On their own, historic tax credits (HTCs) are a powerful tool for funding projects that revitalize communities through the reuse of historic structures. When combined, or “stacked,” with Low Income Housing Tax Credits (LIHTCs), New Markets Tax Credits (NMTCs), or the energy-related tax credits under the Inflation Reduction Act (IRA), HTC projects can have an even greater impact on a project’s financial viability.
The reuse of aging buildings can be a financially challenging undertaking; building infrastructure must be updated or replaced, hazardous materials may need to be removed, and unforeseen conditions abound. HTCs, LIHTCs, and NMTCs, and IRA programs can bridge the gap between available financing and actual project costs, helping to fund transformative renovations that make our communities safer, more beautiful, and more sustainable while preserving their character and sense of place.
Historic Tax Credits (HTCs)
The Federal Historic Preservation Tax Incentives program provides a 20% federal income tax credit for qualified rehabilitation expenditures, including most construction and design costs as well as certain holding costs such as insurance and property taxes. Many states and local governments also offer HTC programs that stack with federal HTCs. Tax credits are a dollar-for-dollar offset of the recipient’s tax burden—unlike tax deductions, which lower the recipient’s taxable income. Learn more about historic tax credits by downloading our comprehensive guide, “Navigating Historic Tax Credits.”
HTC “Sweeteners” for Sustainable Rehabilitations
Some states offer “sweeteners,” or additional tax incentives, for HTC projects that also attain a sustainable certification. For example, under its Heritage Structure Rehabilitation Tax Credit program, Maryland offers an additional 5% tax credit to projects that receive state HTCs (which cover 20% of QREs, up to $3 million) and are certified LEED Gold.
CASE STUDY: THE PACKING HOUSE
The Packing House is an adaptive reuse project in Cambridge, Maryland, that met state HTC program requirements and achieved LEED Gold certification, rendering it eligible for an additional 5% state HTC. To meet both preservation and sustainability goals, we developed creative solutions to insert efficient new systems without disruption to the historic fabric. For example, we located new HVAC equipment on areas of the roof that had fallen in and needed to be rebuilt.
Low Income Housing Tax Credits (LIHTCs)
LIHTCs subsidize the acquisition, rehabilitation, or new construction of rental housing targeted to lower-income households. Projects that create affordable housing within historic structures may be eligible for both HTCs and LIHTCs.
The federal government issues LIHTCs to each state based on population. States then award the LIHTCs to projects at 4% or 9% of the project’s construction cost. In most states the 4% credit is virtually unlimited, with applications accepted on a rolling basis and without competition so long as the project meets the minimum requirements of the state’s Qualified Allocation Plan (QAP). The more lucrative 9% credit is often awarded on a competitive basis, with applications accepted only during a certain annual window and ranked according to scoring criteria defined in the QAP.
If a project receives both HTCs and LIHTCs, the value of the HTCs is deducted from the project’s qualified basis for purposes of LIHTCs. Generally, HTCs more than make up for the reduction in LIHTC funding, as shown in the chart below.
CASE STUDY: WALTER FRENCH
The mixed-use redevelopment of this former school in Lansing, Michigan, is taking advantage of multiple funding mechanisms. The completed Walter French will consist of affordable housing (Units 1 and 2) and an office and daycare (Unit 3). Unit 1 will be funded using the 9% LIHTC; Unit 2 will be funded using the 4% LIHTC; and Unit 3, which is not eligible for LIHTCs, will be funded using Michigan’s Revitalization and Placemaking Program. All three units are on track to receive HTCs.
New Markets Tax Credits (NMTCs)
The federal NMTC program provides a tax incentive for investment in low-income communities. Unlike the LIHTC program, the NMTC program is not limited by project type. HTC projects located within a census tract designated as a low-income community may be eligible for financing through NMTCs. Unlike HTCs, NMTCs are not limited to qualified rehabilitation expenditures; they can be applied to a much broader range of project costs, including site acquisition.
NMTCs are awarded to intermediary institutions called Community Development Entities (CDEs). The Department of the Treasury maintains a list of CDEs that have been awarded NMTCs and therefore may have NMTC funding available to invest in a project.
Note that while both NMTCs and LIHTCs stack with HTCs (federal, state, and/or local), NMTCs and LIHTCs do not stack with each other. In other words, a project is not allowed to receive both NMTCs and LIHTCs.
CASE STUDY: EVERYMAN THEATRE
Located in downtown Baltimore, the Everyman Theatre’s mission is to provide professional theater experiences that are welcoming, relevant, and affordable to everyone. We renewed Baltimore’s historic yet vacant Town Theater to serve as the new home for Everyman’s resident company and community education programs. The award-winning project received funding from federal and state HTCs as well as NMTCs.
Tax Credit Programs Under the Inflation Reduction Act (IRA)
The IRA includes many provisions aimed at expanding our nation’s supply of clean energy and promoting energy-efficient technologies. It created or modified multiple energy-related tax incentive programs—including credits, reductions, and rebates—that can be utilized by building owners and developers of both market-rate and workforce housing. The programs may be referred to by name or by the section of the act in which they appear.
The tax credit programs under the IRA can generally be used in conjunction with each other; with other federal, state, and local tax credit programs; with other incentive programs under the IRA; and with utility rebates. Many of the IRA tax credit programs may be utilized by organizations that do not pay federal income taxes, such as nonprofits and state and local governments, through an elective pay option.
NEW ENERGY EFFICIENT HOMES CREDIT
Also called Section 45L, the New Energy Efficient Homes Credit provides a tax credit of $1,000 per dwelling unit of a new or substantially renovated multifamily building that is ENERGY STAR and Zero Energy Ready Home certified. The credit rises to $5,000 per unit if prevailing wage requirements are met.
CLEAN ELECTRICITY INVESTMENT TAX CREDIT
Also called Section 48/48E, the Clean Electricity Investment Tax Credit covers 6% of the cost of certain building systems that produce clean energy, including solar technologies, geothermal systems, and ground source heat pumps. The credit is increased if the project meets additional criteria, such as prevailing wage and apprenticeship requirements or location in a low-income community; this can result in the credit covering up to 70% of the system’s cost.
ALTERNATIVE FUEL VEHICLE REFUELING PROPERTY CREDIT
Also called Section 30C, the Alternative Fuel Vehicle Refueling Credit covers 6% of the cost of an alternative fuel vehicle refueling system (like an electric vehicle charging port) located in a low-income community. The credit is capped at $100,000. If prevailing wage and apprenticeship requirements are met, the credit rises to 30% but is still capped at $100,000.
Stacking Tax Credits for Greater Impact
Every existing building has enormous worth as a repository of both embodied carbon and community memory. The federal HTC, LIHTC, and NMTC programs, as well as the tax credit programs under the IRA, are a powerful tool for transformational building projects that improve our cities and save our natural resources.
Learn more about historic tax credits by downloading our guide, “Navigating Historic Tax Credits: A Guide to Funding Transformational Capital Projects Through the Federal Historic Preservation Tax Incentives Program.” The guide includes in-depth discussions of the HTC application process and program prerequisites such as designing to the Secretary of the Interior’s Standards for Rehabilitation.
