The "Magic" Part
When you view before and after photos of different reuse and redevelopment sites, you have to ask yourself "how did they do that? Was it magic?" In fact, there are many criteria and "tools" that developers will use when acquiring distressed properties and sites. The Federal Government has initiated a program known as the Federal Historic Preservation Tax Incentives Program. Basically, the program has two parts. There is a 20% tax credit for the certified rehabilitation of certified historical structures and a 10% tax credit for the rehabilitation of non-historic, non-residential buildings built before 1936. A tax credit is not the same as a tax deduction. Where a tax deduction lowers the amount of income subject to tax due, a tax credit will lower the amount of the tax owed by swapping a dollar of tax credit for a dollar of tax owed. The program is jointly managed by the National Park Service (NPS) and the Internal Revenue Service (IRS) and both partner with the State Historic Preservation Offices (SHPOs).
What It Takes
To certify a structure (the structure can not be a ship, bridge, railroad car or a dam) the owner of the building must complete Part 1 of the Historic Preservation Application. The owner submits the application to the SHPO who reviews it and sends it on to the NPS. It's the NPS that determines if the structure has any historical significance. If the NPS approves, the structure can be certified historical. Part 2 describes the what the rehabilitation will encompass. After the work is completed, the owner will submit Part 3, which is a request of Certification of Completion. There are of course, fees involved. Fees are assessed by the cost of what the rehabilitation is. The IRS requirements are: The building must be depreciable (that is, it must be used as a business or in a trade), the rehabilitation must be substantial, the rehabilitation process may be in phases, and the property must be placed in service as a certified historic structure. Also, the owner must hold the building for five years. If the owner decided not to keep the building within the first year, 100% of the credit is "recaptured".
More of What It Takes
If you are an owner or owner developer with intentions of rehabilitating a historic structure, you may chose an alternate or an added Tax Credit program, called New Market Tax Credits (NMTC). Congress passed the NMTC program in 2000. The NMTC program encourages investments for low income communities. The NMTC program allows users to write off 39% of qualifying costs over a seven year period. There are a number of entities that are involved in the NMTC process. Basically, a Tax Credit Investor and Commercial lender will pool into an investment fund. A Community Development Entity (CDE) will act as managers and receive a set fee. Now for the good news....Historic Tax Credits (HTC's) and New Market Tax Credits (NMTC) can be used together. This process is known as "twinning". The "twinning" process has brought about great success in reuse and redevelopment of old, abandoned structures. The $23 Million redeveloped abandoned Colt weapons factory in Hartford Connecticut, into a mixed-use, high density loft apartment complex over a ground floor retail/commercial venture and the long vacant, severely contaminated Albers Mill, a former cereal mill located in Tacoma, Washington, which was redeveloped into market rate lofts with ground floor retail, are just two examples of the "twinning" process of tax credits.
Last but Not Least
The most successful tax credit program in the country today is the Low Income Housing Tax Credit (LIHTC) program. As part of the Tax Reform Act of 1986, the program has provided the necessary financing for the development of 2.4 million affordable rental homes and directly or indirectly, has supported 95,000 jobs. In addition, it finances about 90% of all affordable housing annually. This is not all Federal Government. The success of the Housing Credit lies in the public-private partnership that forms a Qualified Allocation Plan (QAP) that addresses and prioritizes what affordable housing projects that will be built. The job of the private sector of the partnership manages site selection, underwriting and compliance with the program. In addition to these tasks, the private sector assumes all of the construction and lease-up risk. In 2008, the Housing and Economic Recovery Act was enacted and this created a 9% fixed floor rate for new construction and substantial rehabilitation. The 9% fixed rate was installed to remove financial uncertainty and risk associated with underwriting properties using a "floating rate" system.
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