Historic Preservation Tax Credits

Creative thinking in the current lending environment is critical when it comes to securing financing needed to purchase or rehabilitate commercial real estate.  With underwriting standards still extremely tight, banks remain less likely to lend, and when they do, loan-to-value ratios are low and collateral requirements are high.  However Pittsburgh and many of its surrounding small towns have numerous turn-of-the-century structures that are well suited for conversion to apartments, offices and restaurant spaces.  But adapting a building to modern usage while preserving and restoring its historic character can be a daunting and expensive task.  With this understanding the government has provided a tool to assist redevelopers with this effort and help to provide the up-front equity needed to put the project together.

Properties listed on the National Register of Historic Places, located within designated historic districts of those buildings that can be listed on the National Register are eligible for the historic tax credit at both the state and federal levels.  The property’s rehabilitation must meet the specific criteria that are designated by the National Parks Services to maintain the buildings historic character.  Certified historic structures are eligible for a credit equal to 20 percent of the cost of rehabilitation. Properties built before 1936 that are not eligible for individual listing on the National Register of Historic Places, nor eligible for inclusion in a certified historic district (considered non-historic, non-contributing structures), are eligible for a credit equal to 10 percent of the cost of rehabilitation.

The main concerns that need to be addressed up front break down to the four questions below:

  • Does my project qualify for the 10 percent historic tax credit or the 20 percent historic tax credit?
  • Does my planned rehabilitation satisfy the qualification criteria established by the IRS and NPS?
  • How much of my earned credit will the IRS regulations allow me to redeem?
  • Can I “sell” my credits to investors who can apply them to reduce their federal tax liability?

Remember that the credit is a percentage of the amount of the qualified rehabilitation costs; this does not cover costs attributable to the acquisition of the asset.  A developer can monetize the federal tax credits and receive a term sheet for the purchase of the state tax credit, thereby raising actual capital ( in tranches as the construction progresses) for the federal tax credit.

To start the process, the property owner applies to the state historical commission for both federal and state credits.  The process of applying for and securing historic tax credits typically requires a development team including a lawyer, a consultant and a syndicator.  Seeking out information about this process before the project commences allows for the potential tax credit equity to be built into a proposed budget or proforma allowing greater control over your financing costs.

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