“Retention and reuse of older buildings is an effective tool for the responsible, sustainable stewardship of environmental resources,” stated Richard Moe, President, National Trust for Historic Preservation: at a dinner last December where Moe was honored by the National Building Museum with the Vincent Scully Prize for his work on historic preservation. Moe went on to state that “[N]o matter how much green technology is employed in its design and construction, any new building represents a new impact on the environment. The bottom line is that the greenest building is one that already exists.”
Moe is not alone in seeing the critical interplay between historic preservation and sustainable development. I’m with him, which is why when I was recently asked by the Indiana Chapter of the United States Green Building Council to speak to its members and guests about tax incentives for sustainable development I could not resist the opportunity to talk a little bit about federal historic rehabilitation tax credits. Federal income tax law has allowed for many years two credits , a 10% credit for pre-1936, non-certified historic structures, and a 20% credit for “certified historic structures”. The credit amount equals credit rate (10% or 20%) multiplied by amount of “qualified rehabilitation expenditures”.
The 20% credit provides the historic developer a source of funds with which to fund gaps in financing. The source is tax credit equity provided by an investor or investors willing to become an owner of the project for 5 years in return for tax credits generated by the project expenditures. For example, assuming the project has $10M of qualified rehab expenditures (defined below), the project owner (a partnership for federal tax purposes) has $2M in federal tax credits to pass through to its owners. The project owners can typically raise 85-95% of the $2M in the form of tax credit investor equity.
There are four basic requirements to consider, though other requirements and limitations(such as those related to tax-exempt use of the property) may apply
Must involve a “certified historic structure”
- Building is listed in the National Register of Historic Places maintained by the Dept. of Interior pursuant to the National Historic Preservation Act of 1966; or
- Building is located in a “registered historic district” and certified by the Secretary of the Dept. of Interior as being of historic significance to the district
Must result in “qualified rehabilitated building”
- Must be a “building” (apartments, factories, office buildings, warehouses, barns, garages NOT bridges, boats, trains, storage tanks, kilns, ovens)
- Building must be “substantially rehabilitated”
Must have “qualified rehabilitation expenditures”
- Costs associated with renovation, restoration or reconstruction which are chargeable to the capital account for property which is depreciable (Hard construction costs, Walls, floors, ceilings, Windows and doors, Plumbing, electrical, lighting, Construction period interest, taxes and insurance, Architectural and engineering fees, Legal fees related to construction, Reasonable developer fees, Historic consultant fees
- Certain costs NOT included (Building acquisition costs, Enlargements and new additions, Landscaping, parking lots, sidewalks, Outside environmental cleanup, Building demolition costs, Appliances, Furniture and other personal property, Cabinets and carpet (unless permanently affixed), Feasibility and marketing costs
Must be a “certified rehabilitation”
- Rehabilitation of a certified historic structure must be certified by the Secretary of the Dept. of Interior in order to qualify for the credit
- Three part application process involving the State Historic Preservation Officer (SHPO) and the Dept. of
As mentioned above, other limitations and special rules apply, but historic rehabilitation tax credits can serve as one of the many incentives potentially available to finance sustainable development.