4 Ways Nonprofits Can Participate in Historic Preservation

Published by Frank Buss on Friday, January 8, 2021
Journal Cover Thumb January 2021

Question: What are ways a nonprofit entity can successfully engage in historic preservation?

Answer: Historic preservation, albeit an impactful and transformative endeavor, can be fraught with challenges, difficulties and economic puzzles. This task can be even more challenging for nonprofit entities looking to make an impact in the historic preservation space. Nonprofit resources, both financial and supportive are often lean to nonexistent. Raising funds in the nonprofit world is challenging. Nonprofits must have a clear vision to find donors and grantors that are willing to invest dollars in nonprofits that are strong, mission-oriented and have a track record of positive outcomes.

A nonprofit entity can facilitate rehabilitation projects and create cash flow to support continuing preservation activities in several ways. Nonprofit law and tax issues are extremely complex, take significant due diligence and sometimes the same amount of creativity. As a result, consultation with a nonprofit attorney and accountant is a must before wading into these waters.

Below, we will discuss several options for how a nonprofit may be able to provide resources and dive deeper into the role of preservation and historic rehabilitation. But first, let’s look at what a nonprofit is and how it becomes tax-exempt.

Nonprofit can mean different things to different people. Most think of nonprofits as Internal Revenue Code (IRC) Section 501(c)(3) entities or public charities. These entities must meet certain conditions to be exempt from paying federal income taxes. A public charity must also choose a mission. What will the nonprofit focus its energy on to make a vital change in society? A nonprofit looking to succeed in the historic preservation space must have a charitable mission which can include the “erection or maintenance of public buildings, monuments or works,”–see Treasury Regulation Section 1.501(c)(3)-1(d)(2)–and/or the purposes can be “educational.” Either choice will allow the nonprofit to focus on preserving historic structures. Once the Internal Revenue Service (IRS) determines that an entity is a nonprofit under IRC Section 501(c)(3), it is then able to receive tax-deductible contributions from donors.

Now that our 501(c)(3) is established with a proper mission, let’s explore the ways the nonprofit entity can start to impact the essential area of historic rehabilitation.

1. Grants

Certain nonprofits can give grants for historic rehabilitation and preservation. These grants can be to either other nonprofit organizations that have the same mission, or to for-profit entities that are looking to close financing gaps on historic projects. A word of caution here, though, as sometime grants can raise flags at the IRS. Grants cannot be to the benefit of a person or company involved with the nonprofit that is considered an insider or substantial contributor. This determination by the IRS could jeopardize the nonprofit’s status as tax-exempt. Additionally, if the IRS determines that insiders knowingly benefited and approved of or received excess benefits, the individuals involved may be assessed federal excise taxes that impose a personal liability. 

2. Loans

A nonprofit can also make subordinated, low-interest loans to historic preservation and rehabilitation projects. This funding could give the project the added capital to complete the rehabilitation while being a more patient source of capital. Additionally, the loans may generate a continuous income stream that can be recycled into other historic preservation projects. This type of lending could also be done by establishing a historic preservation loan fund. This strategy offers the nonprofit and donor potential advantages. The nonprofit is able to commit to certain projects and cover initial development costs and then generate revenue from donors or other sources to repay the funds already committed. Those funds then get recycled for new projects. A loan fund that focuses on certain types of historic preservation or in specific geographical areas may be particularly attractive to various donors.

3. Partnerships

A nonprofit could form partnerships with for-profit entities. This would most likely look like our historic tax credit (HTC) structures where a new LLC or LP is formed and a tax credit investor is found to invest in the federal and/or the state HTCs. A few items to note on the nonprofit side of this transaction is that the project must be within the scope of the nonprofit’s tax-exempt purpose. Additionally, these transactions, as noted before, are highly complex, involve large structing risk and could possibly subject the nonprofit to unrelated business income tax (UBIT) if not properly planned. Tax credit transactions can be favorable for nonprofits though, as the nonprofit often earns fees and benefits on the back end when the transaction unwinds. This type of transaction is where consultation with legal counsel and a Novogradac professional is crucial so that the deal is properly structured within the tax credit and nonprofit provisions alike.

4. Develop

Lastly, a nonprofit entity could preserve and own its own space. In this manner, the nonprofit controls the rehabilitation and then leases or occupies the historic space. This may be an advantage for the nonprofit, as it can control the rehabilitation and ensure the long-term historic nature of the property is maintained. One downside here is that ownership could require a substantial amount of capital to purchase and rehabilitate the property. The nonprofit would also take on deal and construction risk and would need to review UBIT rules accordingly. Leasing activities could be to other nonprofit entities, governmental entities or for-profit entities.


As one can see, there are several ways in which nonprofits can become involved in the historic preservation and rehabilitation space. Each path has its own advantages and disadvantages and may be highly complex with a tremendous level of professional experience needed. Nonprofits have a large role to play in the saving of historic buildings and addressing other social issues, such as affordable housing, community development and sustainable living along the way. Nonprofits are essential advocates for saving our blighted neighborhoods and the memories of the past. If using a nonprofit to expand your mission of historic rehabilitation is a possibility for your organization or if you are considering forming a nonprofit entity please contact a Novogradac professional to help navigate these challenging waters.