What is the Federal Historic Rehabilitation Tax Credit?

What is the Federal Historic Rehabilitation Tax Credit? It provides federal income tax credit for the rehabilitation and re-use of historic, income-producing buildings that are determined by the Secretary of the Interior, through the National Park Service, to be “certified historic structures.” This program has been one of the nation’s most successful community revitalization programs, encouraging private sector investment, creating jobs and preserving our architectural heritage for future generations. Since 1976, the program has generated almost $132 billion in private investment involving nearly 43,000 projects, according to a report by Rutgers University and the National Park Service.

 

We’re pleased to say that this tax credit program survived the tax reform bill, but not without some significant changes: it modifies the 20% Historic Rehabilitation Tax Credit, repeals the 10% tax credit for the rehabilitation of non-historic buildings, and provides transition rules for both credits. These and other changes to the Internal Revenue Code definitely reduce the value of HTC’s and may affect a taxpayer’s ability to use them at all.

 

The 20% tax credit functions like free equity: a developer can use it to offset its federal corporate tax liability or, more often, sells the credits to investors to generate capital for equity. The most impactful change of the bill is to require taking the credit spread over a 5-year period, rather than all at once in the year the project is placed in service. What’s the big deal you ask? Because a dollar today is worth more than a dollar tomorrow, that 5 year stretch reduces the credit’s value by almost 20%. Could a developer think twice about rehabilitating a historic building with this 20% change? Absolutely, because it can leave a big gap in project financing, rendering a once-feasible project infeasible.

 

In Philadelphia alone, you can thank the pre-reform HTC for projects including The Victory Building, The Divine Lorraine, Lit Brothers Building, The Sheridan Building, The Cosmopolitan and Historic Landmarks for Living projects such as The Wireworks condos in Old City. We were able to revitalize 833 Chestnut Street with the help of the HTC and plan to do the same for our Ruby Match Factory project in Camden, NJ. Fortunately, there is a 30-month grace period for historic projects already in the works at the time of the bill’s inaction, so the capital stack for that project wasn’t toppled.

 

Given that many predicted its complete elimination, we are relieved that the HTC still exists. Still, the new bill is not as good as the old one because it made it harder to bridge the equity gap that frequently thwarts rehab and preservation projects. Though historic buildings will still have a chance at a new life, the reduction in the credit’s value will doubtless mean that some preservation projects will not happen. Read a little more about The Historic Tax Credit here.