To a real estate developer, Federal Historic Tax Credits (HTC) are analogous to the exceptional bread Casamento’s or Domilise’s uses for their oyster po-boys and roast beef sandwiches. It is often times the difference between making a rehabilitation project economically viable as opposed to an undevelopable project that could result in the demolition and destruction of an otherwise historic resource.
To qualify for the federal rehabilitation credit the building must be a qualifying certified historic structure. In order to obtain such a designation, the structure must be listed either: (1) individually in the National Register of Historic Places (NRHP); or (2) as a building that is located in a “registered historic district” and certified by the National Park Service (NPS) as contributing to the historic significance of that district. In order to qualify for the state historic tax credit the building must be located in a state cultural product district.
Benefits of Being Listed on the NRHP
There are a number of benefits that come with having a property labeled on the National Register as being historic. One of these benefits is the ability to save historic buildings and sites from demolition or non-historic redevelopment. A nationally registered property is also protected from federally assisted development projects. More importantly, there are both federal and state tax incentive programs available to properties listed on the National Register.
The HTC Process – Part I
The process begins by submitting the specification of the structure and property to the State Historic Preservation Office (SHPO) who must give its recommendation on the building as being a “qualified” structure. Then the application is sent to NPS who gives final approval. Generally if the building is at least 50 years old and serves as a contributing structure to the neighborhood, the first step of the HTC process will be satisfied.
The HTC Process – Part II
After the first part of the process is approved by SHPO and NPS, in order to qualify for the tax credit, the proposed project must also survive what is known as the “rehabilitation test.” In this part, the NPS and SHPO will decide on whether to give the rehabilitation the requisite “certified” status. A certified rehabilitation is a rehab project of a “certified historic structure” (i.e. a qualified property under Part 1 that is approved by the NPS as being “consistent with the historic character of the property and, where applicable, the district in which it is located.”). The rehabilitation project must not damage, destroy, or cover materials or features, whether interior or exterior, that help define the building’s historic character.
The standards, as established by the NPS, used by the NPS for the construction phase of the project, are applied in a reasonable manner. The NPS will take into account the economic and technical feasibility of the project’s requirements on both the interior and exterior of the building. Additionally, the standards encompass the landscape of the property and any attached, adjacent or related new construction on the site. In most cases, there is a back-and-forth exchange of the design plans between the developer and the NPS during the Part II submissions to ensure compliance with the Secretary of the Interior’s standards for rehabilitations.
A Final Component – The Compliance Period
A final component of the program is that the rehabbed structure must adhere to the requirements outlined in its Part II for a minimum of five (5) years following the renovation project. This is generally referred to as the Compliance Period. During the Compliance Period nothing can be done to the building that would cause it to not adhere to the Part II and the party earning the credits may not dispose of their interest. The NPS and relevant SHPO will remain in contact with the owner of the structure to ensure this requirement is being followed. This factor is only really pertinent to housing developments. Many developers use the tax credit program to develop apartments out of an historic building and then, after the five-year period, sell-off the individual units as condominiums. More and more rental rates are rising during the Compliance Period such that many rehabilitation projects are continuing on as rental properties instead of condominium conversions.
After Approval and the Tax Act of 2017
After a project is approved and completed, the sponsor then qualifies for the federal tax credit equal to 20% of the project’s qualified real estate expenses (QRE). These certified expenditures include most of the total project costs. In the words of Richard Roth, an historic tax credit attorney in New Orleans, “anything that does not fall out if you were to flip the building upside-down is a certified expenditure.” Up until the recent Tax Act of 2017 (TA2017), the sponsor was able to claim the full tax credit when he/she filed their taxes for the fiscal year in which the project was completed or “placed into service.” However, under the TA2017, the sponsor will have to utilize the tax credits over a five-year period.
Economic Impact of Historic Tax Credits
Each year, Rutgers University produces an extensive study on the impact the HTC program has on our nation’s economy. The Rutgers study uses a self-made tool called the Preservation Economic Impact Model (“PEIM”) to portray the economic effects of the federal tax credit program. The model is used for both the fiscal year study and the cumulative assessment of the program over its entire lifespan. The HTC has been in use since 1978 and Rutgers recently released the report for the fiscal year 2016.The PEIM focuses on five major sectors of the economy where the program has had its influences felt: (1) Jobs, (2) Income, (3) Wealth, (4) Output, and (5) Taxes.
Since the inception of the tax credit program in 1978, more than $130 billion has been spent completing qualifying rehabilitation projects. From that $130 billion, more than 2.4 million jobs have been created, and it has added about $145 billion to our nation’s Gross Domestic Product. The construction sector of the economy has realized some $42.3 billion in GDP over the life of the program. The manufacturing sector ($37.9 billion), the service sector ($19.2 billion), and the retail trade sector ($10.5 billion) also reaped major benefits from the formation and implementation of the tax credit program. In addition to these more-obviously directly impacted sectors of the economy, other areas of our economy benefitted from the tax credit program as a result of direct and indirect multiplier effects and the basic notion of our interconnected national economy. Those sectors not immediately associated with the program that were positively impacted include agriculture, mining, transportation and public utilities.
The HTC is a tax expenditure for the government. This means there is a pubic cost to running the program. Over the life span of the program, it has proven to be a “net positive” revenue-generating platform for the U.S. government. The program has cost the U.S. Treasury approximately $25.2 billion in inflation-adjusted 2016 dollars, by way of the amount of credits allocated. The U.S. Treasury has generated a net benefit of $29.8 billion in tax receipts. This means that this program has generated nearly $5 billion for the federal government since 1978. In addition to the program being revenue-positive for the government, it has clearly had a tremendous effect on nearly all sectors and industries of the national economy.
Historic Tax Credits are a Win-Win
The HTC is a tactical investment by the government that has proven to be a true “win-win” for both the public and private sectors. Equally, if not more important, is the preservation of historic buildings, the re-purposing of historically significant buildings and the savings to the environment when buildings are rehabilitated and placed back in service, as opposed to demolished.