By Renee Kuhlman and Shaw Sprague
Is your community considering policy changes to its state historic tax credit (HTC)? The National Trust for Historic Preservation has developed a best practices guide for preservation advocates and lawmakers interested in establishing or improving their state HTC incentives. State HTCs can increase building reuse, revitalize areas of disinvestment, and drive innovative approaches to addressing state policy priorities.
While the preservation community rightfully cheered federal policymakers for retaining the federal HTC in the 2017 tax bill, the bill did weaken the federal credit at a time when we are experiencing significant change in our cities and Main Street communities. As a result, financing historic rehabilitation projects is now more difficult, and the preservation movement stands to lose opportunities to revitalize older and historic buildings.
Recognizing that strong state HTCs are more necessary than ever and tapping into the knowledge gained from decades of supporting those credits, the National Trust has developed best practices for state and local policymakers. This report, “State Historic Tax Credits: Maximizing Preservation, Community Revitalization and Economic Impact,” outlines the benefits of historic rehabilitation and key factors to consider when structuring a state HTC incentive. By capturing and sharing innovative ways in which states use HTCs, the National Trust hopes to effect policy changes that will attract private investment and transform underperforming historic buildings into economically productive community assets.
State HTCs Across the Country
Although there is significant variety from state to state, all state HTCs are a dollar-for-dollar reduction in tax liability and include:
- Criteria that establishes which buildings qualify to receive HTCs;
- Preservation standards that ensure the preservation of a building’s historic character;
- A method for calculating the value of qualified rehabilitation expenditures;
- A minimum amount of investment required; and
- An approval process that starts with the state historic preservation office.
In 1984 New Mexico became the first state to offer tax credits that incentivize the rehabilitation of historic buildings. Today, 35 states offer credits, and most of those work in tandem with the federal HTC. These states pursued rehabilitation incentives because a properly designed state HTC:
- Makes historic rehabilitation financially feasible. Given the financial challenges and often higher costs associated with historic rehabilitation, banks lend fewer dollars to these projects compared to new construction. Incentives are required to fill the financing gap.
- Attracts private capital to areas that have not seen public investment in decades. Without rehabilitation, blighted buildings lower the tax base, invite crime, deter other investment, and cost communities money. Economic development in areas with existing infrastructure saves significant tax dollars and reduces the pressure to use our farmland and open spaces for new construction.
- Creates high-wage local jobs. Rehabilitation project costs are on average 60 percent labor and 40 percent materials, whereas new construction costs are about 40 percent labor and 60 percent materials. Historic rehabilitation materials are more likely to be purchased locally, and rehabilitation projects employ more local labor. As a result, approximately 75 percent of the economic benefits of these projects remains in the communities where the buildings are located.
- Consistently provides a strong return on state investment. Not long after the state certifies the completion of a building’s renovation, credits are issued. The state recoups its full investment in the form of new tax revenue generated by businesses that operate in the rehabilitated building—and continues to receive state tax revenues for years to come.
- Offers a flexible tool for community reinvestment. State HTCs have been adapted to provide economic help to areas suffering from disinvestment. Enacting a credit specifically to encourage rehabilitating vacant mill buildings in North and South Carolina, for example, has helped rebuild formerly textile-dependent communities.
- Leverages significant private investment. For every dollar they invest in HTCs, states tend to see between three and seven private dollars invested in their underused historic buildings.
- Benefits a broad range of communities. State HTCs benefit both our nation’s rural and urban areas because potential historic rehabilitation projects exist everywhere—from blighted former industrial areas or Main Streets. Redeveloping a historic building increases its property value, as well as the value of surrounding property, promoting economic activity in the area.
Optimizing State HTCs
The best-performing state HTCs—the ones that help rehabilitate the most buildings and attract the most private investment—generally follow the framework of the federal HTC and are:
- Easily transferrable, which is critical to creating value;
- Predictable, which makes project financing easier;
- Tailored to address state priorities; and
- Set at a percentage of qualifying expenses that ensures optimal performance.
The report highlights state HTCs in Maine, Ohio, and Texas. These case studies can help policymakers understand the credits’ impacts on local citizens and their communities. Steve Coon, owner of Coon Restoration & Sealants in Canton, Ohio, explains:
“It is not possible to do these restorations with just a loan. If the historic tax credits were not available in Ohio, we would not have been able to save and develop the three buildings in the Mercantile Block and the former Journal News building in downtown Hamilton.”
The report also includes a state-by-state chart summarizing the key features of 35 state HTCs, including the credit percentage, the minimum investment required by each state to apply for the credit, and how the credit may be transferred to another entity with tax liability.
The National Trust encourages establishing effective state HTCs to dramatically increase public-private partnerships for historic rehabilitation. With these incentives, states not only see more revenue from broadening their tax base but they also transform areas of disinvestment into revitalized neighborhoods that attract residents and tourists alike.
Renee Kuhlman is the director of policy outreach and Shaw Sprague is the senior director of government relations at the National Trust for Historic Preservation