June 12, 2017

Tax Credits Abound for Historic Building Renovation and Land Revitalization

Tax Credits Abound for Historic Building Renovation and Land Revitalization

In a recent presentation to a Cleveland Civic Leadership Institute class, LAND studio Executive Director Greg Peckham described some of the creative approaches that real estate developers, architects and designers are taking in converting old and/or underutilized urban spaces and buildings to livable, attractive places.

LAND studio is dedicated to creating places and connecting people through public art, sustainable building and design, collaborative planning and dynamic programming. The nonprofit agency connects high-profile downtown revitalizations, such as East 4th Street and the Flats, with other urban amenities through high-quality public spaces. The agency often works on the conversion of vacant and underused properties into welcoming places for people to gather.

“The exciting thing about working in a legacy city like Cleveland is that reinvention of underused assets is part of our DNA,” says Peckham. “We look at old buildings or public spaces and can imagine transforming them into something new that will bring vitality to the next generation of the city.”

Economic Impact

In addition to the beautification of spaces, these efforts extend well beyond “doing good.” For example, in its efforts to design and build vibrant, thriving neighborhoods, such as the 17-acre park overlooking the Cuyahoga River and the downtown skyline on Irishtown Bend, LAND studio spurs economic investment, development and growth that increases surrounding property values. The nonprofit’s work in the Public Square redesign has created jobs, and attracted long-term residents and tourists as well as employers seeking to retain top talent.

According to a study by Ohio History Connection, the organization that manages the State Historic Preservation Office, Ohio leads the country for projects in the 2015-2016 federal spending year with 103 projects, an investment totaling $365 million. Additionally, the restoration of old buildings to new uses as apartments, hotels and mixed-use adaptations has generated investment of more than $1 billion in downtown Cleveland and $2 billion in Cuyahoga County.

Maximizing Tax Credits for Redevelopment Projects

A host of federal and state tax credits are available to professionals in the commercial real estate and construction industry to encourage the redevelopment of historic buildings and underutilized spaces. Some of the more notable ones are detailed below.

The Federal Historic Preservation Tax Incentive program encourages private sector investment in the rehabilitation and re-use of historic buildings. It is one of the nation’s most successful and cost-effective community revitalization programs. It has leveraged over $84 billion in private investment to preserve 42,293 historic properties since 1976. The National Park Service and the IRS administer the program in partnership with State Historic Preservation Offices.

Ohio Historic Preservation Tax Credit Program

Like the federal program that oversees it, the Ohio Historic Preservation Tax Credit Program provides a tax credit to leverage the private redevelopment of historic buildings. Owners and long-term lessees of historically designated buildings who undertake a rehabilitation project may apply for the Ohio Historic Preservation Tax Credit for a state tax credit up to 25 percent of qualified rehabilitation expenditures incurred during rehabilitation projects up to certain limits.

A building is eligible if it is individually listed on the National Register of Historic Places; contributes to a National Register Historic District, National Park Service Certified Historic District or Certified Local Government historic district; or is listed as a local landmark by a Certified Local Government. For more information, including eligible buildings, see the Ohio Historic Preservation Tax Credit.

Easements to Protect Historic Properties

An historic preservation easement – a “façade easement” – is a voluntary legal agreement, typically in the form of a deed that permanently protects a historic property. Through the easement, a property owner places restrictions on the development of, or changes to, the historic property, then transfers these restrictions to a preservation or conservation organization. A historic property owner who donates an easement may be eligible for tax benefits such as a federal income tax deduction. Easement rules are complex, so property owners interested in the potential tax benefits of an easement donation should consult with their accountant or tax attorney.

Section 179D – Federal Energy Tax Credit

The 179D commercial buildings energy efficiency tax deduction enables building owners to claim a tax deduction for installing qualifying systems and buildings. The tax credit Section 179D was extended in 2015 as part of the Tax Extenders Law, and then renewed as part of the Protecting Americans from Tax Hikes (PATH) Act.

If the qualifying system or building is installed on federal, state or local government property, the 179D tax deduction may be taken by the person primarily responsible for the system’s design.

Section 179D offers new or existing building owners a one-time depreciation deduction of up to $1.80 per square foot for their installation of energy efficiency measures such as (1) high-efficiency interior lighting; (2) efficient building envelopes; and (3) heating, cooling, ventilation (HVAC) or hot water systems.

New Markets Tax Credit

The New Markets Tax Credit (NMTC) program grants investors a credit on qualified equity investments in Certified Development Entities (CDEs). The credit is claimed over a seven-year period at a rate of five percent of the qualified investment in each of the first three years, and six percent in each of the last four years.

The CDE must make a qualified low-income community investment in the form of equity or a loan to qualified active low-income community businesses (QALICB) within a year from when an investor makes an investment in the CDE. Most commercial and mixed-use development projects in low-income census tracts qualify as QALICBs.

Older buildings that qualify for such credits are often located in NMTC-qualified census tracts. Unlike rehabilitation tax credits, the annual dollar volume of NMTCs allocated by the federal government is capped, making the application process highly competitive.

Conservation Easements

If you are willing to grant a perpetual conservation easement to a qualified organization (effectively giving up or limiting your rights to develop the property), then the tax law will reward you with a tax deduction. The amount of the deduction is the difference between the appraised value of the land, assuming its highest and best use value before the granting of the conservation easement, and its value after granting the conservation easement. Note that you must reduce your deduction, however, by the amount of any value enhancement to adjacent property you own as a result of the conservation easement.

Looking Ahead

Tax credits are a powerful – and often necessary – tool for developers. For example, according to the analysis by the Ohio History Connection, ever since the federal historic tax credit went into effect in 1976, Cuyahoga County has had 292 federal tax credit projects worth a total investment of $2.2 billion. Cleveland has benefited the most from both federal and state tax credits, with 85 projects. It is a good bet that most of these projects would not have been completed without the availability of the historic tax credits. Real estate developers that aren’t already tapping into the tax credits should work with their professional advisors and tap into public-private partnerships with groups like LAND studio to continue the upward trend.

For questions about real estate tax issues, or information on our development advisory services, contact your Marcum representative at (855) MARCUM1..

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