Using the Historic Tax Credit for Affordable Housing

• Transcript

The webcast above, presented by Elizabeth Rosin, Principal at Rosin Preservation was recorded on May 4, 2017. The following content was developed in association with the webcast and is accompanied by links and additional tools and resources.

 

Noble Lofts, Bartlesville, OK: This $2.5 million rehabilitation project transformed a long-vacant commercial building in downtown Bartlesville into eleven apartments plus ground floor retail space, adding considerable activity to Main Street outside of business hours. Photo: f-stop Photography

 

Albert Pike Apartments, Little Rock, AR: The 1929 Albert Pike Hotel was converted into Section 8 apartments in the 1980s. In 2012, the owner used HTC and LIHTC to update finishes and fixtures. The $6 million project maintained the historic lobby and dining rooms as event spaces available to the community for rental. Photo: f-stop Photography

 

Clay Hall, Enid, OK: Built shortly after World War II as a women’s dormitory for Phillips University, Clay Hall was vacant for 30 years before being rehabilitated as affordable senior housing that was much needed in this small central Oklahoma community. Photo: f-stop Photography

 

Iberville, New Orleans, LA 

 

Iberville, New Orleans, LA Exterior: Built in the 1940s as public housing, the Iberville Projects underwent a major redevelopment by the Housing Authority of New Orleans after receiving a HUD grant in 2011. As part of the project, the historic buildings in the complex were placed on the National Register and rehabilitated using HTC. The project adapted the seventy-year-old units for modern living while maintaining the historic character-defining features. Photo: HUD

 

 

Dierks Building, Kansas City, MO: This $30 million rehabilitation converted an early 20th century office building in Kansas City’s central business district into 134 affordable apartments. The project preserved historic elements dating to multiple periods of construction, including the historically significant 1959 renovation of the storefront, lobby and banking hall. Photo: f-stop Photography

 

Cass Plaza, Detroit, MI: This project rehabilitated two early 20th century apartment buildings in the Cass Corridor of Detroit to create 39 units of low and moderate income housing. Photo: Kidorf Consulting

 

Champlain Street, Burlington, VT: While some historic affordable housing projects transform large commercial or industrial buildings for residential use, many use the credits to upgrade existing workforce housing. The $900,000 rehab of this small Victorian apartment building is a great example. The project removed non-historic vinyl siding and windows, preserved distinctive historic elements, and updated interior systems and finishes. It will continue to provide affordable housing in a working class residential neighborhood.

 

 

Poehler Lofts, Lawrence, KS: The industrial east side of Lawrence had long languished when rehabilitation of the 1909 Poehler Warehouse began in 2011. The $8 million historic rehabilitation created 46 affordable apartments. Marketed to artists as live-work space, the development was the catalyst for subsequent revitalization efforts that included rehabilitation of historic buildings and new construction. Photo: f-stop Photography

 

Baxter Springs Apartments, Baxter Springs, KS: When small towns build new schools, the vacated historic buildings are often threatened with demolition. Fortunately, historic classrooms are the ideal size for apartments. The historic Baxter Springs High School is typical of the many schools built nationwide before World War II. In the process of converting the 1918 building into 28 affordable senior apartments, the $5.5 million rehabilitation uncovered historic plaster walls throughout the building and replicated a long-missing monumental cornice. Photo: f-stop Photography

 

 

While large, high-dollar rehab projects attract a lot of attention, buildings of all sizes can take advantage of the HTC.

• Roughly 50% of all HTC projects cost less than $1 million
• Roughly 25% of all HTC projects cost less than $250,000

Since the HTC program was established in 1976, the program has impacted communities throughout the country. The statistics for the program are impressive:

• 42,293 projects completed 1977-2016
• Projects in all 50 states
• $84.15 billion of private investment
• Over $7 billion investment in 2016 alone
• 2.44 million jobs created
• 153,255 low and moderate income housing units created/rehabilitated

 

 

This map prepared by the National Trust for Historic Preservation shows the distribution of HTC projects nationwide between 2002 and 2016. You can see that projects have been completed in all 50 states.

 

Historic Tax Credits (HTC) are available through a non-competitive, open application process. If you meet the program requirements, you can claim the credit. The project must involve an “income producing” “certified historic structure”. The scope of work must meet the requirements of a “certified historic rehabilitation” and must make a “substantial investment” in the property, specifically in items that are considered Qualified Rehabilitation Expenditures (QRE). There is no cap on the amount of credits an individual project can claim nor on the amount of credits available for the program in any given fiscal year.

Definitions:

1. Income-producing Properties include all buildings that generate income for their owners. Office buildings, retail stores, hotels, restaurants and rental apartments are the most common uses. Buildings owned by a for-profit owner but leased to a non-profit institution may also qualify, but check with your tax advisor. Owner-occupied dwellings are not eligible for the HTC, and buildings must remain income-producing for 5 years after rehab is complete.
2. Certified Historic Structures are buildings listed in the National Register of Historic Places either individually or as contributing resources to a historic district. Buildings determined to be non-contributing to a historic district (because of age or alterations) are not able to use the HTC. While other types of resources (bridges, structures, objects, landscapes, etc.) can be listed in the National Register, they do not meet the Internal Revenue Service (IRS) definition of a “building” that is required to use the HTC. A building can apply for National Register designation while applying for the HTC.
3. A certified historic rehabilitation meets the Secretary of the Interior’s Standards for Rehabilitation (Secretary’s Standards). The State Historic Preservation Office (SHPO) and the National Park Service (NPS) review photographs of the building, architectural plans, and a written scope of work to ensure that the project preserves the character-defining features of the historic building, site, and environment.
4. QRE include depreciable construction costs as well as allocated soft costs. All permanent changes to the exterior and the interior of the building are QRE. A simple way to visualize QRE is to imagine turning the building upside down. Anything that falls out is NOT QRE. A general list of non-QRE expenses includes:
   • Acquisition
   • Enlargement of the building footprint or mass (although additions may be allowed if they meet the design guidelines). This includes structures and equipment required for new circulation towers, if those elements are outside the historic building footprint
   • Site improvements, including hardscaping and landscaping
   • Personal property, such as furniture, appliances, and signage
   • Marketing and lease-up
5. Substantial Investment is defined by the IRS as QRE exceeding the greater of $5000 or the “adjusted basis” of the building. If the building is newly acquired the formula is:

Purchase Price
-Value of land
Adjusted Basis

If you previously made improvements to the building those need to be added to the equation, and any earned depreciation can be subtracted.

Purchase Price
- Value of land
+ Value of prior capital improvements
- Depreciation
Adjusted Basis

Commercial Building Lofts, Sedalia, MO (Before): Located just north of the courthouse square, the 1896-97 Commerce Building was rehabilitated to create 28 affordable apartments for families. The plan preserved a wide variety of historic fabric including pressed metal ceilings, cast iron columns, stair railings, mosaic floor tile, and glazed corridors. Photo: f-stop Photography

 

Commercial Building Lofts, Sedalia, MO (After). Photo: f-stop Photography

 

A simple way to visualize QRE is to imagine turning the building upside down. Anything that falls out is NOT QRE.

 

Projects that use the HTC must involve a building listed in the National Registrar of Historic Places. The National Register of Historic Places is the nation’s list of historic buildings, structures, sites and objects that merit preservation. The National Register was created by the National Historic Preservation Act of 1966, and it is administered by the National Park Service with input from the State Historic Preservation Offices (SHPOs).

Typically, resources must be at least 50 years old to qualify for National Register designation. There are exceptions for newer resources that can demonstrate exceptional significance. As mentioned above, only designated buildings are eligible for historic tax credits. To find out if a property is on the National Register contact your SHPO or visit the National Park Service (NPS) website.

In addition to its age, a National Register property must demonstrate that it has significance at the national, state or local level in at least one of four areas. These include association with historical events or patterns of history, association with important persons, and architectural or artistic distinction. The fourth criterion, the ability to yield information about history or prehistory, mainly applies to archaeological sites. A property that is on the National Register as part of a historic district can have less individual significance as long as it supports the significance of the larger whole.

Finally, the appearance of a property must be able to communicate its period of construction and its historic significance, a quality referred to as architectural integrity. Resources that have integrity appear much as they did when they were built or achieved historic significance. The National Register program defines seven types of integrity – location, setting, design, materials, workmanship, feeling, and association. Changes to a building that remove historic material or add new elements can weaken integrity in one or more areas. When alterations compromise integrity to the point that the building would not be recognizable to the people who knew it during its period of significance, it is no longer eligible for National Register listing.

One persistent myth about the National Register is that designation limits how a building can be changed or used and will impact future sale of the building. Listing in the National Register does not inherently impact how an owner uses a building or changes a building unless the owner chooses to use a federal incentive (such as historic tax credits or a federally-funded grant program) or if the property is subject to a federal permit or other action (such as licensing for a cell tower). Similarly, National Register listing offers a layer of protection to properties that may fall within the path of a federal undertaking, such as a highway construction project.

Some states and localities do require a review when changes are proposed to historic buildings to ensure that the changes are compatible with the property’s character. This review is often triggered by a building permit and usually focuses on the exterior facades. Check with your SHPO or local planning department to see if this type of review applies in your area.

Hollywood Bungalow Courts, Hollywood, CA: The $11 million rehab of the Hollywood Bungalow Courts secured the future of a quintessential Southern California property type while providing housing for special-needs and low-income residents. The project preserved unique historic features of the apartments, such as built-in ironing boards and pull-down kitchen tables, as well as the open space and landscaping that are as essential to the property’s historic character as the buildings themselves. Photo: National Park Service

 

Riverside Plaza, Minneapolis, MN: Although built in 1974, the Riverside Plaza housing complex in downtown Minneapolis was listed on the National Register in 2010. The nomination recognized the exceptional significance of the property as an example of a HUD program called “New Towns - In Town.” Based on European housing models, the varied massing of the Brutalist buildings aimed to create a diverse cityscape that integrated open space and other amenities. After an $85 million HTC rehab, Riverside Plaza continues to provide affordable housing to 4,400 residents, making it the largest affordable housing development in the Midwest. Photo: Sherman Associates

 

Bancroft School, Kansas City, MO (Before): The $14.3 million conversion of the long-vacant Bancroft School into affordable family housing took great care to preserve many of the building’s historic features. Glass-fronted cabinets, beadboard wainscot, chalkboard frames and other trim are among the elements that make the apartments distinctive. Finding creative uses for large-volume spaces (like the auditorium and gymnasium) can be critical to the success of a rehab project. At Bancroft the gym became the site of a mobile health clinic and the auditorium was preserved as community meeting space. Photo: f-stop Photography

 

Bancroft School, Kansas City, MO (After). Photo: f-stop Photography

 

 

Rochester Hotel, Kansas City, MO: The Rochester Hotel was built in 1919 with 24 very small studio apartments and shared bathrooms. It was rehabilitated in 2013, along with six single-family houses/duplexes across the street, to provide affordable senior housing for Jazz musicians in Kansas City’s historic 18^th & Vine neighborhood. Because the building footprint could not accommodate a modern stair and elevator without sacrificing apartment units, a new circulation tower was added to the exterior. It sits back from the façade and is clad in red brick to complement the historic building. Collaboration with the Missouri SHPO and NPS ensured that the design would meet the Secretary’s Standards. Photo: f-stop Photography

 

Murray Hill Sr. Apartments, Chanute, KS: Murray Hill Elementary School was built with a unique window system that allowed day light and fresh air into classrooms, but used glass block to help eliminate distractions to students from outside. This window system was a character-defining feature of the historic building and could not be altered when the project converted to senior housing. The developer worked closely with the Kansas SHPO and NPS to find a solution that met the needs of residents, addressed local building codes, and satisfied the Secretary’s Standards. Photo: f-stop Photography

 

Mt. Washington Sr. Apts, Independence, MO: When the 1903 Mt. Washington School was converted into 45 affordable senior apartments, the project team was tasked with identifying new uses for two key large-volume spaces – the original auditorium and the library, which had served not only the school but the public as a branch of the municipal library system. The library became an informal lounge for building residents, while the auditorium was preserved as meeting space for the community. In addition to HTC and LIHTC, the $10.6 million project also used Neighborhood Stabilization and HOME funds. Photo: f-stop Photography

For buildings that are not already on the NR, the Part 1 provides detailed information about the building’s physical appearance, architectural integrity, history, and significance. The Part 1 documentation should be equivalent to a draft NR so that the reviewers can determine if the building is NR eligible. While the Part 1 approval is a preliminary determination, it provides developers, investors and lenders with a level of comfort before the project moves forward.

After the Part 1 is approved, the owner can apply for official National Register designation. This is a separate process from the HTC review and takes 6-9 months to complete. Rehabilitation can begin before the building has NR status, but the building must be officially listed on the NR within 30 months after the rehabilitation is completed. Tax credits can be claimed while the nomination is in progress, at the owner’s risk.

The HTC can be coupled with other local, state and federal incentives. State historic tax credits are currently available in 34 states, and nearly half of all federal HTC projects are twinned with this incentive. Many state HTCs can be directly transferred (i.e. sold) to other businesses or individuals who want to offset their state tax obligation. If your project is in a state that also has a state HTC, check with your tax advisor to see if these are transferable and by what means.

The two most common federal incentives used with the HTC are the Low Income Housing Tax Credit (LIHTC) and New Markets Tax Credits (NMTC). Other federal, state and local Incentives that developers often use to finance rehabilitation include HOME Investments Partnership Program (HOME) and (Community Development Block Grant) CDBG funds, United States Department of Agriculture (USDA) rural loan programs, Brownfields grants, tax abatement, and tax increment financing (TIF). Investment in an HTC project can also count toward Community Reinvestment Act (CRA) requirements for banks. Be aware that a federal grant may affect the amount of HTC a project receives. If your project is using additional sources of federal funds, be sure to consult with your tax advisor to understand how these funds may affect your project.

HTC & LIHTC:
HTC projects have rehabilitated over 150,000 units of affordable housing since 1976. Some of these projects were originally developed as affordable housing, while others adaptively reuse buildings constructed for other purposes. The HTC and LIHTC program guidelines are generally compatible, although there are some notable differences in how the credits are calculated, which costs are QRE, and when the credits are awarded. The HTC will reduce the eligible basis for the LIHTC, although the LIHTC does not affect the amount of HTC a project earns. Combining the HTC with the LIHTC is very attractive to affordable housing developers because it attracts additional equity to a project.

Elm Terrace, Portland, ME: A rehabilitated building is inherently very “green,” and HTC projects frequently achieve Leadership in Environment Energy and Design (LEED) status or recognition by other programs that encourage environmental sustainability in construction and operations. The $10.6 million Rehabilitation of Elm Terrace by Community Housing of Maine was certified for meeting the Secretary’s Standards and LEED Platinum standards. The project adapted a former Children’s Hospital to provide 38 affordable apartments using federal and state HTC, LIHTC, and federal and city HOME funds. Photo: Sandy Agrafiotis Photography

 

Elm Terrace. Photo: Sandy Agrafiotis Photography

Cherokee Terrace, Enid, OK: Cherokee Terrace was built as a Public Works Administration project in 1937. The 80 apartments fill eight buildings on a landscaped 6.6-acre site. In 2016 the owners completed an $11 million rehab using HTC and LIHTC with a focus on updating building systems and refreshing finishes. The complex continues to provide affordable housing for families in Enid.

 

NSO Bell Building, Detroit, MI: Detroit’s Neighborhood Service Organization (NSO) adapted the 1927 Art Deco Michigan Bell and Western Electric Warehouse to create a social service center and 155 units of affordable housing for the chronically homeless, using both LIHTC and HTC. Photo: Kidorf Consulting

 

Seven Oaks Ribbon Cutting, Kansas City, MO. Photo: Elizabeth Rosin