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2020-077 Historic Denton UpdateDate: September 4, 2020 Report No. 2020-077       INFORMAL STAFF REPORT TO MAYOR AND CITY COUNCIL SUBJECT: Provide a status update regarding the request by Historic Denton, Inc to be a third-party administrator on behalf of the City for a Certified Local Government Grant through the Texas Historic Commission. BACKGROUND: On August 12, 2020 Historic Denton Inc. indicated to staff that they would like to apply to the Texas Historic Commission (THC) for a Certified Local Government (CLG) grant to conduct a historical survey of the North Texas State Normal Neighborhood in order for that neighborhood to be registered as a National Historic District. Historic Denton, Inc would need to be delegated as a 3rd party administrator on behalf of the city, and the Mayor and City Manager would be required to sign a Letter of Intent authorizing Historic Denton, Inc to apply. The letter must be submitted to THC no later than September 30, 2020. On August 25, 2020, staff prepared a work session item for City Council seeking direction on the request. As part of the discussion several questions were raised regarding the organization and its capacity as well as the scope and budget for their proposed project. Those questions included: 1. What is 501(c)3 status of Historic Denton, Inc? 2. Who sits on the Board of Directors? 3. What is the governance structure of Historic Denton, Inc? 4. What is the financial wherewithal of Historic Denton, Inc and the capacity of the organization given that this is a reimbursement grant? 5. What is the Scope of Work for the project? a. Criteria used in determining contributing vs. non-contributing? b. Methodology? 6. What is the overall budget for the project? 7. What is the benefit to the property owners within the proposed boundaries? 8. What type of tax credit is offered and how does it work? 9. Who is eligible to apply? 10. Who does the review and what standards are used? Staff was directed to bring the item back for discussion with additional information in response to the questions raised as well as input from the City Auditor. Additionally, the City Auditor has provided an initial analysis to the City Manager’s Office, which is included as Exhibit A.   DISCUSSION: As a follow to that discussion, Development Services staff requested on August 25, 2020 that Historic Denton, Inc provide the following: • Scope of Work • Budget Date: September 4, 2020 Report No. 2020-077       • Costs/reimbursement • Positives for the area • Copy of the completed application • Any letters of support from those property owners in the area On August 26, 2020 staff from the City Manager’s Office after discussion with Development Services staff and the City Auditor sent an additional request to Historic Denton Inc. requesting the following in addition to the items listed above as well as indicating that the only remaining meetings left in September for a work session is September 1st (passed) and 15th: • List of Board of Directors members • 501(c)3 status • Governance structure of the Historic Denton, Inc. • Set of financials • How Historic Denton, Inc., will comply with the grant requirements. To date, staff has not received a response from Historic Denton, Inc. with the requested items to answer questions 1-7 above; however, staff is able to provide answers to the remaining questions: 8. What type of tax credit is offered and how does it work? The tax credit that is offered is a 20% income tax credit that is available for the rehabilitation of historic, income-producing buildings that are determined by the Secretary of the Interior, through the National Park Service, to be “certified historic structures.” A certified historic structure is a building that is listed individually in the National Register of Historic Places or a building that is located in a registered historic district and certified by the National Park Service as contributing to the historic significance of that district. The 20% rehabilitation tax credit equals 20% of the amount spent in a certified rehabilitation of a certified historic structure. The tax credit lowers the amount of tax owed. In general, a dollar of tax credit reduces the amount of income tax owed by one dollar. In order for an expenditure to be “eligible” for the tax credit, it must be directly related to the repair or improvement of structural and architectural features. Examples of costs that would not be eligible include fencing, cabinets, appliances, and landscaping. The cost of a project must exceed the greater of $5,000 or the building’s adjusted basis, which is calculated based on the formula below. The following formula and example are from the National Park Service and demonstrate how one can determine if their project will be substantial enough to qualify: A — B — C + D = adjusted basis A = purchase price of the property (building and land) B = the cost of the land at the time of purchase C = depreciation taken for an income-producing property D = cost of any capital improvements made since purchase Date: September 4, 2020 Report No. 2020-077       For example, Mr. Jones has owned a small Victorian rental cottage for a number of years. He originally purchased the property for $150,000 and, of that purchase price, $70,000 was attributed to the cost of the land. Over the past years, he has depreciated the building for tax purposes by a total of $41,000. He recently replaced the air conditioning system at a cost of $1,500. Therefore, Mr. Jones’s adjusted basis is $40,500 (or 150,000 — 70,000 — 41,000 + 1,500). Mr. Jones intends to spend $50,000 to install a new roof, repair rotten siding, upgrade the wiring, and rebuild the severely deteriorated front porch, which will qualify as a substantial rehabilitation project. If he completes the application process and receives certification from the National Park Service that the rehabilitation meets the Secretary of the Interior’s Standards for Rehabilitation, Mr. Jones will be eligible for a 20% credit on the cost of his rehabilitation, or a $10,000 credit. 9. Who is eligible to apply? The 20% tax credit is available only to contributing properties rehabilitated for income- producing purposes, including commercial, industrial, agricultural, rental residential or apartment use. The credit cannot be used to rehabilitate a private residence. Historic Denton, Inc. has provided a map (Exhibit B) identifying those contributing and non- contributing properties. Staff has not received any additional survey information from Historic Denton, Inc. in making this determination. Staff has further analyzed this data:  There are approximately 351 parcels within the proposed boundary  Approximately 35% appear to be ineligible due to them being owner occupied.  The zoning of this area is predominately R3, which prohibits multifamily uses as well as most commercial uses. 10. Who does the review and what standards are used? The tax incentives program is administered by the National Park Service (NPS) and the Internal Revenue Service (IRS) in partnership with the State Historic Preservation Office (SHPO). The SHPO serve as first point of contact for property owners and make certification recommendations to the NPS. The NPS reviews applications for conformance with the Secretary of the Interior’s Standards for Rehabilitation. The following standards are to be applied to specific rehabilitation projects in a reasonable manner, taking into consideration economic and technical feasibility:  A property shall be used for its historic purpose or be placed in a new use that requires minimal change to the defining characteristics of the building and its site and environment.  The historic character of a property shall be retained and preserved. The removal of historic materials or alteration of features and spaces that characterize a property shall be avoided.  Each property shall be recognized as a physical record of its time, place, and use. Changes that create a false sense of historical development, such as adding conjectural features or architectural elements from other buildings, shall not be undertaken. Date: September 4, 2020 Report No. 2020-077        Most properties change over time; those changes that have acquired historic significance in their own right shall be retained and preserved.  Distinctive features, finishes, and construction techniques or examples of craftsmanship that characterize a historic property shall be preserved.  Deteriorated historic features shall be repaired rather than replaced. Where the severity of deterioration requires replacement of a distinctive feature, the new feature shall match the old in design, color, texture, and other visual qualities and, where possible, materials. Replacement of missing features shall be substantiated by documentary, physical, or pictorial evidence.  Chemical or physical treatments, such as sandblasting, that cause damage to historic materials shall not be used. The surface cleaning of structures, if appropriate, shall be undertaken using the gentlest means possible.  Significant archeological resources affected by a project shall be protected and preserved. If such resources must be disturbed, mitigation measures shall be undertaken.  New additions, exterior alterations, or related new construction shall not destroy historic materials that characterize the property. The new work shall be differentiated from the old and shall be compatible with the massing, size, scale, and architectural features to protect the historic integrity of the property and its environment.  New additions and adjacent or related new construction shall be undertaken in such a manner that if removed in the future, the essential form and integrity of the historic property and its environment would be unimpaired. The IRS answers inquiries on financial aspects of the program and publishes an audit guide to assist owners. Additionally, they audit the taxpayer to ensure that only parties eligible for the 20% tax credits use them. CONCLUSION: Based on the memo provided by the City Auditor and the fact that Historic Denton, Inc. has not responded to staff’s request for information requested by City Council, staff has concerns with supporting the request for Historic Denton, Inc to be a third-party administrator of a CLG Grant on behalf of the City. Staff is in the process of developing a formal policy in conjunction with the City Auditor for future requests and expects that to be presented to City Council in October. ATTACHMENTS: 1. Memo to Deputy City Manager from the City Auditor dated August 28, 2020 2. Map of contributing and non-contributing properties as identified by Historic Denton Inc. STAFF CONTACT: Richard D. Cannone, AICP Deputy Director/Planning Director Development Services Department (940) 349-8507 Richard.Cannone@cityofdenton.com Internal Audit Department 215 E. McKinney St., Denton, TX 76201  (940) 349-7228 OUR CORE VALUES Integrity  Fiscal Responsibility  Transparency  Outstanding Customer Service DATE: August 28th, 2020 TO: Sara Hensley, Deputy City Manager FROM: Madison Rorschach, City Auditor Non-Audit Report Regarding a Certified Local Government Grant Purpose: On August 25th, 2020, the City Auditor received a request (Attachment A) from City Manager Todd Hileman. This request revolved around a request for the City to delegate grant application and management authority to Historic Denton, Inc. for a Certified Local Government (CLG) Grant issued by the Texas Historical Commission (THC). These grants are intended to provide funding to city and county governments to develop and sustain effective local preservation programs critical to preserving local historic resources. The City Auditor then discussed this request further with Deputy City Manager Sara Hensley and the Deputy Director of Development Services Richard Cannone. Based on this discussion, the Internal Audit Department entered into a Non-Audit Services Agreement (Attachment B) with City management in order to provide advice on the following questions: 1. What is the responsibility of the City of Denton if this authority is delegated? 2. Is there evidence that the grant project supervisor is professionally qualified as required by the Certified Local Government Grant Manual? 3. Is there evidence that the third-party has the financial capacity to complete the proposed project? Based on the Engagement Letter, the City Auditor received the following documents which form the basis of this review: • An email received by Mr. Hileman from Randy Hunt on 8/12/20 (Attachment C); • An email received by Mr. Cannone from Mr. Hunt on 8/25/20 (Attachment D); and • The information presented to the City Council during the 8/25/20 Work Session including the CLG Grant Application (Attachment E), the CLG Letter of Intent (Attachment F), and a staff presentation. Methodology: 1. Reviewed the request and the information presented to the City Council during Work Session on August 25th, 2020 (see Attachment A). 2. Reviewed communication between Mr. Hunt and City management that was submitted to the City Auditor. 3. Researched the Certified Local Government grant application process and requirements. Page2 Summary of Review: City Responsibility Based on a review of the provided documents, the Texas Historical Commission allows only city or county government, and certain state recognized Native American Tribes to apply for the CLG grants. In addition, commercial firms, nonprofit entities, or educational institutions that have administrative capabilities can be delegated as a third-party to administer the grant on behalf of the CLG. If the third-party applies for the CLG grant directly, the CLG Representative and Chief Elected Official must sign the application. Based on a review of the documents, there appears to be a two-step delegation process as shown in the figure below: Figure 1: CLG Application Process Based on this process, the City does not appear to take on any financial risk by signing the Letter of Intent and may chose to not sign the grant application – effectively stopping the project – if the application does not address its concerns. In essence, this means that the Letter of Intent does not obligate the City in any way, only notifies the THC of the intention to apply. According to the Grant Manual, the Texas Historical Commission assumes the responsibility for ensuring that public money will be spent appropriately and with the maximum effectiveness. This would indicate that if the grant application is signed by the City, the City is not responsible for ensuring funds spent by Historic Denton, Inc. meet grant requirements. Given that Historic Denton, Inc. has committed to funding the project without City financial support, this effectively transfers all financial risk for this project away from the City. This report is not intended to provide an assessment of reputational risk to the City. Professional Qualification The CLG Grant Application (see Attachment E) requires that “persons supervising [CLG] grant projects must be professionally qualified in accordance with 36 CFR Part 61.” As the intended project is a National Register Nomination, I believe the minimum Architectural History professional qualifications are applicable. These include: • A graduate degree in architectural history, art history, historic preservation or closely related field with coursework in American architectural history; or Letter of Intent •Requires brief project description Grant Application •Requires Scope, Budget, Professional Qualifications Page3 • A bachelor’s degree in architectural history, art history, historic preservation or closely related field plus one of the following: o At least two years of full-time experience in research, writing, teaching in American architectural history or restoration architecture with an academic institution, historical organization or agency, museum, or other professional institution; or o Substantial contribution through research and publication to the body of scholarly knowledge in the field of American architectural history. Based on the documents currently received from Mr. Hunt, there is no indication of who would be supervising the project from Historic Denton, Inc. thus there is no way to evaluate if they meet these requirements. That being said, Historic Denton, Inc. will be required to provide the resume of the grant project supervisor as part of the grant application submission. It may be more appropriate to evaluate these qualifications at that time if the City wishes to continue exploring the National Register Nomination project. Financial Capacity According to the Texas Historical Commission’s website, CLG grants typically range from $2,000 to $30,000 and is a 50-50 match, reimbursement grant. This means that it would follow the following process: 1. Historic Denton, Inc. performs work and documents its expenses (includes staff time and commodity purchases);1 2. Expense documentation is submitted to the Texas Historical Commission; 3. The Texas Historical Commission reviews the expense documentation and determines what is eligible for reimbursement under the grant terms; 4. The Texas Historical Commission reimburses Historic Denton for 50% of eligible expenses. Based on this review, Historic Denton, Inc. would need the financial capacity to pay all project expenses up front. At this time, I have not received a budget for the proposed project. Without this information along with additional financial information from Historic Denton, an assessment of financial capacity cannot be made. It should be noted that Historic Denton, Inc. will be required to provide a budget for the project as part of the grant application submission. For this reason, it may be more appropriate to evaluate financial capacity at that time if the City wishes to continue exploring the National Register Nomination project. Conclusion: The following summarizes the answers to the questions posed at the beginning of this report: 1. By signing the Letter of Intent, the City has not formally committed to signing the grant application. Thus, the decision to sign the Letter of Intent appears to be purely a policy decision dependent on if the City is interested in a National Register Nomination. If the grant application is signed by the City, all financial risk is 1 It should be noted that any procurement of subcontractors must follow federal procurement standards. Page4 effectively transferred to Historic Denton, Inc. and the Texas Historical Commission. 2. No documentation has been received to effectively provide advice on the professional qualifications of the CLG grant project manager. That being said, this documentation will be necessary to submit the grant application and could be evaluated at that time. 3. Similarly, no documentation has been received to effectively provide advice on the financial capacity of Historic Denton to perform the CLG grant project. That being said, this documentation will be necessary to submit the grant application and could be evaluated at that time. Attachments: A – Received Request B – Non-Audit Service Engagement Letter (Hensley) C – Delegation Request (Hileman) D – Information Request (Cannone) E – CLG Grant Application F – CLG Letter of Intent John B. Denton College Neighborhood Historic DistrictZoning Map of Contributing Properties Date: 9/3/2020 The City of Denton has prepared maps for departmental use. These are not official maps of the City of Denton and should not be used for legal, engineering or surveying purposes but rather for reference purposes. These maps are the property of the City ofDenton and have been made available to the public based on the Public Information Act. The City of Denton makes every effort to produce and publish the most current and accurate information possible. No warranties, expressed or implied, are providedfor the data herein, its use, or its interpretation. Utilization of this map indicates understanding and acceptance of this statement.SWELCHSTW OAK ST W PARKWAY ST PANHANDLE ST EGAN ST W CONGRESS ST BERNARD STW HICKORY STAMARILLO STM OUNT S A V EW MULBERRY STFULTON STCOIT STALICE STDENTON STPONDERAVEPINER STWILLIAMS STN CARROLL BLVDN WELCH STNCARROLLBLVDGREGG ST S CARROLL BLVDANNA STSCRIPTURE ST GRACE TEMPLE AVE PEARL ST ANDERSON ST HAYNES ST O-R3 (S) R3 O-R3 O-R7 MN PF µ0 200 400100FeetJohn B. Denton College Neighborhood Boundary Contributing Properties R3 - Residential (198) MN - Mixed-Use Neighborhood (3) PF - Public Facilities (2) OVERLAY (61)