Historic Tax Credit: 40 Years of Historic Preservation and Community Revitalization

7 min read

Can the Past Be Prologue For the HTC  

For 40 years, the Historic Tax Credit (HTC) has allowed developers to preserve some of the most beautiful, iconic, historic buildings in the nation, while revitalizing small towns and cities from the Atlantic to the Pacific. But many experts in the historic preservation space say the HTC has weakened over the decades and needs strengthening so it can continue to strengthen communities. Tax Credit Advisor spoke with experts about the evolution of the credit and what might be ahead. They all share one overarching view, however: the HTC has changed the face of America and affordable housing.

“In general, if you visit any downtown area…in large cities, small cities and small towns, there is evidence of the HTC program having been used to drive revitalization and neighborhood improvement,” says Bill MacRostie, senior advisor, MacRostie Historic Preservation LLC.

Cindy Hamilton, president of the Heritage Consulting Group, says the HTC also links community members to their history.

“It informs the residents about the histories of the buildings in their neighborhoods and allows for continuity of the visual landscapes and architecture,” she says.

Schools, Churches, Factories Brought Back to Life: Communities Transformed
Schools and churches have been transformed into affordable, multifamily units, factories into retail shops or restaurants and breweries. Such is the power of the HTC to bring historical, sometimes dilapidated, buildings back to life. Often, these preservations transform the communities around them as well, and are a catalyst for urban revitalization.

“This (HTC) program has really been identified as an economic development driver,” says John Tess, founder of Heritage Investment Group. “The buildings act as a catalyst for other projects and have a great ripple effect.”

Part of that ripple effect often is an increase in affordable housing.

Tess explains that the HTC, twinned with other tax credits, such as the Low Income Housing Tax Credit (LIHTC) and other state tax credits, is often a major “piece of the puzzle” that brings deals together.

“You can’t look at it with blinders on. It is a player in affordable housing,” says Tess, adding that the credit has expanded public-private partnerships.

“We have a whole new generation of younger developers who are ready to do this…People who come to the table and now there are more creative ways to put public private partnerships together,” says Tess.

Historic preservation is about aesthetics too and about reusing what already exists to reduce the carbon footprint of developments.

“The HTC has been reusing and recycling buildings for decades,” says Mike Phillips, director of public policy for the National Trust Community Investment Corp. Preservation reduces the carbon footprint of the project.

“We don’t want people to forget about this,” Phillips adds. “This is a very significant aspect of the credit.”

Merrill Hoopengardner, president of the National Trust Community Investment Corp. (NTCIC), adds that the foundational goal of the credit is to help communities retain the assets.

“It is unlocking these buildings that have struggled to find a modern purpose or in some ways have been forgotten,” she adds.

Changes to the HTC Over 40 Years
The first iteration of the HTC launched under President Jimmy Carter as an accelerated depreciation provision in the tax code for historic preservation. In January 1981, just at the end of Carter’s term, the provision became a tax credit in the tax code. The launch of the credit led to development of historic preservation projects in many cities throughout the United States. But the credit was dramatically altered under the 1986 tax reform act, when it was changed to a two-tier system with a ten percent credit for nonresidential buildings placed in service before 1936 and a 20 percent credit for structures deemed historic by the National Park Service. Administered jointly by the Department of the Interior and the Department of the Treasury, the reform of the credit essentially removed individual investors from the marketplace, says MacRostie. The 2017 tax bill dramatically altered the structure of the credit again, restricting the claiming of the credit from the year a property is put into service to requiring it to be taken over a five-year period. Some experts say the changes in 2017 resulted in a reduction in the use of the credit because its value was reduced. It also shut out some small investors, favoring other big investors.

“The institutional investors want large projects that will at least generate $3 to $5 million of credit,” says Jerry Breed, of Miles and Stockbridge. “Small projects have a much more difficult time raising money.”

Breed says the HTC has some benefits over the LIHTC in that “there is no restriction on the rent you can charge in a historic building” but there are added difficulties too.

“Your rental square footage may be less, because of grand staircases, the lobby areas, the size and structure of the building and the layout. You have potentially a reduction in value because you aren’t maximizing the square footage you can actually rent in the building,” he says.

The changes in the structure of the credit itself and the difficulties inherent in preservation, may have led to a decrease in its use in recent years.

Hoopengardner, of the NTCIC, says she has seen a dramatic decrease in the value of the HTC over her career.

“In my career working with the HTC, and this has been about 18 years, I’ve seen the pricing of the credit change significantly,” says Hoopengardner. “Down 25 to 30 percent from ten years ago.”

And according to the National Park Service, usage of the HTC over the past three years is down 20 percent. Players in the field say it is a combination of factors that led to the decline, including the weakened credit itself and the impact of the pandemic.

Advocating for Changes
The Historic Tax Credit Coalition (HTCC) says historic tax preservation is in crisis in the United States. It is advocating for changes to the HTC to strengthen it. Some of the changes outlined in a press release include: a temporary credit increase to 30 percent; a permanent increase to 30 percent for projects with Qualified Rehabilitation Expenses under $2.5 million; elimination of the basis adjustment of the HTC; changes in the substantial rehabilitation test to 50 percent of an owner’s adjusted basis in the building from the current 100 percent; and elimination of most of the disqualified lease rules to buildings operated by nonprofits to be able to take advantage of the HTC.

“Hundreds of projects have simply not happened in the last three years because they are too challenging in the current environment,” the HTCC says in a press release.

Many of these proposed changes were contained in the Build Back Better (BBB) legislation but stripped out as the bill was downsized. Now the BBB itself is stalled.

“Not being in the BBB is making things worse, not better,” says Hoopengardner. “But we hope to catch a ride in another vehicle that may arrive this year. We’ve been working on the proposals incorporated in BBB for several years now…but Congress is a little hard to predict right now.”

Bill MacRostie agrees that the future of the HTC is murky.

“This industry is in a bit of flux right now with stressors that have been applied to it…” he says. “It’s a little bit of a kind of wait and see attitude.”

“Old is Sometimes Good”
Tess, of Heritage Investment Group, says one of the inherent values in historic preservation is that “old is sometimes good.”

“It brings people together. For example, when you rebuild a school people come together. It’s amazing with historic preservation how many times people on the site will say, ‘I used to come here to play baseball.’ People come back with photographs of the building. It enhances the cultural aspect of the community. People talk about their culture…It’s mom and apple pie.”

Breed also notes that there is an incalculable benefit to simply preserving history and beauty – keeping it alive.

“There is a value in preserving the fabric of communities,” Breed says. “ What makes Paris so beautiful? What makes Rome so beautiful? And what makes people want to go to Bruges? It’s because they have been able to preserve historic buildings and the beautiful architecture. This applies to the United States as well.”

Pamela Martineau is a freelance writer based in Portland, ME. She writes primarily about housing, local government, technology and education.