The Latest on the Government’s Participation in Historic Rehabilitation
Published by Forrest D. Milder and Patrick Robertson on Wednesday, September 6, 2023
Over its more-than-four-decade history, the federal historic tax credit (HTC) has been responsible for enormous redevelopment across the country. But it has also faced:
- a mix of adverse statutory and regulatory changes while other tax credit industries have seen favorable improvements, and
- the difficulty of complying with the rules and regulations of two significant federal agencies, as well as local regulation, which varies across the 50 states.
As the chair and the executive director of the Historic Tax Credit Coalition (HTCC), which consists of dozens of users of the federal HTC (including developers, investors, lawyers, accountants, consultants, syndicators and others), we get to see and hear a lot about the successes and the issues facing the HTC, as well as to collaborate with an amazing team of colleagues who work with legislators, representatives of the Internal Revenue Service (IRS) and the Technical Preservation Services (TPS) of the National Park Service (NPS) in an effort to enhance the user experience and make the credit easier to use. In this piece, we identify some potential problems that users of the HTC face and point out efforts made to make the HTC better.
Tax, Legislative Issues for HTC
On the technical tax front, in recent years, we have seen the stretching of the period over which the credit is claimed from one year to five and the toughening of the tax treatment of the amortization of the tax credit when the lease pass-through method is used (so-called 50(d) income). At the same time, the Inflation Reduction Act of 2022 significantly expanded the usability of renewable energy tax credits, both by awarding increases in the tax credit rate for certain kinds of projects and locations and by providing for the first time the ability to sell a federal investment tax credit without the need of a partnership or lease structure.
The HTC community has not been standing by as this has happened. Of course, our IRS committee has worked with IRS and Treasury over the the years on tax guidance, such as Revenue Procedure 2014-12.
In addition, the legislative committee of the HTCC has been hard at work, encouraging legislators to adopt the Historic Tax Credit Growth and Opportunity Act (HTC-GO Act). Most recently introduced in the 118th Congress (S. 639 and H.R. 1785) by lead sponsors, Sens. Ben Cardin, D-Maryland, and Bill Cassidy, R-Louisiana; and Reps. Darrin LaHood, R-Illinois, and Earl Blumenauer D-Oregon, the bill would make long overdue changes to the program to further encourage building reuse and redevelopment in small, midsize, and rural communities. The bill sponsors recognize the needs of the program and designed improvements to make the HTC more attractive. While there are myriad examples of projects in rural and suburban areas, there is significantly more inventory that has yet to be rehabilitated. Additionally, HTC projects in these areas have a significant catalytic effect and a great influence on the community. Here is a summary of the provisions in the HTC-GO Act:
- a 30% credit for smaller deals to make sure rural towns and non-urban areas have an equal opportunity to benefit from the credit, This small deal credit would be capped at qualified rehabilitation expenditures (QREs) of $2.5 million,
- increase the credit to 30% for all projects for the next five years and then step it back down to 20% over three years (House bill only),
- change the expenditure threshold to qualify for the credit to the greater of $5,000 or 50% of adjusted basis,
- eliminate the depreciable basis adjustment associated with the HTC,
- eliminate the tax-exempt disqualified lease rules for all non-government properties; the disqualified leases that would be eliminated under the bill include those with purchase options, leases of more than 20 years, prior use rules and leases in buildings that use tax-exempt financing.
We are also pursuing other ideas: the possibility of returning to a one-year credit, providing Community Reinvestment Act recognition for financial institutions that invest in HTC projects and making the HTC work efficiently with the low-income housing tax credit.
Working With NPS
On the NPS side, in addition to the challenges presented by the rehabilitation of modern buildings and changes in construction codes and permitting–as well as significantly increased costs to rehabilitate properties–historic projects have faced the perception of tougher and at times inconsistent application of state historic preservation organization (SHPO) and NPS hurdles to completing the so-called Part 1, Part 2 and Part 3 required to qualify for the HTC. These include longer and more comprehensive submissions, as well as the apparent call for a significantly increased number of amendments to many project submissions.
Here, the NPS committee of the HTCC has undertaken several efforts, which include regular meetings with TPS, at which TPS leadership has listened closely, leading to efforts to bring consistency and education to both private and government participants in the program. The HTCC is also close to completing a comprehensive study of the industry and its dealings with both the NPS and SHPOs for submission to the Advisory Council on Historic Preservation. This comes as part of the call for comments on the HTC made by Sara Bronin, its chair. In our summary to the ACHP, we observed:
- There must be a more consistent and predictable application of the Secretary’s Standards for Rehabilitation to historic projects, updated from time to time to address changing building stock as well as financial and development requirements.
- At the same time, SHPOs and the NPS should endeavor to bring flexibility to the incentive, especially to avoid delays and increased costs that can undermine the successful completion of a project.
- NPS should establish regular educational programs to assure knowledge and consistency across its own staff and the many SHPOs. As noted above, by the time this article has been published, we expect NPS will have completed such a program and we applaud that very significant step forward.
- NPS should ensure that its decisions and the results of appeals are available to users of the program and then followed in other reviews.
- NPS should establish guides and checklists that enable users to know that they have completed applications.
NPS and SHPOs should have accelerated timetables for reviewing user submissions.
NPS should facilitate the use of historic structures to provide housing. NPS should pay close attention to environmental and energy-reducing solutions in materials and construction.
Forrest Milder is the chair of the Historic Tax Credit Coalition, and a partner with Nixon Peabody, LLP, where his practice emphasizes tax equity transactions. He is a frequent contributor to the Journal.
Patrick Robertson is the Executive Director of the Historic Tax Credit Coalition, where he has also served as government relations consultant since 2009 and the principal of Confluence Government Relations.