Certified historic rehabs: Restore history and raise equity through the rehab of existing structures
FRIDAY, AUGUST 20, 2004
www.rejournal.com
REPRINTED from The New England Real Estate Journal
Since 1976, developers using historic rehabilitation tax credit programs have restored over 27,000 historic structures. Historic restorations utilizing Federal and State tax credit programs have created more $18,000,000 billion in total project costs and over 200,000 housing units. Restoring an existing structure differs significantly from developing raw land or a new construction project. The project characteristics associated with restoring existing structures paradoxically complicates and simplifies the development, design and construction process. Managing the projects financing, regulatory, design, and construction phases requires a development team experienced with historic restorations and the approval process. Substantive due diligence during the planning stage of the project is essential to keep the project on budget with completion delivered on time.
A certified historic structure must be listed individually in the National Register of Historic Places or be determined to contribute to a Registered Historic District. When a project contributes to the historic significance of a community, and is designated on the National Register, it then becomes eligible for federal and state rehabilitation tax credits. The Department of the interior and the IRS administer the 20% federal tax credit incentive, with the National Park Service acting on behalf of the Department of the Interior. On the state level, the 20% Massachusetts Historic Tax is allocated and administered by the Massachusetts Historical Commission in consultation with the Department of Revenue. The rehabilitation tax credit is available to the owner of the project. The ownership is generally structured as a Limited Partnership, or Limited Liability Corporation. The equity raised through the sale of rehabilitation tax credits is based upon the amount of qualified rehabilitation expenditures known as the eligible basis. Qualified rehabilitation expenditures include construction work performed on the project, architectural and engineering fees, legal expenses, development fees and other construction related costs. No rehabilitation tax credit is allowed for expansions to existing buildings, acquisition costs, site improvements, furnishings or personal property. Investors and owners typically pay between 80 – 90 cents for one dollar of tax credit. One dollar of tax credit reduces the amount of income tax owned by the ownership entity by one dollar. The full amount of the rehabilitation tax credit is claimed in the year in which the qualified rehabilitation expenditures are placed in service, commonly defined by the issuance of a certificate of occupancy. The project must be depreciable and held be the ownership entity for five full years after completing the rehabilitation. If the ownership disposes of the project within the five year holding period, the tax credit is subject to recapture based on a declining per year basis of 20% annually.
A “Certified Historic Rehabilitation” follows a three stage approval process administered on the Federal Level by the National Park Service acting on behalf of the Department of the Interior, and on the State Level, administered by the Massachusetts Historical Commission. Stage one is focused on the historic nature of the building and site; determination of the projects historic contributions; and listing on the National Register of Historic Places. Stage two involves presenting for review and approval the rehabilitation plans with documentation of existing conditions. Stage three relates to compliance with the approved rehabilitation plans. The rehabilitation plan requires an architectural design of project adhering to the Secretary of the Interiors Standards for Rehabilitation (36 CFR Part 67). These standards include ten basic design principles created to help preserve the historic character of a structure and its site, while allowing for reasonable physical changes to meet the needs of new end users. The standards apply to both the exterior and interior of historic buildings. In general, the standards involve the following design principles; minimal change to the defining characteristics of the structure; preserving the historic character; restoring distinctive features; no use of chemical or physical treatments; any new work shall be different from the existing features yet compatible in massing, size and scale; and if the new work shall be removed in the future, the historic integrity of the project would be unimpaired.
The existing conditions governing the physical condition of a historic structure requires substantive due diligence during the planning stage of the project. The buildings structure, envelope and subsurface need to be probed, analyzed and documented by the project development, design and construction team. Environmental problems associated with subsurface contamination, lead, asbestos, mold and radon will necessitate remediation. When the existing conditions and environmental problems of the project are quantified and understood, then design and construction documents can be prepared which contain the unforeseen and unforeseeable issues during construction. Compliance with the Secretary of the Interiors Standards for Rehabilitation and thorough due diligence of the projects existing conditions are the driving forces in maintaining the development budget and schedule.
Historic rehabilitation projects raise equity and restore history. Historic rehabilitation projects are often found in the highly sought after sites of established communities. Historic structures offer unique development opportunities for these structures are often located within a central business district, adjacent to a waterway, along transportation corridors or within a large land campus. In many cases, a historic structure has been vacant for many years, awaiting redevelopment supported by the local community. An experienced development, design and construction team can contain the cost and schedule risk by management of the development process and thorough due diligence of a projects existing conditions.
