Using Federal Rehabilitation Tax Credits in Your Development

Using Federal Rehabilitation Tax Credits in Your Development

Article by David Hill

Developers often need to employ multiple financing sources and credits to make developments feasible.  Many credits revolve around low income attributes, but one credit source, Federal Rehabilitation Tax Credits, does not contain such restrictions.  Administered by the Michigan State Housing Development Authority in conjunction with the National Park Service and the IRS, Federal Rehabilitation Tax Credits were created to encourage re-use of historic buildings.

Certified historic structures qualify for up to a 20 percent credit.  If the building is not certified as historic or part of a historic district, a 10 percent credit may be possible if the building existed prior to 1936.  To maintain the integrity of the structure, the development must comply with the National Park Service’s rehabilitation standards in effect at that time and the rehab must be “substantial”.  This means you must maintain the historic character of the property and historic district, where applicable.

The Federal Rehabilitation Tax Credit program is broad-reaching and each year over 1,000 projects are approved for the credit.  The application process requires close interaction with the state historic preservation office to submit the necessary multi-step application along with proposed rehab plans.  The credit may be monetized by admitting the tax credit investor into the entity that is entitled to the credit on a pro rata basis as tied to that investor’s interest in the entity.  The structures of the entity can be complex to reach the necessary outcomes, including placement of management control and determining the exit strategy for the investor(s).

If you are considering substantial rehabilitation of a qualified building, the Federal Rehabilitation Tax Credit program may fill the necessary gap to make the project feasible and should be added to your list of tools when considering the financing of the project.

 

 

 

Posted on August 18, 2014
Tagged as Business Law, Real Estate, Tax Law