Unusual tax credit sale would fund renovations at Schenley High

By Joe Smydo,
Pittsburgh Post-Gazette
Monday, March 20, 2006

Pittsburgh school officials are considering an unusual public-private partnership that would use federal tax credits to help pay for renovation of historic Schenley High School in Oakland.

Under the arrangement, Pittsburgh Public Schools would sell the 90-year-old building to a for-profit venture, such as a group of banks, and use the proceeds to address the school’s costly asbestos and systems problems.

But the for-profit group wouldn’t be buying the building as much as the tax credits an owner can get for overhauling an historic building, said Richard Fellers, district operations chief, and Chris Berdnik, district finance director.

Mr. Fellers and Mr. Berdnik said the for-profit partner would lease Schenley to the district for a period of years dictated by federal tax law. After that, the district would buy back the building at a nominal cost, perhaps $1.

The deal would allow the district to renovate Schenley while keeping its debt load down and the partner would get a reduction on its federal income taxes.

The plan is in a preliminary stage and subject to thorough vetting by the administration, school board and community, Mr. Fellers and Mr. Berdnik emphasized.

At Wednesday’s legislative meeting, school board members will vote on having the district’s bond lawyers work on the proposal.

“This is not a financing methodology that you read about every day for a school building,” Mr. Berdnik said.

But it isn’t unprecedented, either. Mr. Berdnik said he’s found three schools in Virginia and one in the area of Spokane, Wash., that were renovated under similar arrangements.

In addition, public-private partnerships have been formed to refurbish other kinds of historic buildings.

“Essentially, there is a market for for-profit organizations to acquire tax credits,” Mr. Fellers said.

Overall, the use of federal tax credits to rehabilitate historic properties is widespread. Since 1978, the program has helped owners make $3.5 billion in upgrades to 2,090 properties in Pennsylvania.

The tax credits are available only to building owners. The district doesn’t pay federal income taxes or have use for tax credits itself. Mr. Berdnik suggested bringing in a private partner to leverage the credits and limit the renovation project’s impact on city taxpayers.

In November, as part of a districtwide reorganization, school Superintendent Mark Roosevelt proposed closing the triangle-shaped Schenley building and moving the school to the Reizenstein Middle School site in Shadyside in 2007.

Mr. Roosevelt said the district couldn’t afford to renovate Schenley, which is listed on the National Register of Historic Places and has a long list of distinguished alumni. One architect estimated the project would cost $55.7 million, and another put the cost at $86.9 million.

Parents, students and other school supporters mounted a campaign to save the building, saying its location in vibrant Oakland fueled success of the school’s international studies program. Mr. Roosevelt named a task force to study the school’s future, and a third architect later proposed a scaled-down rehabilitation for $32 million.

Mr. Roosevelt has put Schenley’s fate on hold indefinitely.

While Mr. Fellers and Mr. Berdnik declined to say how much money the district may put into Schenley, they said tax credits wouldn’t fund the whole project.

To make up the difference, the district could issue bonds or use proceeds from the sale of other buildings. There’s no shortage of buildings to sell, given that Mr. Roosevelt’s reorganization will close 18.

The federal tax credits would cover 20 percent of the cost of work allowed by the federal government, said Bonnie Wilkinson Mark, historical architect with the Pennsylvania Historical and Museum Commission. Abatement of asbestos and overhaul of heating and ventilation systems are allowable work; landscaping and sidewalk work are not.

Mr. Fellers and Mr. Berdnik proposed selling the tax credits for more than 90 cents on the dollar and offered this example:

A $40 million project would generate $8 million in tax credits. The district would sell the building — and the credits, they said — for about $7.3 million. The district would use the proceeds for renovations, and the private partner would use the credits to lower its income taxes.

Under federal law, the private partner would own the building for at least five years after renovations are completed.

During that period, the partner would lease the building to the district for continued use as Schenley High School. At the end of that period, the district would buy back the building for a nominal charge.

Ms. Wilkinson Mark said she’d already heard about the proposal from an architect working with the district.

She said the partners would have to submit the proposal to her organization for review. The commission would then make a recommendation to the National Park Service, which has the authority to accept or reject tax-credit projects.

On Wednesday, school board members will vote on paying up to $30,000 for the district’s bond counsel to research the proposal.

(Joe Smydo can be reached at jsmydo@post-gazette.com or 412-263-1548.)

This article appeared in the Pittsburgh Post Gazette. © Pittsburgh Post Gazette