The Historic Tax Credit Explained — Commercial Real Estate Loans

Investors who are rehabilitating or repurposing historic buildings may qualify for the Historic Tax Credit, or HTC. The HTC is a federal tax credit program which provides investors with a 20% credit against the costs of rehabilitating eligible historic structures. The program — in operation now for the last 40 years — has been responsible for the restoration of numerous historic properties, and has served as a catalyst for over $140 billion of private investment dollars being funneled into historic rehabilitation projects. The Historic Tax Credit Program is often confused with State Historic Tax Credits which are offered by 35 states and can be used against an investor’s state income tax liability.

How the Historic Tax Credit Program Works

Through the program, investors in qualified historic buildings are granted a 20% tax credit against rehabilitation expenses, though not all expenses qualify under the program guidelines. In fact, only designated qualified rehabilitation expenses (QREs) actually count. QREs generally include costs associated with all of the operational and maintenance components of a building, such as

  • Floors, walls, partitions, and ceilings

  • Doors, windows, stairs, and chimneys

  • Tiles, paneling, or other permanent coverings

  • Lighting fixtures, electrical wiring, and plumbing components

  • Elevators, escalators, fire escapes, sprinkler systems

  • In contrast, some common expenses do not qualify for the credit. These ineligible expenses include:

  • Cabinets, appliances, furniture, and tacked carpeting

  • New decks, porches, fencing, and landscaping

  • Planters, parking lots, signage, and sidewalks

  • Financing fees, feasibility studies, leasing costs

  • Structural demolition costs

It should be noted that some development and financing-related fees still qualify — interest and financing on construction loans, for example — along with construction management, engineering, and developer fees that may also qualify for the tax credit.

Which Buildings Qualify?

Property eligibility for the historic tax credit program includes:

  • Buildings listed in the National Register of Historic Places as certified historic buildings

  • Buildings situated in a registered historic district and certified by the National Park Service as historically significant

Rehabilitation Rules for the HTC Program

Developers attempting to apply for historic tax credits must bear in mind that in order to be approved, their project plan must be consistent with the Secretary of the Interior’s Standards for Rehabilitation. The purpose behind the standards for rehabilitation is to ensure that a developer makes as few changes as possible to the building — an effort to retain the key historical and architectural elements of the property — essentially ensuring the majority of the work done is restorative in nature.

Properties eligible for the HTC program are typically multifamily apartment buildings, office buildings, warehouses, and industrial buildings, though a wide variety of other structures are also potentially eligible. A crucial factor, however, is that properties should have a good chance of generating income and creating jobs in the surrounding community in order to qualify — non-commercial properties such as bridges, monuments, and railroad cars do not qualify for the credit.

Investing in Opportunity Zones with HTC

The Opportunity Zones program, which was created as part of the Tax Cuts and Jobs Act of 2017, is one of the most popular federal tax incentive programs available for commercial real estate. The program has designated 8,700 Qualified Opportunity Zones across the country — these zones being representative of low-income areas nominated by state or territorial governors and approved by the U.S. Treasury. By investing in real estate located in Opportunity Zones utilizing Opportunity Funds (specialized investment vehicles which must keep at least 90% of their assets invested in Opportunity Zones), investors can defer their capital gains taxes for a set period of time.

In regards to the historic tax credit program, many opportunity zones also overlap significant historical areas — meaning there is great potential to combine these two tax incentive programs to maximize investment yields. In cities like New Orleans, for example, registered historic districts overlap Opportunity Zones in multiple areas, making the area a prime target for HTC/Opportunity Fund redevelopment.

Combining HTC With Low-Income Housing Tax Credits (LIHTCs)

In addition to combining benefits from Opportunity Fund investments with Historic Tax Credits, investors may also combine Historic Tax Credits with Low-Income Housing Tax Credits (LIHTCs) if the historic property serves a multifamily purpose. While the benefits of combining these incentives are quite impressive, in order to qualify, investors must be willing to make either a portion or all of the building’s units affordable.

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