Student Corner: A Primer on Applying for Historic Tax Credits and the National Historic Register

Community and Economic Development – Blog by UNC School of Government

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Student Corner: A Primer on Applying for Historic Tax Credits and the National Historic Register

By CED Program Interns & Students

Published June 16, 2016

In development, it is often easier to start from scratch – buy a property, clear the land, and begin building the structure you want.  In fact, this is frequently the most cost effective way to develop a property: old structures can literally be ‘messy,’ with major deferred maintenance, old systems, and outdated uses commonly making it cost prohibitive to bring an old building back to life.

However, at the same time many of our State’s older buildings are beautiful, character-rich structures which should be worth saving.  North Carolina’s history of textiles and manufacturing alone has left the state with hundreds of beautiful buildings with fascinating histories, plus detailing and charm that would be nearly impossible to replicate.  At the same time, as much as a developer might wish to preserve a structure, financial realities must prevail, and some properties are simply not financially viable as they are.

Readers of the CED blog should be aware of the existence of Historic Tax Credits, and the value of their use in the redevelopment space (see previous posts here, here, and here).  However, to the owner of a historic structure, or someone hoping to invest in one, the process might seem far too complex and daunting to be worth their time.  This common misperception leads property owners to follow the path of least resistance, and allow their properties to fall into further disrepair. 

As an example, the Development Finance Initiative (DFI) is currently working with a small town in North Carolina whose downtown contains dozens of beautiful historic buildings – many of which are in severe disrepair, with broken and boarded windows, leaking roofs, and paint peeling off the walls.  However, behind the decay lies beauty, and the expansion of a local business into the town has created the opportunity to redevelop derelict second floor spaces into new apartments.   In assisting owners in this town begin the redevelopment process, DFI helped prepare a basic primer for the Historic Tax Credit application process – one which would be valuable to any owner or investor who might want to consider using HTCs for their own properties.

Overview

In order to apply for historic tax credits for the renovation of an existing structure, a building must be included on the National Historic Register (North Carolina’s register can be found here).  Properties can be listed on the Register in two possible ways – either they are individually named, or part of a Historic District.  For buildings in a Historic District, if a property was considered to be ‘Contributing’ at the time of the most recent survey, then nothing needs to be done in anticipation of the historic tax credit process.  To apply for credits, the owner must submit the first two parts of the Historic Tax Credit Application to the North Carolina State Historic Preservation Office.  As of this writing, copies of the application can be requested from either Tim Simmons (tim.simmons@ncdcr.gov), 919-807-6585, or David Christenbury (david.christenbury@ncdcr.gov), 919-807-6574, (owners should provide name, address, and name and location of their project).

In order to prepare this application, the owner often engages a consultant who is well versed in the application process (the state maintains a list of approved consultants, but owners are not required to use them, and could in theory prepare the application without the help of a consultant).  Generally, the cost is not more than a couple thousand dollars, but depends on the scope of the project itself.

When preparing the application, two parts are initially required:

Part 1: Statement of Significance

Again, if the property is already listed as Contributing, the application need only say “See Nomination,” and attach a copy of the most recent survey in the historic district.

If the building is not listed as Contributing, then the application must address the deficiency.  Often, buildings are excluded as a result of age (not yet 50 years at time of most recent survey), which makes the application as easy as a verification that sufficient time has passed.  In other cases, the structure has been renovated in a way to remove some or all of the historic elements (which is noted in the survey).  In those cases, as long as the proposed renovation will reinstate the historic elements, the property can be re-included as Contributing.

Furthermore, an application can be submitted pending historic approval.  However, income-producing structures must be listed in the National Register of Historic Places within 30 months from the date the federal and state tax credit is first taken.

Part 2 (Federal) and Part A (State): Description of Work

This section will detail the work that will be done on the building.  Overall, the goal of this document is to identify major features of the structure, their current condition, and what changes or improvements are being proposed.  This section can get into a great deal of detail, and keep in mind the goal of maintaining and/or improving all historic elements.

After submission, the project is typically approved within 30-45 days, with rolling approvals throughout the year.  Applications for income-producing structures are subject to a joint review by the N.C. State Historic Preservation Office and the National Park Service, with final authority resting with the National Park Service.

Following completion of work, the owner must submit the final part of the application:

Part 3 (Federal) and Part B (State): Documentation and Certification of Completed Work

Generally, this involves a discussion of work which was done, along with before and after photos which highlight historic elements.

If everything is done properly, owners can expect to receive a 20% federal tax credit for work that was done, and additional credits provided by the state depending on the cost of the project (15% up to $10 million of qualified expenditures, 10% from $10 million to $20 million, no credit above $20 million).  Furthermore, if the project is located in a Tier 2 county (such as Stanly), the State is currently providing an additional 5% tax credit.  In addition, mills in Tier 2 counties are eligible for a further 5% bonus as long as they have been more than 65% vacant for the past two years (more info on these guidelines can be found here).

The tax credits can be claimed by the property owner/developer or sold to tax credit investors (the proceeds of which can be used as equity towards the redevelopment).

Credits can be provided for all qualified rehabilitation expenditures, including interior up-fits which change the original floor plan.  Additions which change the footprint of the building itself, or changes which destroy any of the historical characteristics are not allowed.  Of note, expenditures on income-producing projects must exceed the “adjusted basis” of the structure within a 24-month period (or a 60-month period for phased projects).

Applying for the National Register

If a building is not presently listed on the National Register, the owner must pursue listing in order to qualify for tax credits.  Generally, buildings which are over 50 years in age and have preserved historic character are good candidates for inclusion.

Before being included in the official registry, the building must be submitted for inclusion on the Study List, which is used to identify properties and districts that are likely to be eligible for the National Register, giving the green light to sponsors and staff to proceed with a formal nomination with reasonable assurance that the property can be successfully nominated. Of over 2,700 nominations submitted from North Carolina since 1969, only seven have been rejected outright by the National Register as not eligible.  Nomination forms can be found here, and are submitted to the State Historic Preservation Office.

Nominations for the Study List are reviewed three times per year, with applications due in advance of the meetings.  A calendar for meetings and submission deadlines can be found here – in 2016 meetings will be held in February, June, and October, with Study List applications for the October meeting due on September 9^th.

It is also possible, if uncommon, to apply for the inclusion on the Study List and Historic Register at one time.  However, typically a Historic Register application is prepared and submitted after a property has been approved and placed on the Study List.

Brittany Kielhurn is a Community Revitalization Fellow with DFI and will be a graduate student in the MBA program at UNC Kenan-Flagler in fall 2016. 

This blog post is intended to provide an overview for property owners interested in redeveloping real estate assets and applying for State and Federal Historic Tax Credits. It is strongly advised that interested individuals speak to their tax advisors and the professionals in the organizations listed below about his/her ability to take advantage of these credits.

For Further Reference:

Practical Advice for Preparing National Register Nominations in North Carolina: http://www.hpo.ncdcr.gov/PRACTICAL_ADVICE_FINAL_PDF.pdf

NC Historic Preservation Tax Credits http://www.hpo.dcr.state.nc.us/credits.htm

Historic Preservation Certification Application Instructions: https://www.nps.gov/tps/tax-incentives/taxdocs/hpca-instructions.pdf

Secretary of Interior Standards and Guidelines: https://www.nps.gov/tps/standards/rehabilitation/rehab/stand.htm

State Mill Rehabilitation Tax Credits: http://www.hpo.dcr.state.nc.us/millcredits.htm

Historic Preservation Tax Incentives Presentation: http://www.sanfordnc.net/historic_preservation/Historic%20Preservation%20Tax%20Incentives_Adolphsen.pdf

How to Claim the Tax Credit: https://www.nps.gov/tps/tax-incentives/before-apply/irs.htm