Historic Tax Credits
Has anyone gone through the process of applying for the tax credits associated with renovating in a historic district? Question I have:
1) How difficult was it to renovate to the historic architectural standards?
2) Did you receive the entire tax credit you expected? (In VA, eligible properties can get 20% state credit and 25% federal credit)
3) How much longer did the renovation take compared to a similar non-historic renovation?
@Thomas Fortune, did you do this deal? I'm looking at something similar in another state.
I did not - particular property I was evaluating had more structural issues than I cared to deal with. Still looking at doing this at some point though, just haven't done it yet.
I have been recently looking into this and it seems like a no-brainer if you can find the right property. @Stanci March did you move forward on the property in the other state. If so, do you have anything you can report back on?
I'm in Kansas which is also 20% like VA. I haven't done one of these yet but have met with a few folks that have been involved at various level. I'm actually meeting with an architect next week who specializes in these. I think I am still a few years out, gathering more traditional properties and building equity in them that I can cash out before tackling one of these projects.
Some of the historical projects that I've seen developed in my area are amazing and I'm fairly certain they were very lucrative. It just seems like they need to be done on a fairly large scale to justify all of the headache.
I am looking into these credits too. I'm in the process of purchasing a 1900s building that was originally a hotel but converted into small apartments. My long-term goal is to convert it back to a hotel (airbnb) style property. Any advice or tips would be greatly appreciated!
I would like to bump this thread. Any developers out there feel like shedding some light on this?
I have completed 8 Preservation Tax Credit deals to date and have applications pending on a 9th and 10th deal. In Massachusetts there is a 20% credit for all QRE ( Qualified Rehab Expenses) and 20% available through a second application on the federal level with the National Park Service. Properties need to be in a historic district or have stand alone significant importance to be added to the National Register of Historic Places. The program has specific guidelines and rehab standards that must be followed and a consultant is typically required to prepare the applications and oversee the work. The credit can be brokered out for sale to investors to help offset the rehab costs of the projects.
Originally posted by @Bob Obear:
I have completed 8 Preservation Tax Credit deals to date and have applications pending on a 9th and 10th deal. In Massachusetts there is a 20% credit for all QRE ( Qualified Rehab Expenses) and 20% available through a second application on the federal level with the National Park Service. Properties need to be in a historic district or have stand alone significant importance to be added to the National Register of Historic Places. The program has specific guidelines and rehab standards that must be followed and a consultant is typically required to prepare the applications and oversee the work. The credit can be brokered out for sale to investors to help offset the rehab costs of the projects.
Reviving an old thread to ask a question. For Bob (or anyone else who has used the historic tax credit), could you include some example numbers to help us understand how much you actually save?
For example, let's say I buy a historic building for $2 million and spend $1 million in QREs. Let's also say that my state matches the federal 20% credit for a total tax credit of 40%. I'm having trouble understanding how much I'm actually saving. $400k (40% of $1 million)? Some other number? And when is that paid out and from whom?
I am a historic preservation tax credit consultant in Massachusetts, but have worked on projects throughout the country. There is a lot of variation in tax credit programs from state to state, but the federal program is the same across the board. One thing to keep in mind is that you need to meet the substantial rehabilitation test, meaning the cost of rehabilitation must exceed the pre-rehabilitation cost of the building (note: building only).
Tom - in your example you say buy for $2 million and spend $1 million in QREs. Unless the land is very expense, this may not work. Some state tax credit programs have lower basis tests.
Since tax reform, the Federal credit is given over a 5 year recapture period after the project is completed and receives an approved Part 3. It is a guaranteed 20% of the QREs. In MA for example, you apply for allocations 3 times a year and are allocated in increments. It's a very competitive programs and you may not get the full 20%. How much you actually save, again, depends on a lot of factors such as if you are keeping the credit yourself or selling the credits.
I've worked on projects big and small and it does take a village (architects, accountants, consultants). I've only worked on historic projects, so I don't know how it compares, but I would say needing to get approvals can definitely slow the process. There is too much to put in a forum, but let me know if you have questions!
@Emily Dominijanni that was very helpful, thanks. I am looking at a project in a historical district where the cost of the rehabilitation exceeds the cost of the building (and the underlying land). Are you able to obtain a Historical Tax Credit if the construction is already underway?
Great thread so far. Quick follow-up question for the experts out there....do lenders let you use the credits as equitable collateral against a loan when funding the purchase of a historic build that qualifies? i.e. buyer brings less cash to the table at close.
Great question @Michael Magnell I'd love to hear from someone who has the answer. One potential issue I see is that you would likely need to have the state and federal approvals in place prior to closing, and I believe that can take 3-9 months.
Reviving this thread... I decided to purse the Historical Tax Credit program. I just had Part 1 approved and am now working through Part 2 of 3.
@Michael Magnell
Some tax credit investors or syndicators will “buy” the tax credits at the beginning of the project before they are earned for less than if you sold them once they were earned. This depends on the project and the state. I work in preservation and development. Feel free to pm me for details.
We are in the process of renovating two 50,000 + square foot buildings using historic tax credits. One was already on the national register, the other we have contracted an expert to get it listed and secure those credits. In both deal's we were able to acquire the building at an incredibly low cost, and our bank agreed to use the Historical tax credits as our down payment for the multi-million dollar rehab loan on both buildings. When all is said and done we should have close to $9 million in equity between both buildings and have close to $1 million in combined cash flow on our less than $300k initial investment.
The number one thing that makes all this possible is our contractor. At the start of this project, we began working with a local contractor with plenty of experience in both securing Historical tax credits and rehabbing historic buildings. He has already done this process several times and has a great track record for these types of deals. Without him, we would have a much harder time with these deals.
I'm in the middle of this process now and am working to find an investment partner to syndicate with to transfer tax credits. I hadn't thought of working with the bank to use the credits as down payment. That's a good pitch to add to get the remaining funding needed for the project.
We also are receiving funding from our city for the rehab. Both of our projects have a lot of public support and so the city is willing to give us the funds to put on a new roof. Comes out to about $250k free money and the only stipulation is that we do the projects and only use the money for the roof.
So I would also check with your city planner to see how they could help you.
Fun question: You receive your Part 3 approval from the state and federal governments... Now what?! How do you actually implement the credits?
This seems like a great question for our experienced HTC investors and CPAs. @Michael Plaks and @Ashish Acharya
Are there any podcast episodes dealing with Historic Tax Credits?
@Jon Fletcher The IRS requires that the NPS certification of completed work (Application Part 3) be filed with the tax return claiming the tax credit. Generally, the tax credit is claimed on IRS form 3468 for the tax year in which the rehabilitated building is placed in service.
@Jon Fletcher Each state is different. For example, in Louisiana the Dept of Rev, which reviews each project’s qualified expenditures, has a specific form they issue to the applicant as final credit amount
Thanks @James Rolf. I have heard people mention that IRS Form 3468 gets filed on your PERSONAL return. But is there a form that needs to be filed with your LLC return?
@Michael Plaks @Ashish Acharya do you have clients for which you've filed the necessary forms for the Historic Tax Credits?
Quote from @Cian R.:
Reviving this thread... I decided to purse the Historical Tax Credit program. I just had Part 1 approved and am now working through Part 2 of 3.
@Cian R. if you don't mind me asking, did you use a consulting firm? If so, how much do they cost ish? I just got my first quote back and was quite suprised.
@Catherine Cleveland I priced the application process with 3-5 architecture or consultancy firms. I was a little shocked that the proposals came back ranging from $10k - $25k. I ended up doing a bunch of research online and did the whole thing myself. And we got approved!