The Part 1 application for historic preservation tax credits

SECOND IN A SERIES

So you want a 20% tax credit for rehabbing a historic building? You won’t get past square one if you can’t prove your building has historic cred.

Welnick Arcade Market, Phoenix — The Welnick Marketplace in downtown Phoenix is making use of federal historic preservation tax credits.

In my prior post, “Historic Preservation Tax Credits: Worth the trouble if you know how to get them,” I gave an overview of the federal Historic Preservation Investment Tax Credit (ITC) and when it may be an appropriate tool for enhancing the financial package for a renovation project. In this article I will review the first step in the three-step process by which a project achieves status as a “certified rehabilitation” and becomes eligible for the ITC.

The three steps to certification relate directly to the National Park Service (NPS) Parts 1, 2, and 3 certification forms that are filed to prove that your project qualifies for the ITC. In Part 1, you are establishing that the building you’re working on is historic. Part 2 outlines in detail what work will be performed on the building and how it meets preservation standards. Part 3 documents the finished project and requests certification.

The challenge and the strategy

Getting approval from the Parks Service for your Part 1 filing could be hard or easy, depending on the circumstances around your building. Simply stated, your building must be listed in, or eligible for, the National Register of Historic Places. That may sound onerous, but it’s really not as big a hurdle as you may think.

If you are considering applying for the historic rehabilitation ITC, presumably you either know that your building is listed as historic or you suspect that it might be eligible. I’ll go over three cases: a property that is listed in the National Register of Historic Places, either individually or as part of an historic district; a building that has been determined eligible or likely eligible to the register by a past survey; and the third case, what I would call an “unrecognized” historic building that may be eligible, but that has drifted along under the radar. Each case requires a different approach to getting your Part 1 form approved.

Like most things in life, your best approach is to make sure you have done your homework. Gain a full understanding of the history of your property and how it fits into the larger history of the place. Become an expert on these subjects, and you will have a much easier time convincing others of the historic value of your property.

It’s a good idea to bring your State Historic Preservation Office (SHPO) representative into the process as early as possible and recruit him or her as an advocate for your project. (Arizona SHPO’s page linked here.) They have an interest in seeing that your project get tax credits, because it helps to justify the value of their preservation program politically. Their role in the process is to provide the first line of review, and in effect serve as the field agent for NPS. Your initial discussions are with a SHPO representative. They will review and comment on your form submissions and construction plans, and will be the one forwarding your documents to NPS. Of particular relevance to this article, your SHPO is the best source of guidance about whether or not your building is historic, and an ITC candidate.

The Historic Preservation certification Application part 1 - Evaluation of Significance" is just a quick 2-pager, but needs to have the right information to convince the reviewers. — The **“Historic Preservation Certification Application part 1 – Evaluation of Significance”** is just a quick 2-pager, but needs to have the right information to convince the reviewers.

National-Register listed buildings

If your building is already listed, then the Part 1 form is a mere formality. All you need to know is the name of the property, the date of listing, and whether it was listed individually or as part of a group (an historic district).

Eligible buildings not yet listed

Because the National Register nomination process costs money and time, many buildings have been identified in the course of local historic surveys as being eligible to the National Register but which have never actually been nominated. In most cases, those surveys include a certain amount of historical background research that provides the context for the recommendation of eligibility. The survey usually says explicitly why a given building is recommended eligible. This initial information is a valuable head start on showing NPS that your building is eligible, but is often not definitive. In most cases, additional research will need to be completed to flesh out the details of the building’s history and the historical context under which it is considered eligible.

In order to claim your tax credits when your project is complete, your building will need to be listed in the National Register, and that will require a nomination form to be prepared. Don’t wait to get this started. The best proof to NPS that your building is historic is to be able to show them the nomination, even if it has not yet been fully reviewed or approved.

The Part 1 form documents the same types of information that would be eventually submitted for National Register listing but in brief, narrative format. It boils the question down to two short statements: a “description of physical appearance” and a “statement of significance.” If the case for eligibility is simple and strong, then just submitting the information gleaned from past studies or surveys can be enough. After the summary information has been submitted, NPS will let you know if they agree with your eligibility claim.

Sometimes NPS does not agree. Don’t take an initial rejection too seriously! In reviewing a Part 1 form they are making a judgment on very little information. Providing them a copy of your full, draft National Register nomination at that point can make a big difference.

Unrecognized buildings

There are many buildings around the country that are National Register material (and thus candidates for the ITC) but which have not been recognized or surveyed. Here are some of the categories of buildings that could present hidden opportunities for a rehabilitation project using the ITC.

Newer buildings: 50 years is the usual cutoff age for historic consideration. For this reason, historic surveys don’t normally consider younger buildings, and as time marches on, more and more buildings reach that magic 50 year birthday and need a fresh look. As of 2016, buildings constructed between 1956 and 1966 have only recently been old enough to be considered for their historic value – and many of these have never been evaluated.

Building types that have become rare: The conditions around which buildings are evaluated for historic status can change over time. Ordinary-seeming buildings that are old enough to qualify, but are deemed to lack importance, may be skipped over by historic surveys. Consider the case of just such an unremarkable and common old commercial building that was built in a typical downtown. If the area around it is redeveloped, tearing down so many of its neighbors that it becomes one of the last of its kind … suddenly it becomes a lot more important.

Buildings with reversible alterations: Old buildings are frequently passed over in historic surveys because they no longer represent their original architectural appearance. Some common alterations include “re-facing” a building, filling in door and window openings, or making additions to the front side. By National Register rules, if you can’t see the building’s important architectural features, they can’t contribute to its character and the building is ineligible. But what if you were to remove the covering, or open up those old window openings? That’s a different story. If you can show that enough of the original historic features are present and visible to collectively define the historic appearance of the building, it can regain eligibility.

The Liefgreen Seed Co. Building was considered ineligible for tax credits until its storefronts were uncovered and restrored — The Liefgreen Seed Co. Building was considered ineligible for tax credits until its storefronts were uncovered and restored

Flawed or incomplete surveys: Historic surveys aren’t perfect. Sometimes important buildings are passed over for any number of reasons, such as incorrectly identifying the building age, or failing to uncover an important bit of data, such as who the architect was or that it was the home of an important person.

In each of these cases, proving the eligibility of an unrecognized resource will require some research and understanding of how the arcane rules of the National Register are applied. If you are not knowledgeable about the criteria then it can be difficult to tell an eligible building from an ineligible one. Fortunately, your state or local historic preservation office or a qualified preservation consultant can offer guidance.

This was the easy part

In most cases, proving that your building has the qualities necessary to be considered historic is just a matter or proper documentation. You can usually receive approval of your Part 1 form within a month or so from NPS. The real challenges are in formulating your project approach and gaining approval of your Part 2 form in the ITC process, which will be the subject of the next article of this series.

Worth the trouble if you know how to get them

First in a series

By Bob Graham, Motley Design Group

One of the most powerful financial tools in the preservation toolkit is the federal Historic Rehabilitation Investment Tax Credit (ITC). Qualifying a project for an ITC can be difficult, but the reward is recovering 20% of your building improvement costs in the form of income tax credits. This article will give an overview of the rules, benefits and liabilities of attempting a certified rehabilitation. In later articles I will address the process in more detail, and review some of the common pitfalls to watch out for that could derail an otherwise worthy project from being certified.

The DeSoto Central Market in Phoenix, Arizona was certified by the National Park Service for the Historic Rehabilitation Investment Tax Credit in 2016

As a disclaimer, I’m an architect who has been doing preservation projects for 30 years, so I have been around ITCs for some time. But I’m not a CPA and I’m not an attorney; if after reading what I have to say about the ITC you are inspired to do a certified rehabilitation, you’ll need advice from those professionals as well.

The Historic Preservation ITC provides for direct tax credit of 20% of the investment in a certified historic building undergoing a substantial, certified rehabilitation. In essence, if you plow a million dollars into fixing up a building that’s eligible for the National Register of Historic Places, you can recover $200,000 in forgiven taxes – using just this one incentive.

Of course, there are strings attached – and a process that many find to be daunting and incomprehensible. But with a little foresight and the right team, you can cover any increased costs many times over.

What kind or project is eligible? In short, the project must involve a registered historic building that undergoes a “substantial rehabilitation” that conforms to the Secretary of the Interior’s Standards for Rehabilitation. Let’s address each part of those requirements in more detail.

Any income-producing, commercial building that is listed in, or eligible for, the National Register of Historic Places could be a candidate for the ITC. The building doesn’t have to look like much, or even be individually listed; it could just be a contributor to an historic district. Most local governments and the State Historic Preservation Office (SHPO) keep track of what’s already listed and have surveys of places that are eligible, but not listed yet. There are also lots of other buildings around that could be eligible, waiting for someone to come along and do the research and paperwork necessary to get listed. The same governmental entities can usually render an informed opinion if there is any doubt. A good consultant can also advise you with some degree of assurance.

Even buildings that are not yet listed on the National Register, like the Stewart Motor Co. Building in Phoenix - are eligible for the ITC. — Even buildings that are not yet listed on the National Register, like the Stewart Motor Co. Building in Phoenix – are eligible for the ITC.

The ITC is intended to encourage re-investment in historic buildings that are currently underutilized. So, to qualify, the project must be a “substantial rehabilitation,” in which the investment in improvements is worth at least as much as the value of the building (not including land) before rehabilitation (technically, the “adjusted basis”). This requirement tends to exclude small projects like tenant improvements and quick fix-and-flips. What they really want to see is a project that is transformational – that reverse years of deterioration and neglect and put the building back into service.

The standards that must be met in order to be named a “certified rehabilitation” are what many developers and their architects find to be hardest to understand. The

The origin of the Secretary of the Interior's Standards — The origin of the Secretary of the Interior’s Standards

Secretary of the Interior’s Standards for Rehabilitation can be thought of as the “ten commandments” of the historic preservation approach. The intended affect of the Standards is to allow certain kinds of changes and updates to be made in order to keep (or return) a building in service, while still protecting the very qualities that make it qualify as an historic building in the first place. If you have an eligible historic building and you follow the standards, it will still be eligible after you have completed the work.

Rehabilitations are certified using a 3-part process that I will cover in more detail in a later article. In the first step, you establish that the building itself is eligible for the program. In the second step, you document what you plan to do, and in the last step you show that you did it. Each of these steps is reviewed by the SHPO (largely advisory) and then by the National Park Service (which actually decides if you have met the bar).

The obvious benefit of a certified rehabilitation is the tax credit itself. That credit can be carried back one year, and best of all, can be carried forward 20 years. And if the ownership entity does not pay enough in income tax to make a 20% credit worthwhile, or doesn’t want to wait that long to recover the funds spent out of pocket, it’s good to know that there is a secondary market for these credits and that they are transferrable. Even nonprofit entities that don’t pay any income tax at all can take advantage of the ITC by partnering with for-profit investors to whom the credits can be assigned.

There is some risk of failure, particularly if your project needs to stick to a tight schedule and you have to proceed with construction before you have received approval from NPS. At a minimum, you will have spent some money on consultants to register the building and to do the paperwork to apply for the credit. You may have compromised the function or size of the project in an attempt to make it “certifiable,” and you may have incurred significant additional construction costs in preserving things that would have been cheaper to replace (or demolish). For these reasons, it’s always best to get your project certified before it is built.

If you have incurred some of these sunk costs and then are denied certification, all is not necessarily lost. If the reasons for NPS denying certification are minor, then it may be worth re-doing the part of the design that they object to. If not, then there is also a back-up plan: the 10% rehabilitation ITC. A 10% credit is available to ANY rehabilitation of a non-residential building constructed before 1936 – the building does not have to be certified historic, and the rehabilitation does not have to be certified by NPS.

Knowledge is power and the risks of embarking on a project using the Historic Rehabilitation ITC can be controlled. Make sure that you fully understand the requirements of the program, and hire an architect and contractor that “get it” and won’t do something that will disqualify the project. If your architect doesn’t have the in-house expertise to get your building listed as historic, apply preservation standards, and guide you through the ITC process, there are preservation consultants who can fill this gap in the team.

Tag: tax credits

Hey NPS! My Building is Historic