Bringing a historic building back to life for future generations to enjoy is an exciting endeavor. Historic tax credits (HTCs) are designed to encourage private sector investment in the rehabilitation and re-use of historic buildings. More than 45,000 buildings have been preserved through the program since 1976.
When it comes to your HTC project, here’s how to set yourself up for success and maximize tax credit equity in the deal.
1. Assemble the right team
Assembling the right team upfront—including architects, preservationists, contractors, attorneys, accountants, etc.—is instrumental in the success of an HTC project. Your team will be working together throughout every stage of the project, helping you submit things like your National Park Service applications, complete state applications, identify qualified rehab expenditures (also known as QREs—further discussed below), appropriately structure the project, and more.
2. Develop relationships
As alluded to above, there are a lot of professionals involved throughout the project. Each one will need to communicate and trust one another. Contractors will need to work closely with preservationists and accountants, equity investors with developers and attorneys, and all parties will likely have a hand in responding to state or federal program administrator questions.
Meeting regularly can help everyone stay on track identifying your QREs and maximize tax credit equity in the deal.
3. Allow time for construction delays and review
When it comes to an HTC project, you never quite know what’s going to be behind those walls, so it’s important to build in time and budget for the unexpected. It’s also important to consider that the review process with the state can be somewhat unpredictable and can take longer than expected. Your architect and preservationist should have a pulse on how long the review is taking and any potential problems that may arise.
4. Discuss QREs vs. Non-QREs with your general contractor
QREs are costs directly related to the repair or improvement of structural and architectural features of a historic building.
Not all project costs qualify for HTCs. In general, only depreciable costs that are directly related to the improvement of the historic building will qualify. Some examples of depreciable hard (construction) costs include masonry, drywall, windows, roofing, and more.
The manner in which something is rehabilitated can have an impact on whether or not they are QREs. For example, a fire escape that is a replacement in kind of the original, may qualify. If it is expanded or new, it may not.
Soft costs during the construction period may qualify, including construction management costs, architectural/design fees, engineering fees, and more. Several states have fee limitations, so you may be limited to the amount of general requirements, overhead, and profit that may be charged to the project and considered QREs.
It is important to identify QRE opportunities with your general contractor. Ensuring your contractor is aware of what construction work does and does not qualify can enable them to separately track these costs. When it's time to claim the credits, you'll have more efficient and accurate reporting to maximize your credit amount.
5. Keep accurate and complete records
Complete project expenses must be tracked and recorded. In many cases, all invoices and proof of payment must be provided to the state agency during their review. Tracking project costs and organizing documentation during the duration of the project minimizes the chance of missing information and maximizes QREs. It also gives an opportunity for any questions regarding project costs to be resolved in real-time.
The first step to success in an HTC project is assembling the right team. MarksNelson can help guide you through this process and through the completion of your project. Our team has helped bring countless historic projects to life, including the Universal Life Building in Memphis, which went on to win a 2020 Richard H. Driehaus Foundation National Preservation Award. Set your project up for success by reaching out to us today.
