Finding Purpose
By Nushin Huq
9 min read
The Federal Historic Preservation Tax Incentives Program Breathes New Life into Buildings
Imagine living in an old school, mill or a historic hotel. For many people, that’s a reality due to conversion projects made possible through financing under the Federal Historic Preservation Tax Incentives Program, a program gaining popularity in the Low Income Housing Tax Credit industry.
The Federal Historic Preservation Tax Incentives Program, commonly referred to as the Historic Tax Credit (HTC), has allowed developers to not only preserve historic buildings across the country but breathe new life into buildings and give them purpose. Instead of being demolished or becoming a source of blight, historic buildings have been transformed into commercial and residential buildings. Over the last decade, an increasing percentage of those projects are conversions into affordable housing.
Since its 1976 inception, the federal program has leveraged $199 billion in private investment to rehabilitate over 47,400 historic properties, producing more than three million jobs, $428 billion in output and $214 billion in gross domestic product, the National Park Service, which oversees the program, said in a recent press release.
Twinning Credits
In fiscal year 2021, $8 billion of private investments in historic rehabilitation projects certified by the Federal HTC program contributed more than $15 billion of output in goods and services to the U.S. economy, generated approximately 135,000 jobs and added $7.7 billion in GDP.
Of those projects, more than 40 percent were in low- and moderate-income areas, according to a report by Rutgers University’s Center for Urban Policy Research. More than three-quarters of all projects were in economically distressed areas.
The number of projects that use both LIHTC and the HTC, often referred to as twinning the credits, has been steadily increasing over the last ten years when the U.S. Department of Housing and Urban Development implemented its Rental Assistance Demonstration program, or RAD, according to HTC experts.
“I would say a significant percentage of our projects twin historic and LIHTC,” says Cindy Hamilton, president of Heritage Consulting Group.
Since the enactment of HUD’s RAD program, Heritage Consulting has seen a steady uptick in affordable housing projects. Because of RAD, the percentage of projects that twin LIHTC and HTC is getting close to 50 percent, Hamilton says.
“Most of our RAD historic conversions are using LIHTC, though some are not, it’s not required,” Hamilton says. “Some housing authorities opt to use the HTC only to streamline the process.
The 40-year-old firm specializes in HTC consulting. The firm has hundreds of projects nationwide, at various stages, from early design all the way through to finishing up construction.
Schools Are the New Go-To
During COVID, Hamilton saw more former hotels being converted to affordable housing, but the go-to building of choice for conversions involved old schools. While today’s teenagers might not relish the idea of living at school, it turns out that seniors love the idea of living in old school buildings, Hamilton says.
The firm recently worked on The Brigadier General Hazel Johnson Brown Veterans Center, which adapted a vacant school in North Philadelphia into 55 apartments for low-income seniors with a set aside for homeless veterans.
The former General John F. Reynolds School was designed by noted school architect Irwin T. Catharine and constructed in 1926 in the Art Deco style of architecture, Hamilton says. The building was designed with wide corridors and classrooms on either side lit by large banks of windows. In the rehabilitation, corridors were retained, and classrooms were converted to modern apartments.
Schools are good conversion options because they already have communal areas, like gyms and cafeterias, Hamilton says. In this conversion, the building also includes a community room and on-site health and support services. This public-private partnership, led by developer HELP USA, was financed using the nine percent LIHTC along with Federal HTC, among other sources, Hamilton says.
Hamilton anticipates that LIHTC will be Heritage’s “most active sector in the coming year, as the need for affordable housing, unfortunately, continues to increase across the country,” Hamilton says.
Albert Rex, principal at MacRostie Historic Advisors/Ryan LLC, a Washington DC-based historic tax credit advisor, also points to the RAD program as one of the reasons their firm is seeing more LIHTC projects.
MacRostie has worked on a lot of large manufacturing or mill projects, especially in the northeast, converting those buildings into affordable housing, as well as other kinds of conversions to affordable housing. Their portfolio has mostly residential projects but also has a mix of hospitality and office, Rex says.
“Right now, we’re probably actively working on somewhere close to 400 projects in the U.S., and probably 68 to 70 percent are multifamily of which 70 percent is LIHTC,” Rex says. “We do a lot of market-rate too, but certainly the LIHTC multifamily markets are a strong one for us. Part of that also has grown out of the RAD program.”
Securing Historic Tax Credits
Also contributing to the popularity of the twinning of LIHTC and Federal HTC is its use by larger housing authorities, like New York City. The city has brought in third-party developers to rehabilitate some of its old buildings using the HTC.
LIHTC developers basically come to HTC the same way normal developers do, they need money from somewhere, says Rex, “They figured out that these historic credits are a real opportunity, and that they matched well with a lot of potential LIHTC projects,” Rex says.
LIHTC developers are used to working with multiple sources of funding and all the paperwork, so the HTC may not seem as daunting to them as they do for some market-rate developers.
For a project to qualify for HTC opportunities, it must meet all required criteria. It must be a historic building; the proposed work must meet the National Park Service (NPS) standards; and the numbers must work for the project.
“It can be really challenging to find opportunities where all the boxes can be checked,” Hamilton says.
The HTC is a 20 percent dollar-for-dollar tax credit related to all hard and soft costs directly attributed to the rehabilitation of the building. Typically, 90 to 95 percent of costs count towards the credit, Rex says. Just like the LIHTC market, most developer clients don’t use the credit. Instead, the clients go into a third-party market to look to syndicate it and find an investor to make an investment in the project.
The Challenges of Twinning
While many LIHTC developers who initially didn’t consider the HTC are now taking another look, especially as the cost of construction has gone up, twinning the two credits isn’t without challenges.
One “rub” with using LIHTC and HTCs on a project is that the LIHTC program requires a basis adjustment if you use the historic credit, Rex says.
For example, a project with qualified rehabilitation expenditures of $10 million would generate $2 million in HTC. If the LIHTC basis originally was $11 million for the project, the developer would have to lower the LIHTC basis from $11 million to $9 million, offsetting the basis by the amount of historic credits. It’s the only tax credit program that makes that adjustment and something that the industry has been working on for years to change, Rex says.
From the regulatory review perspective, the biggest challenge is meeting the requirements of the state housing agencies while also meeting the requirements of the NPS, especially in the area of energy efficiency.
State housing agencies have certain guidelines for energy efficiency, which can be difficult to meet under NPS guidelines. For example, states push for solar panels, which is possible on HTC projects if the building has a flat roof where the panels won’t be visible. However, if the panels are visible, the NPS is not likely to approve it, says Hamilton.
Another area of conflict is often with windows. The National Park Service’s preference is to retain the historic windows.
“Only where windows survive in advanced conditions of deterioration will the National Park Service permit replacements,” Hamilton says.
Where NPS has made concessions, to some extent, is building interiors, where they now frequently permit the insulation of perimeter walls, which is generally required by the state housing agencies, Hamilton says.
The industry and regulators are making some strides, Hamilton says. Window manufacturers have come a long way in the number of options for historic replica windows and NPS is aware that developers need to meet energy efficiency requirements. With the passage of the Inflation Reduction Act, NPS knows there will be a greater push for energy efficiency in buildings.
New Opportunities
“The National Park Service is open to new products and new ideas, and they look forward to seeing new opportunities to incorporate energy efficiencies in historic buildings,” adds Hamilton.
MacRostie recently completed a passive house LIHTC historic deal, Rex says. It was a conversion of a former school building.
“That was a real challenge, Rex says. “We were able to achieve it, but it took a lot of work.”
On the exterior, it was a nice building architecturally, Rex says. On the interior, it didn’t have much left relative to the historic fabric, so developers were probably able to do some things in that building that might not have been possible in other projects.
Despite challenges, the twining of the LIHTC and HTC continue to be important since the changes in the market, especially since the COVID pandemic.
“From our business perspective, we’ve been pretty successful at riding downturns,” Rex says. “The 2008 downturn, and kind of the 2017 downturn, because we had a lot of affordable housing clients. The public dollars just don’t go away as much as the private dollars.”
For LIHTC developers interested in looking at HTCs, Hamilton advises to definitely have an experienced team. The HTC consultant should have a successful track record with projects that have used LIHTC.
“An experienced consultant will anticipate potential issues and know to ask about the timeline and the project schedule so that HTC approvals don’t hold up a closing,” Hamilton says.
New opportunities for HTC projects are continuously opening up as new buildings qualify for the credit due to the passage of time. Buildings must be at least 50 years old to be eligible for the HTC, so those constructed in the early 70s—a time when several large cities saw building booms—now qualify.
“With the age of our housing stock and the housing stock crisis we’re having, both existing affordable units in private hands, as well as public housing, there’s just so many opportunities to utilize HTCs,” Rex says. “The National Park Service really needs to help focus on how it can be supportive of these LIHTC projects and making sure that they can access these additional dollars to be able to preserve not just a building, but helping folks.”
