Tax Credit Gold

Owners of commercial buildings built before 1937 have access to one of the most cost-effective, least-bureaucratic, federal subsidy programs – the 10% Rehabilitation Tax Credit for re-using old buildings.  Two virtually identical buildings can differ significantly in value because of the availability of this little-known tax credit.  As a result of its age, a 1932 building can qualify for the 10% Rehabilitation Tax Credit, whereas a 1939 building cannot.  An appraiser needs an awareness of the implications of tax credits of this kind in order to properly estimate value for older buildings. 

The 10% credit helps save ordinary structures from the wrecking ball, and is more a “recycling credit” than a “historic credit”.  It is specifically for buildings built during or before 1936, that are not residential, and that are not listed as historic on federal, state or local historic registers.  If an owner spends at least the building’s basis on a rehab of such a building, 10% of the total rehab cost (including construction, design and many professional and financing fees) may be deducted from the owner’s federal tax bill.

Most real estate owners with older buildings are aware of the 20% Federal Historic Tax Credit program and have correctly heard that a lot of technical work and expense is involved in obtaining historic certification.    Few realize the 10% Rehabilitation Credit even exists, or if they do, assume that the same time-consuming historic oversight applies.   In fact, for the 10% credit, the only design regulation simply requires that 75% of the exterior walls and structural elements remain physically intact.  Other than that, the building may be visually and functionally transformed, with no design oversight other than ordinary building/zoning code enforcement.  There is no requirement for plan submittal or approval from any historic authorities.  In other words, the 10% credit creates no added cost for either design or construction.

In a 1997 example from downtown Boston, an 80,000 square foot building in the Boston Wharf area, which at the time was not an historic district, was totally renovated by  a major financial firm at a cost of approximately six million dollars.  The industrial property had been purchased for $4,250,000, so the cost of the renovation exceeded the building’s basis.  When the process was complete, a 10% rehabilitation tax credit of $600,000 was available.  The building was triple-net leased to the occupant, and the completed, leased property was sold to an investor from Europe.   The sales price was increased by about 60% of the value of the $600,000 tax credit.   Because virtually no expenditure of time or money went into obtaining the credit, the resulting increase in the sales price was net profit to the seller.  In terms of value-gained for work done or risk taken, few endeavors offer a better return.

Major industrial, retail, or office renovations can generate credits worth millions of dollars of income tax reduction.   At this scale the potential credit’s size may mean bringing in an investor partner with the proper tax credit appetite, which in turn involves legal and accounting work.  But even when added partners are required, the 10% Rehabilitation Tax Credit is still one of the most cost-effective, least intrusive forms of government subsidy on the books.

Real estate owners involved with older buildings should be aware of this small, uncomplicated program.  The federal government’s web site 
http://www.irs.gov/businesses/small/industries/article/0,,id=97599,00.html  is a good place to start.  For an in-depth look at the credit and its applicability to your situation, seek guidance from a professional.   And remember that in this age of resource conservation, saving a building from the wrecking ball adds up to a huge net benefit for the planet, and may well also enhance the owner’s bottom line.

Richard Graf 

Richard Graf brings over three decades of experience in the specialized field of historic tax credits to Reenstierna Associates, and is uniquely qualified to appraise their value