Missed Opportunity? The Historic Preservation Tax Credit Program Proposal in the “AIA’s Economic Stimulus Recommendations”

Originally Published 2009

By Gary L. Cole AIA, Esq.

Through its Renew and Rebuild initiative, the American Institute of Architects (AIA) recently released its AIA Economic Stimulus Recommendations, a set of construction-related spending recommendations for the Obama administration’s proposed economic stimulus package. Among the proposals are: $25.7 billion for “21st Century Schools”; $50 billion for various green-related construction projects and an enlargement of the Energy Efficient Commercial Buildings Tax Deduction; $12 billion for “Transit and Livable Communities,” and various business-related tax amendments.

For the sake of this posting, Law/Ark assumes that the AIA’s recommendations are based . . .

on sound research and backed with specificity, and don’t simply represent a wish list of funding for projects that in less desperate economic times have gone, or would go, unnoticed by Congress. So stipulated. But the AIA may be missing an historic opportunity to aggressively advocate for the strengthening of an existing program that for several decades has proven effective in achieving the dual goals of stimulating economic development by incentivizing private investment in our communities, and protecting our cultural heritage – the Historic Preservation Tax Credit Program (HPTCP).

Administered by the National Park Service and state historic preservation offices, the current HPTCP allows a 20 percent federal income tax credit for all “qualified rehabilitation expenditures” (as defined by the Internal Revenue Code), incurred as part of the rehabilitation of an income-producing certified historic property that meets the Secretary of the Interior’s Standards for Rehabilitation. In simplified terms, for a project that incurs, say, $10 million in qualified rehabilitation expenditures, the developer of the project would qualify for $2 million (i.e., 20 percent) in dollar-for-dollar federal income tax credits. The HPTCP, especially when combined with other development incentives, works to attract developers and encourage investment in projects that might otherwise fail a proforma’s bottom line test.

But, for unknown reasons, the AIA Economic Stimulus Recommendations seems a bit tepid in its support of a more robust HPTCP. The AIA recommends increasing the HPTCP from the current 20 percent to 40 percent – so far, so good – however, that recommendation only applies to very small commercial historic rehabilitation projects. From the AIA’s website, the enhanced HPTCP benefits appear to apply only to:

“. . . smaller projects in which the qualified rehabilitation expenditures do not exceed $2 million.

The AIA correctly recommends an increase in the HPTCP’s tax credit rate to 40 percent – it hasn’t changed since the Tax Reform Act of 1986 when it was decreased from 25 percent to the current 20 percent – but the recommendation falls short by imposing a $2 million cap on the qualified rehabilitation expenditures eligible for the enhanced tax credit rate. And, as currently promoted, the AIA’s HPTCP recommendations need clarification – is it intended that small projects with qualified rehabilitation expenditures of, say – $2.1 million, are disqualified for the higher tax credit rate altogether, or is it intended that projects with qualified rehabilitation expenditures greater than $2 million can take the 40 percent tax credit for the first $2 million of qualified rehabilitation expenditures, and then drop back down to the current 20 percent tax credit for those qualified rehabilitation expenditures in excess of the first $2 million? The former eliminates all but smaller projects from the enhanced HPTCP, the latter would include all projects, though with graduated benefits.

The HPTCP has a well-proven record as an effective tool for stimulating private investment in income-producing historic properties. Without clarification from the AIA, it’s hard to see why, as part of an $87.7 billon dollar spending proposal, it didn’t seize the high ground and also propose a significant increase to the incentives for income-producing historic rehabilitation by recommending the 40 percent HPTCP rate for all income-producing historic rehabilitation projects, not just the relatively small ones.

Developers of income-producing historic rehabilitation projects borrow money from commercial lenders to fund their projects; they provide both short-term employment to teams of professionals – architects, engineers and consultants – and to general and specialty contractors. The completed projects also provide long-term jobs for the businesses that manage and occupy those completed properties. Best of all from the government’s perspective, those projects generate sales, property and income taxes during their construction and operational phases.

A successful AIA recommendation to increase the HPTCP could spur private investment in both large and small certified historic income-producing properties, create jobs and generate real taxes – surely the most sustainable way to ensure the long-term survival of historic properties and make a real contribution to the stated goals of the a massive, deficit spending-based federal economic stimulus bill – that is, actually stimulate the economy.

Copyright Gary L. Cole 2009.

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