HTC Improvement Act Includes Several New Provisions

Published by Michael Novogradac on Thursday, October 29, 2015 - 12:00am

When the Historic Tax Credit Improvement Act was introduced Wednesday, many may have assumed it was a repeat of the Creating American Prosperity through Preservation (CAPP) Act that was introduced in the last and earlier Congresses.

It’s not.

While both pieces of legislation seek to expand and improve the historic tax credit (HTC), there are more differences than duplications of the CAPP Act in the new bill, which was introduced in the House of Representatives by cosponsors Rep. Mike Kelly, R-Pa.; Rep. Earl Blumenauer, R-Ore.; Rep. Tom Reed, R-N.Y.; Rep. Charles Boustany, R-La.; Rep. Richard Neal, D-Mass.; Rep. John B. Larson, D-Conn.; Rep. Pat Tiberi, R-Ohio; Rep. Ron Kind, D-Wis.; Rep. Mike Turner, R-Ohio; and Rep. Charles Rangel, D-N.Y. Sen. Susan Collins, R-Maine, and Sen. Ben Cardin, D-Md., plan to introduce a similar bill in the Senate next week.

The new legislation adds several provisions and eliminates others from the CAPP Act. First introduced in 2011, the CAPP Act stalled during the 112th Congress. The CAPP Act was again introduced in the Senate in 2013 and in the House of Representatives last year before being assigned to committees, where it again languished.

Of the seven significant provisions in the new Historic Tax Credit Improvement Act, just three remain from the CAPP Act–and one of those three was changed significantly.

A key section that remains is to provide a boost in the HTC from 20 to 30 percent of qualified expenditures for “small projects,” which supporters say will encourage more development in rural areas. However, there’s a key change from last year’s bill: the definition of “small project” was reduced from $7.5 million to $2.5 million in qualified rehabilitation expenses

The bill also retains a provision to eliminate federal taxation of state historic tax credits, as well as a change in the definition of “disqualified lease,” to limit it to those that are part of a sale leaseback arrangement involving a nonprofit that has used the property before it was certified as a historic rehabilitation.

The rest of the bill is new. Unlike the CAPP Act, the new legislation:

  • Allows HTCs to be transferred as a tax certificate for smaller transactions–those with qualified rehabilitation expenditures of $2.5 million and less.
  • Changes the definition of “substantial rehabilitation,” so the threshold to qualify for the credit drops from 100 percent of the adjusted basis to the greater of $5,000 or 50 percent of the adjusted basis.
  • Changes the amount of the depreciable basis adjustment from 100 percent of the amount of the HTC to 50 percent, putting it in line with renewable energy tax credits.
  • Eliminates the concept of “functionally related” buildings, which would allow owners to receive an unconditional Part 3 approval from the National Park Service (NPS) for any set of buildings or parts of buildings, regardless of what a future owner might do. This would eliminate the current difficulty resulting from the fact that individual projects within functionally related buildings are dependent for five years on the acceptability of any other rehabilitation work done in the complex–which delays the Part 3 certification until an entire combined project is complete and puts already claimed HTCs from the development at risk.

While those provisions were added to what was in the CAPP Act, two significant items were eliminated:

  • A provision to boost both the 10 and 20 percent credit by 2 percent if the rehabilitation increases the building’s energy efficiency by 30 percent or more.
  • A change in the definition of eligible buildings for the 10 percent credit from those built before 1936 to those that at least 50 years old.

The energy-efficiency proposal was dropped in light of the increased cost and as a way to encourage more Republicans to cosponsor the bill. While a 10 percent rehabilitation credit proposal would match what was intended when the HTC was amended in the Tax Reform Act of 1986, when the date was originally set and was equal to 50 years, it was dropped to focus attention on the more widely used 20 percent HTC, since the 10 percent credit is not widely used.

The legislation received a positive response from the National Trust for Historic Preservation, whose president, Stephanie K. Meeks, heralded its “common-sense enhancements to the federal historic tax credit,” in a press release. Meeks also said, “More rural towns, cities and main streets will be able to use the credit to breathe new life into libraries, theaters office buildings and more.” She called on the House to pass the legislation.

After detailed review, the Historic Tax Credit Improvement Act represents a new approach to updating the HTC. Most of the new provisions make more buildings eligible for the credit, which supporters hope will not only expand the impact, but make it more likely to be used in rural areas.

In addition, all of these provisions would help modernize the HTC and improve the nation’s already proven and essential financing tool for historic preservation. But even more importantly, the bill serves as a way for the HTC community to get their member of Congress publicly on record in support of the HTC. In light of former House Ways and Means Committee Chairman Dave Camp’s tax-reform bill, which proposed to repeal the HTC, such support is crucial as tax reform discussions will continue into 2017. Without significant Congressional support, the HTC will again be at risk in any tax-reform bill.