Last month, Taya Dixon, Senior Consultant for Epsilon Associates, shared the intricacies of Historic Tax Credits with a group of Developers, Architects, and Subcontractor/Suppliers at Tocci’s offices:
01 Between State and Federal tax credits, 40%-45% of a historic project’s restoration costs can be recouped. Developers capitalize on these credits by selling them to investors and converting them into funding to conduct the restoration. These tax credits are often the difference between a hulking, vacant beauty rotting away or transforming into a vibrant and vital architectural entity that revitalizes an entire community.
02 Unfortunately, tax credits tend to be cumbersome. For example, the Commonwealth of Massachusetts will only allow three separate application rounds per year, with allocations usually ranging from $100K to $400K per submission. Most projects require approximately a two year turnaround from acquisition to design to construction. This effectively renders the typical maximum credit to only $2.4M. Developers are encouraged to apply as early in the planning stages as possible, often upon site control and 30% design, to “capture” as many rounds as possible.
03 Because many projects begin their tax credit application process early, there is a great deal of credits tied up with projects that are miles away from being utilized. In some cases, projects do not proceed and committed credits may never materialize and the approved tax credits DO NOT follow the project on to the next developer. Each year there is $50.0M in tax credits available for funding in Massachusetts; however, there are not enough credits to meet the demand. Connecticut, on the other hand, doesn’t structure their credits in a multi-submission format. They allow 25%-30% for mixed use purpose (capped at $5.0M with $50M available in three year cycles) or 25% for residential purpose (capped at $2.7M with $15M available annually). In that state, credits are reserved following approval of the Part 2: Scope of Work.
04 Federal tax credits allow for an additional 20% credit of rehabilitation and renovation costs. However, they are only approved if the building is on the National Register of Historic Places (historic event, architecture, purpose, or associated with historic person) and follow Secretary of the Interior’s Standards for Rehabilitation. Generally, state tax credit programs follow the same Standards, however, a benefit to the Massachusetts program is the building need only be determined eligible for listing on the National Register and one only needs to spend 25% of the adjusted basis of the building to be eligible. For smaller projects or projects in areas where the value of properties is high, utilizing the MA credit is a viable option.
The imaginative methods that are adopted by Preservation Consultants and Developers to meet and maximize tax credits can create funding opportunities and can be the difference between a project stagnating or moving forward. Which leaves us with one last question – What are you doing to capture historic tax credits?