In these challenging times of affordable housing development, sponsors are looking everywhere for sources of financing for their deals. For existing buildings that are located in a historic district or that may have historic characteristics, developers should determine if the rehabilitation credit for certified historic structures is available.
The historic rehabilitation tax credit (HTC) is a one-year credit that is available in the year that the rehabilitation is placed in service. The limited partner tax credit investor would make an additional capital contribution to the deal in exchange for the HTC.
Many times the historic qualified rehabilitation expenditures (QREs) and the costs that are eligible basis for the low-income housing tax credit (LIHTC) are the same costs so, to some degree, there is a double benefit, but there is usually a depreciable basis reduction equal to the HTC that can negatively impact the amount of the LIHTC. The question is: How can an owner tap into this benefit?
The first step is to determine if the property does qualify for the rehabilitation credit. A certified historic structure is a building that is listed in the National Register of Historic Places or is located in a registered historic district and contributes to the historic significance of the district.
If the owner is not sure of the historic status of the building, they should contact the state historic preservation officer (SHPO). If the building is in a historic district, the owner must complete and return the Historic Preservation Certification Application Part 1 to the SHPO, which reviews the application and forwards it to the National Park Service (NPS) with its recommendation to either approve or deny the request. The NPS ultimately decides if the building is a certified historic structure.
If the building is not in a historic district or listed on the National Register, then the Part 1 application is used to request that the building be listed or included in a historic district. A consultant who knows the application process can be invaluable to the owner. Once the owner knows that the building qualifies, the next step is to determine whether or not the plan of rehabilitation will meet the NPS requirements.
Rehabilitation of the building in accordance with the NPS standards can add both complication and cost to the construction. The HTC is intended to compensate the owner for the complications introduced by the NPS requirements.
The planned rehabilitation must not damage, alter, or remove exterior or interior features that the NPS considers significant to the historic character of the building. Special care should be taken if the owner plans to make building additions or changes to windows and doors. Because of these risks, the owner should seriously consider submitting the Part 2 application—Description of Rehabilitation—through the SHPO to the NPS to obtain approval before the start of the renovation. An architect who has experience with historic rehabilitation is a valuable development team member.
The HTC is a one-year credit equal to 20 percent of the QREs. QREs are depreciable improvements made in connection with the renovation of a residential or non-residential building. They do not include the cost of acquisition, building additions or enlargements, personal property, or depreciable improvements made outside the building such as sidewalks and parking lots. When the rehabilitation is complete, the owner submits a Part 3 application—Request for Certification of Completed Work—through the SHPO to the NPS for approval that the rehabilitation has met the standard approved in the Part 2 application.
An example of the interaction between the HTC and the LIHTC may be helpful. Assume:
- - Total development cost: $10 million
- - Acquisition cost: $1 million and no acquisition LIHTC
- - Personal property and land improvements: $300,000
- - HTC price of $0.85 per $1 of credit and LIHTC price of $0.75 per $1 of credit
- - No other nondepreciable costs
In this example, approximately $300,000 of additional equity is available through the use of the HTC in conjunction with the LIHTC. A number of factors like location in a qualified census tract or difficult development area or taxexempt bond financing can influence this analysis negatively or positively.
In addition to this simple structure where one investor uses both the HTC and the LIHTC, the Internal Revenue Code contains provisions that allow the HTC to be passed through to the tenant in the building. In this case, we are not thinking of the low-income tenant but rather a master tenant who leases the building on a long-term basis and then sub-leases to the qualified low-income tenants. The lease structure opens the possibility to get the HTC to one investor and get the LIHTC to a separate investor. The lease structure is technical and complicated, so a knowledgeable tax accountant or lawyer should be consulted.
Historic rehabilitation is not suitable for every transaction, but the equity available from the HTC is another source that a developer can use to close the financing gap.
The NPS Web site, www.cr.nps.gov/hps/tps/tax/, has a number of tools available to help an owner decide if historic rehabilitation works for their deal.
Beth Mullen is a managing principal for the Sacramento office of Reznick Group, a Top 20 national accounting firm with a focus on real estate. She is a member of the firm's Real Estate Consulting Group. With offices nationwide, Reznick Group provides accounting, tax, and business advisory services to clients in a broad range of industries that include affordable housing, commercial real estate, energy, government, and nonprofits.
|LIHTC only||HTC and LIHTC|
|Total development cost||$10,000,000|
|Personal property and land improvements||(300,000)|
|Price per credit||$0.85|
|Equity raised from HTC||1,479,000|
|Total development cost||10,000,000||10,000,000|
|Historic basis adjustment||N/A||(1,740,000)|
|Years of credit||10||10|
|Price per credit||$0.75||$0.75|
|Equity raised from LIHTC||6,075,000||4,900,500|