Historic Tax Credit and Preservation Easement Financing
Historic buildings can benefit from historic tax credits (“HTCs”) and historic preservation easements (“HPEs”):
With respect to HTCs:
- they are equal to 20% of the “qualified rehabilitation expenditures” (“QREs”) relating to historic, income-producing buildings that are either: (a) eligible to be listed on the National Register of Historic Places, or (b) a contributing building located in a historic district;
- owners must comply with the Secretary of Interior’s Standards for Historic Rehabilitation;
- if the owner of the building desires to sell its HTCs, HTC investors will typically pay between $0.85 and $0.96 per $1.00 HTC depending on the size of the transaction;
- there are IRS approved structures (one of which retains depreciation with the owner and the other of which allocates depreciation to the HTC investor);
- there is a 5-year HTC Compliance Period during which certain requirements must be satisfied;
- more than half of the states have their own historic tax credit programs that can be used with the federal HTC program;
- most state HTC programs mirror the federal HTC program, although often with different percentages (as high as 45% of QREs compared to 20% of QREs for federal HTC purposes) but generally have lower pricing;
- HTCs may be used with state HTCs, new markets tax credit financing, and other community and economic development programs (such as opportunity zone financing, and those provided by the USDA Programs and the CDFI Programs); and
- owner-occupied residential properties do not qualify for HTC financing;
The 10% HTCs were repealed by Public Law No: 115-97 (December 22, 2017).
During the 5-year HTC Compliance Period, the developer/owner is entitled to almost all of the revenue generated from the project. The HTC investor only requires a small amount of revenue in order to obtain a particular internal rate of return (which is mostly composed of the HTCs). At the end of the 5-year HTC Compliance Period, the HTC investor sells its interest to the developer/owner at a nominal amount.
A historic preservation easement:
permits a property owner to retain private ownership of property (provided it is a certified historic structure that is listed in the National Register of Historic Places or located in a registered historic district);- ensures that the historic character of the property will be preserved;
- is a voluntary legal agreement (typically in the form of a deed) that permanently protects the historic property;
- permits such property owner to impose restrictions on the development of, or changes to, the historic property, and then transfers such restrictions to a preservation or conservation organization (which has a mission which includes environmental protection, land conservation, open space preservation, or historic preservation);
- once recorded, becomes part of the property’s chain of title (therefore, binding not only the historic property owner but all future owners as well);
- permits the value of the easement to be a federal and/or state charitable deduction; and
- reduces such property owner’s estate taxes.
There are many complex rules that must be followed in order to qualify for and maintain a historic tax credit and historic preservation easement financing.
- ensures that the historic character of the property will be preserved;
- is a voluntary legal agreement (typically in the form of a deed) that permanently protects the historic property;
- permits such property owner to impose restrictions on the development of, or changes to, the historic property, and then transfers such restrictions to a preservation or conservation organization (which has a mission which includes environmental protection, land conservation, open space preservation, or historic preservation);
- once recorded, becomes part of the property’s chain of title (therefore, binding not only the historic property owner but all future owners as well);
- permits the value of the easement to be a federal and/or state charitable deduction; and
- reduces such property owner’s estate taxes.
There are many complex rules that must be followed in order to qualify for and maintain a historic tax credit and historic preservation easement financing.
Our legal and accounting backgrounds as well as significant experience in community and economic development enables us to strategically underwrite, structure and close these complex financings on behalf of our clients.
Generally, all of our fees are contingent upon the funding of the HTC or HPE financing, as applicable.
If you believe that you have a project that could qualify for either HTCs or HPEs, please complete our Initial Intake Form.
Upon engagement, depending on whether HTCs or HPEs apply, we will:
provide our Comprehensive HTC/HPE Intake Form;- if applicable, complete national registration nomination applications;
- as applicable, complete federal (Part 1, Part 2, Part 3 and Appeal, if necessary), and state HTC certification applications;
- work closely with the National Park Service and the applicable State Historic Preservation Office;
- underwrite the HTC and/or HPE financing;
- determine the amount of QREs;
- identify investors for the HTCs and/or HPEs;
- identify and secure other sources of financing (including traditional financing, state HTCs, new markets tax credit financing, low-income housing tax credit financing, and other types of community and economic development programs, such those provided by the USDA Programs and the CDFI Programs);
- negotiate term sheets;
- structure the overall financing;
- collect due diligence materials and create a drop box;
- manage the closing and funding; and
- provide ongoing asset management, compliance and reporting services.
