Undertaking a development project in commercial real estate begins with a tightrope act hinging on balance and style. When preparing the numbers, costs must not only add up, but also make the project look attractive enough to capture the imagination and favor of investors, property owners, and communities. It is for these reasons that historic properties often make excellent redevelopment targets. Compared to new construction costs, the savings that rehabilitating historic property might offer can do wonders for balance sheet math, while the emotional resonance attached to locally familiar and preservation-worthy properties can capture critical early enthusiasm by project financers. The right historical rehab project achieves economic development and cultural preservation all in one profitable fell swoop.
Since at least the early 1960s, federal development subsidy in the form of rehabilitation tax credit for historic properties has been in the tax code. It’s a policy that lends a simultaneous hand both to developers and to communities concerned with protecting their architectural links to the past.
For developers, a 20% federal and/or state tax credit towards the rehabilitation of a historic commercial property has the bottom-line potential to turn a "maybe" property into a "definitely" project. Allaying rehabilitation costs using tax credits can significantly free up a project's capital, allowing developers the latitude and flexibility to put dollars anywhere they may be needed, all the way from sweetening a pro forma to helping to meet construction code – sometimes with the helping hand of the government that puts these codes in place.
However, obtaining federal or state tax credits is a project in itself. The applications process presents a veritable circus of hoops to jump through, each program with its own idiosyncrasies, categorizations of costs, and demands on applicants. What’s more, the legislatures that enact tax credit programs are actively amending the body of law, altering thresholds and features. Expect a lot of I-dotting and T-crossing with federal and state historic preservation tax credit applications. And as always, retain qualified legal counsel for applications review.
The Changing Picture of Federal Help
The federal level of these tax credits is best exemplified by the Federal Historic Preservation Tax Incentives Program. This program is administered by the Technical Preservation Services division of the National Park Service under the US Interior Department. Even here, the ground is shifting in surprising ways. Recent changes to the IRS Tax Code, signed into law in December 2017, have significantly altered the provisions of the program’s credits, including the outright elimination of a 10% credit for development of non-historic buildings – an unexpected legislative priority coming from a GOP-majority Congress led by a Republican commercial real estate developer as POTUS.
To learn the latest on eligibility requirements for the federal historic preservation tax credit, consult the National Park Service.
The federal level is only the beginning when it comes to rehabilitation tax credits and their changing ground rules. Somewhere around ⅔ of U.S. states offer some form of financial assistance for redevelopers of historic properties. But it’s also true that state legislatures are constantly re-legislating their tax credit laws. Up-to-date information about state historic preservation tax credits is best obtained from local historical commissions or administrative offices identified below.