What is the Rehabilitation Tax Credit Program?
Federal and State historic tax credits (HTC) are a significant financial advantage for historic building rehabilitation. Since 1976, HTCs have been a driving force behind the revitalization of historic landmarks, attracting over $130 billion in private investment to 49,000 projects. This powerful federal program offers developers a 20% tax credit on qualified rehabilitation expenses, repaid over 5 years. Incorporating a tax credit syndicator — an entity that acts as an intermediary to facilitate the transfer of tax credits from a project developer to investors — allows these future tax credits to be monetized before the rehabilitation starts.
While the federal HTC program focuses on federal taxes, it’s distinct from state HTC programs. Each state HTC program is different and HTCs are available on a state-by-state basis to offset state-specific tax obligations. A majority of states offer HTCs, and some do not.
What Buildings Qualify for HTCs?
Eligible buildings lie either within an established National Historic District or are individually listed and must be at least 50 years old and revenue-producing. Prior to pursuing tax credits, the building will be reviewed through a Part I – Evaluation of Significance to confirm eligibility. This is reviewed at the state and federal level. Approval demonstrates that a building qualifies for HTCs.
What expenses qualify for HTCs?
Generally all rehabilitation work that is fixed to the building qualifies for tax credits, comprising a majority of the construction budget. Major items such as framing, drywall, mechanical, electrical, and plumbing, along with casework and finishes qualify. Exterior cleaning and repair, window repair or replacement, roofing and sitework are all also included. Items that are not fixed to the building such as furniture, removable finishes, and some equipment do not qualify.
How are HTCs Granted?
Rehabilitation treatment is the keystone of the Rehabilitation Tax Credit Program and plans for the rehabilitation must be submitted for review and approval through a Part II – Description of Treatment Application. This ensures that the planned rehabilitation will conform to the Secretary of the Interior Standards for Historic Preservation, which prescribe required treatment. To gain approval for the work plan, a detailed submission will be reviewed by the National Park Service, which administers federal credits and the state historic preservation office of the respective state, which administers state credits.
With an approved Description of Treatment, a developer has the assurance and guidance required to start rehabilitation work. This benchmark approval allows Octagon Finance to pre-fund against the HTCs the project is anticipated to receive. As the project nears substantial completion, a detailed application will be submitted for review and approval through a Part III – Request for Certification of Completed Work. If all work is deemed to conform to the Description of Treatment, the project will be approved. At that point, the developer will account for all rehabilitation expenses, normally provided by a third party. This information forms the basis for the application to release the tax credits.
Octagon Finance is expertly suited to guide you through the HTC application process and welcomes the opportunity to discuss the possibilities of your historic property.
