Historic Tax Credits: Industry Trends for an Increasingly Important Subsidy 

In recent years, owners and developers of low-income housing have turned to the Historic Tax Credit (HTC) program as another key source of funding for projects looking to preserve or create affordable apartments in historic buildings. Often used in conjunction with Low Income Housing Tax Credits, the HTC has become increasingly popular as America’s stock of low-income housing continues to age and become eligible for historic preservation.

The HTC program “is the most important program in the historic preservation toolbox,” says Cindy Hamilton, president of Heritage Consulting Group, a national firm that specializes in helping developers navigate the HTC process.

Today’s HTC program stems from the 1966 National Historic Preservation Act, which created the National Register of Historic Places and helped begin the process of federally supported identification and preservation of historically significant structures across the country. Though the program has changed over time to align with given federal priorities, since 1986, developers have been able to utilize a 20 percent tax credit for qualified rehabilitation expenses.

The National Parks Service (NPS) administers the program alongside the IRS, and like the LIHTC program, the HTC program is managed locally by state agencies; in HTC’s case, these are State Historic Preservation Offices.

To qualify for the credit, developments must satisfy a few key steps. First, the structure must qualify as historically significant and be listed on the National Register of Historic Places, a list administered by NPS. Additionally, a structure can qualify if it is a contributing building in a Historic District and may not need to be individually listed on the National Register. Second, the proposed rehabilitation must be “substantial,” and defined as qualified rehabilitation expenditures exceeding the adjusted basis of the building. The rehabilitation is also required to result in an income-producing building (i.e., apartments, not condos or other for-sale real estate). Finally, the rehabilitation must go through a thorough design review to ensure that the structure will still maintain significant historical character after rehabilitation is complete.

On the first step alone, many owners may miss out on even applying for National Register listing (and thus HTC eligibility) through a misunderstanding of what qualifies a building as historic, says Albert Rex, an HTC specialist who serves as principal at Ryan. “I think a lot of people think of the National Register as a beauty contest,” says Rex. “But it’s not.”

Indeed, to be eligible for National Register listing, a building must meet at least one of four criteria denoting significance. And, generally, the building must be at least 50 years old, though buildings not yet 50 years old may qualify if they are exceptionally significant.

Rex says that his work with the affordable housing industry finds him mainly focusing on three of the NPS’s criteria for historical importance: criterion A, in which a building has a significant place in a broad pattern of history; criterion B, which looks towards a building’s association with an important individual; and criterion C, for buildings with important architectural features. The fourth, criterion D, applies to sites with important archeological features, and rarely is used in the context of HTCs.

Meeting these criteria can be contrary to what many people expect. Rex points to sprawling, massive mid-century urban towers built by the New York City Housing Authority, the historic significance of which is not always immediately apparent. One would think, “Well, why would they be historic,” says Rex. “It’s really about the nature of the fact that they had received financing through the Department of Housing and Urban Development (HUD) to create affordable housing, which is a component, essentially, of a broad pattern of history.”

Ultimately, Rex says, a successful HTC process exists “at the intersection between scholarship and real estate.” Developers must not only understand which structures will be most suitable to serve a low-income community, but also which have a compelling history that qualifies them for historic preservation. Generally, this means that schools, mill buildings and other industrial complexes have an easier time being listed and used for affordable housing since they are all easily convertible into high-quality apartments and generally have compelling historic attributes.

Rex says that for best success, developers wanting to use HTCs should bring on outside expertise as early as possible. This is critical for the design components of the project since it can be painful when a developer does the substantial work needed to acquire local building permits only to have NPS say that certain tweaks are necessary for HTC funding.

Additionally, a dedicated historic consultant can help navigate the constant minutiae guidance released by NPS regarding various design elements, like acoustic paneling, popcorn ceilings, luxury vinyl tiling, etc. “The earlier you can get your historic consultant in and engaged, the smoother the process will be, and the more effective the program will be to help fund your project,” says Rex.

New Frontiers in Historic Tax Credits
For many developers, mid-century office buildings have become prime targets for HTC usage, as cities continue to grapple with empty downtowns post-COVID. “A lot of these office buildings are vacant, and they need to be repositioned,” says Hamilton. “And they need the subsidy” to be able to reposition from office to residential.

Although these structures can be ideal candidates for conversion to affordable housing, they present unique challenges that developers must be aware of when targeting them for HTC-assisted projects.

Initially, these buildings can be challenging to get listed on the National Register. Though some buildings are easier to list because a famous architect built them or once served as corporate headquarters, Hamilton says that “a lot of urban core buildings were spec office buildings,” which are more generic multi-tenant buildings that don’t have as readily compelling of a history and were likely updated over the years to attract tenants.

In cases where a spec office building does not rise to the level of individual listing, the creation of a downtown historic district may be an alternative approach, says Hamilton. This strategy can occasionally be high-risk, as one building owner investing time and money into creating a district can be stymied if more than half the owners in the district object to the designation. The most successful strategy that Hamilton has seen for these difficult designations is “stakeholder engagement.” This means working with all the building owners in the district and getting their consensus. “You’ve got to know early on if you’re going to have any obstacles to listing.”

One critical piece is to educate other owners that National Register designation is not necessarily as restrictive as local historic designations and allows building owners in federal downtown historic districts relative flexibility in future rehab work. “Designation provides incentive, but National Register designation does not have a review requirement for privately funded projects,” Hamilton says. “It’s not like a local designation, where if you want to change your windows, you have to get your windows approved. National Register designation is honorific. It doesn’t bring with it any review requirements, so long as your project is privately funded.”

Once listed, there are additional challenges when it comes to the design review process for HTC-assisted conversions from large office buildings to low-income housing, particularly those built in the mid-20^th century. “Buildings in the modern era were designed for change,” Hamilton says. This is unlike buildings of an earlier era, which used materials prized for their permanence and durability, like “marble, terrazzo, ornamental plaster – those materials can, and do, last for centuries.” On the other hand, modern buildings’ “partitions were designed to be removed and relocated to suit the needs of the tenant, finishes like carpeting and suspended ceilings that were designed to last a decade or two.”

This means that the design stage of proposed office conversions can be tricky. “The problem is, how do you decide what is historic on those interiors?” Hamilton says this is a process of working closely with a SHPO and the NPS to determine which design elements are “character-defining features,” and which can be modernized and updated during a rehab. Already, the NPS has published new guidance that allows for some flexibility in the retention of acoustic ceilings, and Hamilton expects further NPS guidance on elements like flooring within the next few months.

In addition to office buildings, developers have turned to large towers originally built to house substantial low-income populations as another frontier in HTC usage. Although Rex points out that “most folks don’t even think of them as historic,” these buildings are often eligible under criterion A and their place in a broad pattern of history, such as those funded using HUD’s Section 202 program or built directly by local housing agencies as a form of public housing.

The fact that these buildings provide a living testament to “the story of the government taking responsibility for providing quality housing for the people of this country,” Hamilton says, often provides enough solid ground for them to earn a National Register listing.

These types of buildings typically pair their HTC funding with a Rental Assistance Demonstration (RAD) conversion, a process whereby a Public Housing Agency (PHA) can convert any number of public housing units from their current financial structure into either Section 8 project-based vouchers (PBVs) or rental assistance (PBRA) contracts. This has opened a wide array of financing opportunities for PHAs undergoing RAD conversion, including, and in particular, LIHTC and HTC funding.

The ability to pair RAD with LIHTC and HTC funding has been “a complete game changer for public housing,” says Hamilton. Before RAD, she points out, “there was no solution to addressing the capital needs” of these aging buildings while also preserving the many units of low-income housing they offer.

Though using HTCs for work on mid-century buildings is indeed challenging, there can also be benefits to working on structures that are relatively young as far as historic preservation goes. Particularly, Rex says Section 202 senior housing towers have found a specific niche within the HTC program since they were often built with modern systems in the first place. “So, when you finish the project, if you look at the before and after pictures, they pretty much look the same,” Rex says. This makes the design review particularly straightforward. “You’re really just upgrading the units to a more comfortable living opportunity.”

No matter the type of building, Rex says that owners of older buildings should at least look into whether HTCs might be an appropriate subsidy for rehabilitation work. “If you have a building that’s anywhere near 50 years old, it’s worth asking the questions, because HTCs work,” he says.