Matthew M. Davis, AICP
Co-authored by Jessica Engeman, Project Manager and Historic Preservation Specialist, Venerable Group, LLC and Matthew Davis, ARG Principal.
The federal Historic Tax Credit (HTC) was enacted in 1981 to encourage the preservation and adaptive reuse of historic and older buildings. As of 2017, the HTC consisted of two separate tax credits: 1) a 20 percent credit for the rehabilitation costs of buildings listed on the National Register of Historic Places; and 2) a 10 percent credit for the rehabilitation of non-historic, non-residential buildings built before 1936. The HTC has been a powerful, and popular, development tool since its inception. According to the National Trust for Historic Preservation, through the HTC program, over $25 billion in tax credits have been used to rehabilitate over 42,000 buildings nationwide (click here for more information).
Following a significant grassroots effort by preservation advocates across the country, the federal tax bill that was passed in December 2017 retained the 20% HTC for certified rehabilitations of historic structures. The credit, however, was changed in one key respect, namely that the credit must be claimed at a rate of 4% per year over a five-year period. Previously, the 20% credit could be claimed in its entirety once a project was placed in service. (The bill eliminated the 10% tax credit.)
How significant is this change? Spreading the credits over five years will certainly reduce their value to investors. In 2017, tax credit investors were typically paying approximately 90 cents on the dollar. The new value is estimated to be between 75 and 80 cents on the dollar, an effective value reduction of 11% to 17%. Even so, the Historic Tax Credit remains a substantial financial incentive that is expected to still be attractive to developers.
In addition, some historic tax credit projects will be able to take advantage of the old 20% program courtesy of a transition rule included in the bill. This provision allows a taxpayer to claim the 20% tax credit under the previous code as long as two requirements are met. First, the taxpayer must have, as of December 31, 2017, commenced their ownership or long-term lease of the property, which must be continuous through the tax credit recapture period.
The transition rule’s second requirement is that the 24-month measuring period for the substantial rehabilitation test (or 60-month period for phased projects) must begin within 180 days of enactment of the tax bill—approximately July 1, 2018. The substantial rehabilitation test ensures that credits go to projects where the investment in the property is significant and the cost of rehabilitation exceeds the pre-rehabilitation cost of the building. While the taxpayer typically selects the beginning and end dates for the 24- or 60-month period that is applicable to their project, under the transition rule the starting date of the measuring period is predetermined. For projects using a 24-month measuring period (which is more common), the building will need to be placed in service and qualified rehabilitation expenditures incurred prior to December 31, 2020 in order to be eligible for the tax credits under the old code.
In 2018 there will be an opportunity to make adjustments to the Historic Tax Credit in a federal “Technical Corrections” bills that will clean up ambiguities and unanticipated consequences of changes in the tax code. Additionally, there may be opportunity for improvements to the HTC in new legislation that could be considered this year. Within this context, advocates will focus to further improve the HTC by working to eliminate the basis reduction (bringing parity with Low-Income Housing Tax Credits), strive for more favorable transition rules, and enact main street revitalization provisions of the Historic Tax Credit Improvement Act (H.R. 1158/S.425). These changes would help expand the value of this crucial financial incentive. Stay tuned!