Tax Credit Advisor, July 2009: The Historic Tax Credit Coalition, an advocacy group, has crafted a package of proposed legislative changes to the federal historic rehabilitation tax credit program it hopes Congress will pass later this year. The prospects for passage are currently unclear.

John Leith-Tetrault, president of the National Trust Community Investment Corporation (NTCIC), and Michael Hanson of C2 Group, the Coalition’s chief lobbyist, said substantial changes to the historic tax credit program are long overdue Ð the last were made in 1981 Ð and are needed for multiple reasons.

Leith-Tetrault said it’s difficult to make the historic credit work on small deals because of the transaction costs; the current minimum rehab expenditure threshold is too high; and that nonprofit developers and tenants shouldn’t be a barrier to use of the tax credit. In addition, he noted, “We think that the 10% tax credit is underutilized, and less effective than it could be because it doesn’t apply to housing.”

The Coalition, an umbrella group whose members are supporters of historic preservation, has lined up congressional champions for its proposals. Bills incorporating the Coalition’s proposals are expected to be introduced soon in the U.S. Senate and House of Representatives.

One of the organizations already supporting the package is the National Trust for Historic Preservation, according to Leith-Tetrault, of NTCIC, a National Trust arm that syndicates historic and new markets tax credits.

In a recent interview, Leith-Tetrault and Hanson discussed the proposed legislative changes.

Current law allows corporate and individual taxpayers to claim a federal tax credit against income tax liability for a portion of the qualified expenditures spent to rehabilitate historic or older buildings. A 20% historic credit is available for the rehabilitation of virtually all types of certified historic buildings (e.g., offices, hotels, apartments), other than owner-occupied homes. Buildings must be listed on the National Register of Historic Places or be located in, and contribute to, an historic district. Rehab work must satisfy the Interior Department Secretary’s rehabilitation standards and be approved by the National Park Service. Developers often “sell” the historic credit to syndicators or direct corporate investors to raise equity to help finance their project.

A 10% tax credit, much less used, is available against the costs of rehabilitating, for non-residential use, non-historic buildings originally placed in service before 1936.

The Coalition’s proposals would amend the 20% historic tax credit to:

  • Assist smaller projects. The credit rate would be increased to 30% for projects with qualified rehab expenditures of $5 million or less. A second change would permit, for these smaller projects, the creation of a certificate that could be freely transferable. This would permit the sale of certificates for equity to parties that don’t have an ownership interest in the rehabilitated property, as is now required.
  • Permit moderate rehabilitation projects. The minimum amount of rehab expenditures (over a 24-month period) needed to qualify for the historic credit would be reduced from the current threshold of $5,000 or 100% of the adjusted basis of the building, whichever is greater, to $5,000 or 50%.
  • Remove restrictions on projects with tax-exempt tenants. Three of the four current “disqualified use” rules would be repealed, to qualify a renovated building for historic credits even if more than 50% of the space is leased to nonprofit and/or governmental tenants. Only the sale-leaseback rule would remain.
  • Create a “green” add-on credit. Owners would receive extra tax credits for a portion of the costs of energy-saving “green” improvements made in conjunction with the historic rehab of a building.

Additional amendments would:

  • Amend the 10% credit to make it available for all buildings more than 50 years old, including buildings rehabbed for residential rental use.
  • Ensure that state historic tax credit proceeds aren’t subject to federal income tax.

Hanson explained that the proposal for a green “add-on” credit reflects the growing focus in Congress to promote and support green and sustainable steps to reduce energy use and combat global warming, and a desire to incentivize developers and owners to make historic buildings as energy-efficient as possible.

Identical bills incorporating the Coalition’s proposals are expected to be introduced soon in the House by Rep. Allyson Schwartz (D-PA), a member of the Ways and Means Committee, and in the Senate by Sen. Blanche Lincoln (D-AR), a member of the Finance Committee. Each bill will also have a Republican lead sponsor. Hanson said Reps. Russ Carnahan (D-MO) and Michael Turner (R-OH), chairs of the House Historic Preservation Caucus, are “supportive” of the Coalition’s current efforts.   

Sen. Lincoln was a lead sponsor of an historic credit amendments package (S. 584, H.R. 1043) introduced in the last Congress. A few of its provisions were folded into the Housing and Economic Recovery Act of 2008. (For background, see Tax Credit Advisor, September 2008, p. 23.)

Regulatory Priorities

The Coalition has also set out regulatory priorities it hopes to achieve.

Leith-Tetrault said one priority is to “start a dialogue” with the National Park Service to persuade it to interpret the Secretary’s Standards in a way that is “a little more compatible with the developer who wants to make green improvements.”

Another is to try to get the Internal Revenue Service to truly implement and abide by 2006 legislative reforms that supported the tax deductibility of charitable donations of conservation easements, including “facade” easements for historic buildings. In early 2008, an IRS official in a letter to two organizations confirmed that conservation easements, including facade easements, have value, and that the value of an individual easement depends on the particular facts and circumstances. Despite the letter, in examinations and audits IRS agents are still reportedly holding that the tax deductions that have been claimed by taxpayers for preservation easements should be reduced or denied, contending that the easements have little or no value. (For details on IRS letter and on easement reforms, see Tax Credit Advisor, April 2008, p. 21, March 2007, p. 21.)

Hanson said the third priority is to make sure the historic credit is exempted from any “codification”- explicit language inserted in the federal tax code- of the “economic substance doctrine.” This doctrine requires that a taxpayer’s primary motivation for a transaction be to produce income or make a profit. Leith-Tetrault said this exemption, if obtained, would enable historic rehab projects to avoid the complex, more costly deal structures that have often been used to satisfy this standard.