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Communities and Investors Benefit from Historic Tax Credit Programs

By MarksNelson on September 8, 2016 in Articles, Kari Wolff CPA, Real Estate
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The real estate industry is experiencing a nationwide movement. In small towns, big cities and those in between, everything old is new again. Many owners and developers are scrapping plans to build from the ground up and instead reusing existing spaces, especially in urban areas.

“What began as a way to trim labor and construction costs is now a movement, said Mike Marsh, a partner at MarksNelson with more than three decades experience in the real estate industry. “As a result of embracing older buildings, the market offers a wider range of potential investments. Historic tax credit (HTC) programs at both the state and federal level are helping finance the transformations.”

Kansas City is right on trend. One current project in Jackson County Missouri is the Disney Laugh-O-Gram Studios near 31st and Troost Avenue. The groundwork began nearly 15 years ago to save the building used by Walt Disney from 1921 to 1923.

Transforming the Past into our Future

The federal historic tax credit program is administered by the National Park Service and Internal Revenue Service and provides credits for up to 20 percent of qualified rehabilitation expenditures, which can offset tax liabilities. HTCs cover construction related costs, including plumbing, electrical, labor, building materials as well as architectural and engineering fees and accounting expenses.

Kansas and Missouri both offer similar programs for credits of 25 percent for qualified rehabilitation costs. The tax credit can be carried back three years or forward 10 years.

“With nearly identical programs, the federal and state piggy-back off each other,” said Marsh.

Both require regulatory approval and oversight to make sure the rehabilitation follows historic preservation standards. Developers must adhere to specific guidelines on what types of changes can be made to the building both on the inside and exterior.

The Pay Out

HTCs are received once the project is complete and the building is placed into “active service”, meaning a certificate of occupancy is issued and in hand.

“This makes them a valuable short-term investment, unlike affordable housing credits which are spread out over 10 years,” said Marsh.

Developers can transfer the state historic tax credits to investors in exchange for equity. The equity simultaneously lowers the developer’s debt burden and helps secure lending to move the project forward.

Bundling Credits

It’s not a one size fits all approach when it comes to preservation and rehabilitation credits. Often developers will bundle incentives including low-incoming housing, new market, and energy tax credits depending on the scope of the work. Navigating all the nuances of historical tax credits is complicated and will require the help of a professional.

“These programs have a lot of traps. Professionals with an extensive background in HTCs can help you avoid the traps and maximize the benefits you receive from the credits,” Marsh said.

For more information contact your MarksNelson professional at 816-743-7700.

About the author

Kari Wolff has extensive experience providing both tax and audit services to the real estate industry. She specializes in historic and low-income housing tax credit properties. She also provides cost certification assistance for clients.


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