The federal Historic Tax Credit, a 20% credit against federal income taxes for the rehabilitation of certified historic structures, is one of the most established and most consistently used federal development incentives, having financed more than $100 billion in historic rehabilitation since the program was established in 1981. For developers working in markets with significant historic building stock, the older industrial and commercial corridors that are now attracting residential and mixed-use development, the HTC can be a meaningful component of a project’s financing stack, reducing equity requirements and improving project returns.
Understanding how the program works, what it requires, and what construction-phase obligations it creates is essential for developers considering historic rehabilitation projects.
What Qualifies as a Certified Historic Structure
Not every old building qualifies for the federal Historic Tax Credit. The program requires that the building be a “certified historic structure”, a building that is listed in the National Register of Historic Places or that is located in a National Register Historic District and certified by the National Park Service as contributing to the district’s historic significance.
Obtaining certified historic structure status is a two-part process. First, the building (or the historic district containing the building) must be listed in or contributing to the National Register. For buildings not already listed, the State Historic Preservation Office (SHPO) evaluates whether the building meets the criteria for National Register listing and, if so, nominates it to the National Park Service for listing. Second, for buildings in historic districts, the NPS must certify that the building is a contributing (rather than non-contributing) structure within the district.
The contributing vs. non-contributing distinction matters significantly. A building in a historic district that was constructed after the period of significance, or that was so substantially altered that it no longer conveys historic character, may be classified as non-contributing and therefore ineligible for the 20% HTC. In markets with active historic districts, the Pearl District area in San Antonio, the Albuquerque Old Town area, the Pike-Pine corridor in Seattle, the contributing status of specific buildings varies and must be verified before investing in rehabilitation planning.
The Substantial Rehabilitation Test
The federal HTC requires that the rehabilitation be “substantial”, the amount spent on qualified rehabilitation expenditures (QREs) must exceed the greater of $5,000 or the building’s adjusted basis (the tax basis of the building, not the land) within a 24-month measuring period.
For buildings with a low adjusted basis, historic commercial buildings that were acquired cheaply or that have been heavily depreciated, the substantial rehabilitation test is easily met. For buildings with a higher adjusted basis, the required rehabilitation expenditure may be substantial relative to the building’s current market value, potentially making the HTC financially attractive only for intensive rehabilitation programs.
Qualified rehabilitation expenditures include most costs directly associated with the physical rehabilitation of the certified historic structure, construction labor and materials, architect fees attributable to the rehabilitation, and indirect construction costs. Costs that do not qualify: acquisition of the building, new additions to the building (unless the additions are themselves within a qualifying structure), and costs associated with furnishings or personal property.
NPS Certification of the Rehabilitation Work
Using the federal HTC requires NPS certification not just of the building’s historic status but of the rehabilitation work itself. The Secretary of the Interior’s Standards for Rehabilitation, a set of guidelines that govern how certified historic structures may be modified, must be followed throughout the rehabilitation, and the NPS reviews the rehabilitation work in a three-part application process.
Part 1: Evaluation of Significance. The NPS evaluates whether the building meets the criteria for certification as a historic structure.
Part 2: Description of Rehabilitation. Before the rehabilitation begins, the developer submits rehabilitation plans for NPS review. NPS reviews the plans against the Standards for Rehabilitation and approves, conditionally approves, or requests modifications. This is the critical step, beginning construction on a rehabilitation that has not received Part 2 approval risks completing work that NPS determines is non-compliant, which can disqualify the credit or require expensive remediation.
Part 3: Request for Certification of Completed Work. After the rehabilitation is complete, the developer submits documentation of the completed work for NPS certification that the rehabilitation was carried out in accordance with the Standards.
Construction Management Implications
The Standards for Rehabilitation create specific construction management obligations that conventional rehabilitation projects do not face. The Standards require that distinctive features, finishes, and construction techniques from the building’s period of significance be preserved and repaired rather than replaced. When replacement is necessary because of deterioration beyond repair, replacement materials should match the original in design, color, texture, and other visual qualities.
This requirement creates practical construction management challenges. A masonry contractor who is accustomed to replacing deteriorated brick with new brick from whatever source is available will need to be directed to match the original brick’s coursing, color, and texture, which may require sourcing specialty brick that is more expensive and longer-lead than standard commercial brick. A window replacement contractor who is accustomed to installing standard commercial aluminum windows will need to install windows that match the original sash configuration, profile, and glass appearance.
Construction managers on HTC projects need to understand what the Standards require before work begins, communicate those requirements clearly to GCs and subcontractors in the contract documents and preconstruction meetings, and verify compliance during construction rather than discovering non-compliant work at the NPS Part 3 review.
Many HTC projects combine the federal 20% credit with state historic tax credits where available, Washington has no state HTC, but Texas, Colorado, New Mexico, and Arizona have each had state programs at various times. The combination of federal and state credits can make historic rehabilitation financially competitive with new construction in markets where historic building stock is abundant.
Innergy Integral provides these services in Seattle, WA and across our six-state footprint.
Related: Commercial Development Services · Adaptive Reuse Development · Affordable Housing Development Tax Credits · Development Advisory Guide
Markets: Commercial Development Seattle WA · Commercial Development Dallas TX · Commercial Development Houston TX