kentucky Heritage Council for implementing the current tax credit program (capped at $5M per year) is $120 - $150k per year while the estimated current income from fees is $68k per year. This does not consider future costs to the agency when the $100M program cap goes into effect on July 1, 2022 or any additional enhancements to the program that are likely to result from the current legislative session.

Current funding levels are not sufficient to maintain adequate levels of staffing/service to carry out the program efficiently or effectively. Increasing our fee revenue will support the delivery of service including review/processing capacity.

Tiered fee that has been in place since 2005 would be increased. It also includes several clarifications and adds a review component for projects that are not being directly incentivized by the Kentucky Historic Preservation Tax Credit program. Projects that have been largely or fully completed in advance of an application being submitted are not motivated by the incentive and should therefore be excluded. Furthermore, these projects have often implemented design decisions outside of the review and approval process that do not conform to the program requirements. This change to the regulation attempts to curtail or at least limit post project reviews that have little to no opportunity for meaningful consultation.

This emergency regulation reinstates and updates a long-standing but outdated (and recently expired) version. If not corrected, the newly expanded/enhanced Kentucky Historic Preservation Tax Credit Program’s implementation will remain at risk. The Kentucky Heritage Council has needed a fee increase for many years to support the administration of this program. The current staffing levels are unsustainable and our delivery of service to our constituents has suffered. The 20-fold increase to the program’s cap makes this fee increase even more imperative. Furthermore, it is important that this program remain an incentive for rehabilitation. The agency has experienced issues over the years with applications that are too complete for meaningful consultation.

KRS 171.397 provides that the Kentucky Heritage Council can impose fees for processing applications for tax credits, not to exceed the actual cost associated with processing the applications.

Current funding levels are not sufficient to maintain adequate levels of staffing/service to carry out the program efficiently. Increasing our fee revenue will support the delivery of service including review/processing capacity.

All of the above could be affected by this revised administrative regulation. The Kentucky Historic Preservation Tax Credit is an incentive program and fully optional however, so no one would be required to pay the higher fee unless they chose to participate. State Government, and namely the Kentucky Heritage Council, would greatly benefit from fees that would better address the direct and indirect administrative cost to the agency.

No new action. The Part 1 and Part 2 Review Fee would be higher but the process would remain largely unchanged. An exception would be the option of the council to reject a project as ineligible due to substantial levels of completeness.

The higher review fee is tied to the level of incentive being received by the applicant. The incentive is based on expenditure, so a $30M project receiving a $6M Historic Tax Credit will require significantly more review time and coordination than a small project that would be charged (as it is now) a smaller review fee.

We have had many conversations with developers and other users of this incentive program about an efficient review process. They consistently tell us that they would be happy to pay more in review fees if that meant we could better administer the program. These funds will support our capacity and provide applicants with better accessibility to staff and support faster review times. This will help projects that are often time sensitive receive the approval needed to move forward.

Minor change. No cost anticipated.

Minor change. No cost anticipated.

Minor change. No additional funding needed to administer the administrative regulation change.

It will not be necessary to increase a fee or funding to implement this administrative regulation. Minor change. Fee increase to applicants.

Yes. This administrative regulation change would directly increase existing fees.

The Kentucky Historic Preservation Tax Credit was implemented in 2005, and with the exception of owner-occupied projects, this incentive can often be utilized in tandem with the federal credit. Key provisions are: 30% of qualified rehabilitation expenses for owner-occupied residential properties. A minimum investment of $20,000 is required, with the total credit not to exceed $60,000 20% of qualified rehabilitation expenses for all other properties, requiring a minimum investment of $20,000 or the adjusted basis, whichever is greater. The total credit for a project must not exceed $400,000 "Other" properties include commercial and industrial buildings, income-producing properties, historic landscapes and properties owned by governments and non-profit organizations Those eligible to apply for the credit include: Individuals Businesses Non-profit organizations Governments A "first purchaser" of a principal residence following rehabilitation Currently the amount of historic preservation tax credits allowed for all taxpayers for each calendar year is $5 million. If that limit is exceeded by approved projects, an apportionment formula will be applied to determine the amount of the credit that will be awarded per project. As a result, the final credit awarded to each project may be less than the entire percentage for which the project is eligible. With the program cap increase from $5 million to $100 million in the last legislative session, it is unlikely that an apportionment formula will have to be applied.

This is an incentive program that is not mandatory for any public or private entity to take part in. That said, local governments may participate and earn a transferable tax credit that can be monetized. Local governments currently pay a fee to process Historic Preservation Tax Credit applications. That fee would increase for them as well as private sector applicants.

KRS 171.397(12) and (14) authorizes the Kentucky Heritage Council to promulgate administrative regulations to implement the certified historic structures rehabilitation tax credit and to impose fees for tax credit applications.

This is a relatively minor change to an optional incentive program. No effect anticipated other than a higher and more reasonable fee schedule to support the administration of this popular program.

Unsure. We anticipate our workload to increase by at least three times the current amount due to legislative increases in the program cap. Additional revenue will be tied to the number pf applications received in a given year.

Unsure. We anticipate our workload to increase by at least three times the current amount due to legislative increases in the program cap. Additional revenue will be tied to the number pf applications received in a given year.

No additional cost.

No additional cost.

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The proposed administrative regulation change would increase the fee at all investment levels to support the basic administration of the program. The number, type and size and investment level of projects received for review from year to year varies dramatically. Most projects are anticipated to be on the low end of the tier meaning that the additional fee will be small on a per project basis. Looking at the program as a whole however, the additional fees should better cover the costs to the agency that are not being covered by the existing tier of fees.

This will result in no cost savings for regulated entities.

This will result in no cost savings for regulated entities.

Variable. This is a fee attached to an optional incentive program. Costs to regulated entities are directly tied to the financial benefit they will receive from the Kentucky Historic Preservation Tax Credit program.

Variable. This is a fee attached to an optional incentive program. Costs to regulated entities are directly tied to the financial benefit they will receive from the Kentucky Historic Preservation Tax Credit program.

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"Major economic impact" means an overall negative or adverse economic impact from an administrative regulation of five hundred thousand dollars ($500,000) or more on state or local government or regulated entities, in aggregate, as determined by the promulgating administrative bodies. [KRS 13A.010(13)]. Not applicable. There is no additional cost to charge and/or process the fees.