You can’t be in the field of Historic Preservation long before the Historic Tax Credits get touted as…tax credits for historic rehabilitation projects. The problem with the one-size-fits-all promotion is that not only does the one size not fit all, it doesn’t fit most. And here’s why.
Frank Ordia started looking at Historic Tax Credit data when we were in graduate school. He was already familiar with real estate and other tax credits, and he wanted to know the details of how the credits are used and what kind of projects benefit the most. He found that in Texas, the average project cost for projects that successfully applied for the Federal Historic Tax Credit was around $11.4 million. That average is a really important number.
Because the vast majority of historic buildings that qualify for the credit don’t have a rehabilitation cost that even comes close to $11.4 million.
Think about your typical historic downtown building. It’s probably 1-2 stories, 3,000-8,000 sf, may need a combination of new roof, structural repair, replacement windows or window repair, new paint, new electrical, plumbing and HVAC, new floors, new ceilings, new lighting, new equipment… historic buildings each have different rehabilitation needs, and the costs can be pretty high compared to the return you can get on the investment. For the typical building described here, even with extensive rehabilitation work, you likely won’t hit the cost threshold for when historic tax credits begin to make financial sense.
Before you begin the process you need to hire a qualified consultant. You have to. It’s a lot of complicated paperwork, a multi-part application, extensive documentation, and a long, multi-step approval process. You also need a qualified architect or designer, maybe an engineer, maybe a planner, probably an attorney and definitely an accountant who knows how to get the credit applied to your income tax liability once you finally get approved and awarded. This professional team costs money, so your project has to be worth enough money for the costs of pursuing the credit to be worth it. And you really do need to hire these experts.
You have two years to complete your project. You don’t have two years to play around and suddenly decide to finish in the last four months. The paperwork review at the federal level can take 90 days or more, and if you make changes during the project you will most likely have to submit them for review, adding another 90+ days before you can do the work. Your team puts together the documentation, your tax credit consultant submits it, the state reviews it, the feds review it, then it may or may not be accepted and require revisions.
You don’t get a tax credit for doing you, you get a tax credit for following a set of requirements that are specific to your building and project. You have to follow the Secretary of the Interior’s Standards for Rehabilitation. If you have a hard time conforming to building code requirements and certainly don’t want someone else’s taste imposed on you, the tax credits are not for you. If you want to make the space your own mash up of salvage and shiny new, the tax credits are not for you. If you are here to make ART happen, and it will happen on your time, the tax credits are not for you. Honestly, the more personal the project, the harder this is going to be. The $60-70 million restoration projects that have large professional teams behind them and the #1 goal is a solid financial return? The tax credits are for them. If $120,000 is pushing your ability to acquire financing for your passion project, the tax credits are not for you. And that’s why you see an average project price tag of over $11 million. It makes more sense at that level of investment and return.
Tax credit projects have to be income producing. Government offices, your home, a school - these are not tax credit projects. Retail? Yes. Hotel? Yes. Apartments? Yes. But not something you own and occupy yourself, and not a use that can’t produce income. The credit is applied to income tax liability, so you have to have an income that you can apply it to, or you have to syndicate the credits. Which makes the legal and accounting part of the team a requirement instead of an option.
You also have to be able to float the capital for the duration of the project and the time it takes to file the credit on your taxes. This isn’t cash up front, it’s a reduction in your tax liability once you receive final approval. If your project financing is tight and cash flow is a challenge, the tax credit isn’t going to boost you into a better financial position. If you don’t have your project and business financing set up for that, the tax credits may not be for you.
Texas has a credit too, and the threshold is much lower - projects costing just $5,000 can qualify. However, the credit is applied to a business’s franchise tax liability, and most small businesses in these above-mentioned historic buildings in downtown don’t have a franchise tax liability because they don’t make enough money. So you have to sell your tax credit to someone who does for maybe 80-85% of the value. See the note above on accountants and attorneys being a necessity.
So why all the hype if the tax credits aren’t feasible for so many projects? Because they do help the big projects happen, and those big projects are important. And because the preservation field isn’t always very open to critiques. Our question, “Hey, I noticed your tax credits don’t reach the majority of historic buildings in Texas, what can we do about that?” didn’t go over so well.
What would really be great is if the state ALSO put support behind building local incentives that could help small businesses get into historic buildings that need rehabbing. Or if local governments took it upon themselves (and some have) to find a way to get people into buildings by filling in the gaps that have been keeping businesses out of historic buildings. This is not easy, and it is not like building new. Historic buildings have their own challenges, opportunities, owners and places in community memory. And they’re worth it (usually), even without the tax credits. But sometimes, when it makes financial sense for your project, because of them.
We don’t do National Register nominations and Historic Tax Credits, but we know a lot about managing and rehabilitating historic properties and are happy to recommend our colleagues who do tax credits! If you have questions, email email@example.com