Demystifying Historic Tax Credits: A Powerful Tool for Revitalizing Main Street
By Renee Kuhlman, Director, Special Projects, Government Relations and Policy, NTHP; Erica Stewart, Manager, Public Affairs, NTHP; Shaw Sprague, Associate Director for Government Relations and Policy, NTHP | From Main Street Story of the Week | February 13, 2014 |
Did you know the federal Historic Tax Credit (HTC) program is the federal government’s most significant investment in the preservation of our nation’s historic properties?
Since the program was first established by Congress in 1981, the HTC has leveraged over $109 billion in private investment, created more than 2.4 million jobs and adapted more than 39,000 buildings for new uses.
Despite its impressive track record, the historic tax credit is not widely understood or recognized. So how can Main Street take better advantage of this important tool?
How the Historic Tax Credit Works
First, a few basic elements about the program. Property owners of older and historic buildings may qualify for one of two tax credits. A 20 percent rehabilitation credit is available for buildings either listed individually on the National Register or as a contributing structure in a registered historic district.
To claim the 20 percent HTC credit, the proposed rehabilitation work must be certified as conforming with the Secretary of the Interior’s Standards for Rehabilitation. This certification and review process is administered by the National Park Service (NPS), in conjunction with the State Historic Preservation Officer (SHPO) in each state.
In general, in order to be certified, the rehabilitation must be consistent with the historic character of the structure or the surrounding historic district. The defining historic features and character of the structure must be maintained and not destroyed or compromised by the rehabilitation work.
For older buildings not eligible for listing on the National Register or located in a Registered Historic District, a 10 percent rehabilitation tax credit may be available. To receive the 10 percent credit, a building must have been placed in service before 1936 and meet certain internal and external wall retention requirements. There is no NPS oversight of the 10% credit and no state or federal design review. The property owner claims the 10% credit on his or her tax return.
Making Rehabilitation More Bankable
Given the greater inherent risk in rehabilitating historic properties as compared to new construction, banks are often more cautious in making loans to rehabilitation projects. To offset some of this risk, developers are permitted to transfer the tax credits to investors in exchange for equity – a process called syndication. This added equity lowers the amount that needs to be borrowed, making projects financed with HTCs more attractive to lenders.
When a flood nearly destroyed the Paramount Theater in downtown Cedar Rapids, Iowa in 2008, stakeholders used disaster relief funding and the historic tax credit to save the historic theater. The project benefited from a federal historic tax credit allocation of $5.8 million and also received $6.6 million under the 25 percent Iowa state historic tax credit.
As an example, consider a developer who spends $1 million in eligible, or qualifying rehabilitation expenses, (called QREs) to rehabilitate a historic building into loft apartments and first-floor retail space. The $1 million in QREs would yield $200,000 in federal tax credits (20 percent of $1 million).
Rather than waiting to claim the credit after the project is completed and taxes are filed, the developer may partner with an investor that has a need to defray its federal income tax bill by $200,000. When the credits are allocated to an investor through a partnership, the investor is typically assigned a 99% ownership interest in the property for at least five years in exchange for a cash payment for the tax credits. Pricing for the credits can vary by investor and transaction size. Smaller projects may see pricing at $.85 on the tax credit dollar. Larger projects typically price higher between $.90 and $.95 on the tax credit dollar. The investor will make cash "pay-ins" at closing and construction completion. This is often critically important to developers who need to pay architects, builders, engineers, etc., during the construction phase.
Nonprofit organizations, such as a community development corporation (CDC) or Main Street organizations, can utilize HTCs by creating a for-profit subsidiary to be the developer on projects such as community theaters where the intended use is not an attractive proposition for a for-profit developer. The availability of this added tax credit equity helps attract prospective donors since the amount of funding needed to be raised is significantly reduced.
Stimulating Local Economies
When a building is renovated with HTCs, the rehabilitation signals to other developers and investors that an area is ripe for development. More public and private funds are invested in renovating neighboring buildings and constructing new buildings on vacant lots.
Research shows that repairing existing residential buildings produces about 50 percent more jobs than constructing new ones.
The nonprofit Cinncinnati Center City Development Corporation (3CDC) used HTCs to renovate these c. 1924 buildings into the Parvis Lofts which includes 32 market rate lofts and 15,000 square feet of commercial space. The Ohio Development Services Agency calcluates the project generated 195 jobs and generated $670,500 in state ad local taxes.
Moreover, three-quarters of the economic benefits generated by historic rehabilitation remain in the local communities and states where the projects are located. This reflects the fact that the labor and materials for historic rehabilitations tend to be hired or purchased locally.
The HTC and other Financing Tools
The federal HTC can be used in conjunction with other state and federal credits to bring down rehabilitation costs. Combining credits – a process called “twinning” – often results in significant reduction in tax liability.
Today, 34 states offer historic tax credit programs. They frequently are used in conjunction with the federal HTC and other incentives (including the federal New Markets Tax Credit and Low-Income Housing Tax Credit) to make a project economically feasible.
For example, in 2008, massive flooding swamped ten miles of Cedar Rapids, Iowa and caused $2 billion dollars in damage.
The C.S.P.S. Hall, located in the New Bohemia arts district just south of downtown was badly damaged. Built in 1891 by the Czecho-Slovak Protective Society, it served as a social and cultural hub for Cedar Rapids through the middle of the 20th century before becoming a small arts center in 1991.
Damaged in the 2008 Iowa floods, the former social hall of the Czecho-Slovak Protective Socity built in 1891 enjoys a new life through historic tax credits.
Repairing the structure seemed impossible to the nonprofit owner, Legion Arts. The historic tax credit, however, combined with state HTCs, filled the financing gap and made the $7.5 million rehabilitation feasible.
Today the C.S.P.S. Hall houses an independent bookstore, a coffee shop, a photography studio, and incubator space for start-up arts organizations. It also provides a permanent home for Legion Arts and performance space for its diverse programming.
The rehabilitated center has energized the district, evidenced by many new restaurants, shops and bars, as well as new and infill affordable housing.
• Qualified Costs: $6,402,859
• Total Costs: $7,515,777
• Key Financing: The Andy Warhol Foundation provided $80,000 for planning and predevelopment, and the project was jump started by an I-JOBS flood recovery grant of $4,800,000. This was supplemented by historic tax credits of $1,600,714 (State of Iowa) and $1,280,571 (Federal). Many generous individual and institutional donors from the Cedar Rapids area also contributed toward saving this building.
Help Expand the Use of the Historic Tax Credit
For the past several years, the National Trust has been engaged with state and national partners in the “Prosperity through Preservation” campaign to protect and enhance the historic tax credit as Congress considers tax reform. Please visit www.savehistoriccredit.org to learn more about the National Trust’s efforts to protect the credit and be sure to check out the National Trust’s booth at the National Main Streets Conference in May.
As Director of Special Projects in the National Trust's Government Relations and Policy department, Renee Kuhlman has helped protect, improve, and put in place state historic tax credits since 2004. Erica Stewart serves as a Manager for the Public Affairs team of the National Trust for Historic Preservation. She is a 13-year veteran of the Trust and previously provided communications and outreach support to the National Main Street Center and the National Trust Community Investment Corporation. Shaw Sprague is the Associate Director of Government Relations and Policy focusing primarily on advocacy to protect and enhance the federal Historic Tax Credit on Capitol Hill. Before coming to the National Trust, he worked on federal land conservation policy for the Trust for Public Land and as an advisor to Senator Susan Collins on Environment, Natural Resource, Trade, and Judiciary policy.
As Director of Special Projects in the National Trust's Government Relations and Policy department, Renee Kuhlman has helped protect, improve, and put in place state historic tax credits since 2004.
Erica Stewart serves as a Manager for the Public Affairs team of the National Trust for Historic Preservation. She is a 13-year veteran of the Trust and previously provided communications and outreach support to the National Main Street Center and the National Trust Community Investment Corporation.
Shaw Sprague is the Associate Director of Government Relations and Policy focusing primarily on advocacy to protect and enhance the federal Historic Tax Credit on Capitol Hill. Before coming to the National Trust, he worked on federal land conservation policy for the Trust for Public Land and as an advisor to Senator Susan Collins on Environment, Natural Resource, Trade, and Judiciary policy.