Historic tax credits can be a great development tool for affordable housing developers, though navigating the regulatory process can be tricky, said panelists at AHF Live.

Two trends are driving the use of historic tax credits (HTCs). First, the Housing and Economic Recovery Act of 2008 requires states to give preference to historic preservation projects in their qualified allocation plans. Second, pricing for historic tax credits has been astoundingly robust, measuring in the $1.10 to $1.15 range per tax credit dollar—a stark contrast to the sinking prices found in the low-income housing tax credit (LIHTC) market.

There are two types of HTCs, a 10 percent credit and a 20 percent credit, though the 20 percent credit is much more widely used. The figures refer to the amount of rehabilitation costs used to calculate how much of an HTC allocation is awarded—so the 20 percent credit is more powerful, covering more of a development’s qualified rehabilitation expenditures (QREs).

QREs include the cost of walls, floors, ceilings, fixtures, windows, doors, stairs, elevators, chimneys, and heating and air-conditioning systems. But land and building acquisition costs, site work, and new building construction are excluded. Projects must also meet the substantial rehabilitation test, meaning the cost of the rehab must exceed the pre-rehabilitation value of the building.

There are six or seven major HTC investors in the market, and they favor larger deals. “Investors generally like to do deals in the $3 million range,” said Mark Einstein, principal at the Reznick Group. “The lowest deal I’ve seen done was about $200,000 in credits, but it’s rare. There’s a market from about $400,000 to $500,000 and up.”

A $15 million project would net $3 million in HTCs through the 20 percent credit, while a $3 million project would only net about $600,000 in credits. “For smaller deals, the amount of credits you get back from your QRE might not justify the time and cost of qualifying for the credits,” said Lynn Craghead, a senior vice president of U.S. Bancorp Community Development Corp., one of the major HTC investors.

The many layers of review bodies can make the HTC process difficult. There’s a local design review, required for permits; a state review conducted by the State Historic Preservation Office; and a federal review by the National Park Service, which is the final decision-maker.

“It’s a very subjective process; a local reviewer might approve something that your state reviewer might not agree with,” said Cindy Hamilton, a vice president at Heritage Consulting Group, which aids developers seeking HTCs. “Everything is reviewed on a case-by-case basis, and they don’t always take precedence into account. So a developer might have gotten some work approved before that the reviewer might take issue with next time.”

While HTC deals are often more complex, time-consuming, and heavily scrutinized than non-historic projects, the pricing of the credits can generate a lot of much-needed equity. By utilizing a lease pass-through structure, projects using both HTCs and LIHTCs can sell the credits to different investors, maximizing the equity generated by HTCs.

Buildings that qualify for the credits must be for rental housing or nonresidential purposes, and are either listed in the National Register of Historic Places or located in a registered historic district and certified by the Secretary of the Interior as being of historic significance.

The 20 percent credit has become an important federal preservation program. The National Park Service, the program’s federal administrator, approved 1,045 HTC developments in 2007. Forty-five percent of those projects were multifamily developments, noted John Cornell, a partner focused on historic tax credits at law firm Nixon Peabody. The states that have seen the most HTC activity are Missouri, Ohio, Virginia, and North Carolina.