04/05/2005

Earning Credit Where Credit is Due

Tips on how to finance modernization projects in historic properties

Contributors: James Earl  
 

Preservation focuses on the maintenance and repair of existing historic materials and retention of a property's form as it has evolved over time.

SOURCE: (www.cr.nps.gov/hps/tps/secstan2.htm)

Urban location, tall ceilings, large floorplates, and significant daylight exposure – this list of “musts” for modern office and multi-family tenants is no surprise. What’s surprising, though, are the types of buildings meeting these needs. Historic properties nationwide are being polished into some of the most desirable real estate through renovation, rehabilitation, preservation, and adaptive reuse projects.

While the rise and fall of the new economy has had some lasting effects, one that shouldn’t be underestimated is the way dotcom companies changed the definition of the modern office. When asked to address doubts that historic buildings could meet the high-tech needs of today’s knowledge workers, Martha Frish, real estate development teacher at The School of the Art Institute of Chicago, responds, “I would say the dotcom bubble, oddly enough, proved that not to be true. It may have actually created a generation – or helped to create a generation – of people who think that it’s cool to work in a space with big windows and 12-foot ceilings.”

Aside from the somewhat trendy spaces these buildings can deliver, the lasting impacts of revitalizing an abandoned facility or forgotten piece of architecture are numerous. “These buildings are really good buildings. They are built, first of all, on a human scale. They are built of materials that may be hard to come by, with craftsmanship that is hard to recreate – if not impossible to duplicate. And they have amenities that people like,” explains Michael Auer, historian, Heritage Preservation Services, National Center for Cultural Resources, National Park Service, Washington, D.C. Among their many benefits, historic building projects:

  • Preserve buildings of historic significance. According to the Washington, D.C.-based National Trust for Historic Preservation, “Historic places tell a community where it came from – what previous generations achieved, what they believed, what they hoped to be.”
  • Promote sound preservation practices.
  • Generate capital. Since its inception, the Federal Historic Preservation Tax Incentives Program has generated more than $25 billion in private investment in historic properties.
  • Create jobs. “When you’re doing new construction, it’s roughly evenly divided between labor and materials. When you’re doing rehab [projects], it’s much more of a labor investment because the materials are there already,” says David Listokin, codirector, Center for Urban Policy Research, Rutgers, New Brunswick, NJ. “If you’re using more labor, it’s going to generate more jobs and it has a heightened local economic benefit.” As of February 2004, the National Park Service (NPS) reported that, on average, each project it approved created 49 new jobs.
  • Stimulate community renewal and build pride. Julie Stavneak, co-owner of J. Development Co., Omaha, NE, has experienced this firsthand: “A lot of times, other commercial tenants will take advantage [of the opportunity] and find out that, ‘I can renovate my building’ or ‘I can do things, [too],’ so it seems like a snowball effect. Whenever people start to improve their property, it’s just an improved community quality overall that everybody takes pride in.”
  • Provide affordable housing.
  • Promote sustainability. Buildings that may have been demolished (creating landfill waste) are rehabilitated, preserving and recycling building materials in the process.
  • Increase property value.

“Location, location, location” is still the mantra of most building owners and tenants today. The U.S. General Services Administration (GSA) has found historic properties desirable for this very reason. “Location is a prime consideration because most of the historic properties are located in the best areas of the city,” says Rolando Rivas-Camp, FAIA, director, Center for Historic Buildings, Public Buildings Service, GSA, Washington, D.C. The GSA has championed the government’s commitment to historic buildings and, in 2004, funded $266 million respectively for the rehabilitation of historic buildings.

The cost of these projects can certainly be a deterrent. “We have found, through the research that we have done at GSA, that to renovate a historic building costs more money than to renovate a more modern facility,” says Rivas-Camp. “But we have also found that you save much more than you do in maintaining a modern building, because of the systems that are in place [and] the materials that the building is constructed from.” When weighing the costs between building new or renovating an existing historic structure, complete a cost-benefit analysis and make sure you consider the demolition costs of tearing down a building to make room for a new facility or the price of tapping into a city’s infrastructure.

Locating in a historic building or district carries a certain prestige, so don’t be surprised to find that tenants may be willing to pay higher rents. “If you want to distinguish what you’re doing in terms of real estate, [a historic building] is clearly something that’s different,” says Listokin. “It’s something that people will often pay a premium for.”

While some developers and building owners have steered clear of the unknown challenges that these buildings present, others have committed themselves to preserving the craftsmanship and character of historic places while finding ways to creatively finance the necessary modifications (note the eight funding opportunities that follow, indicated with italics).

Tax Incentives

“I think this country started off at sort of a disadvantage in the sense that, for America, new was always better,” says Frish. “This is a shift in how one thinks about one’s environment – that new isn’t necessarily better. In Europe, that’s intrinsically understood.” The shift that Frish is referencing started in the United States in the ’60s when awareness about preserving places of historic, architectural, and cultural significance began to grow.

Following the passage of the Tax Reform Act in 1977, the NPS established the Federal Historic Preservation Tax Incentives Program to encourage private investment in rehabilitating historic buildings. This federal program acknowledges the potentially high cost of renovation in historic properties, and seeks to provide assistance by lessening the financial burden. In partnership with the Internal Revenue Service (IRS) and State Historic Preservation Offices (SHPOs), the NPS administers the program; currently, eligible owners can take advantage of tax credits for preservation projects.

In order to fully understand the benefit of these credits, it’s necessary to recognize how they differ from tax deductions. While a deduction reduces the amount of income subject to taxation, a credit lowers the amount of tax owed. “A dollar of tax credit lowers your taxes by a dollar,” explains Auer. So, a developer that spends $1 million on a qualified historic rehabilitation and takes advantage of the 20-percent rehabilitation tax credit earns a tax credit of $200,000, which lowers their taxes by this much money.

There are two credits that are available. A 20-percent federal tax credit is offered for the certified rehabilitation of a certified historic structure. In order for a project to be considered a “certified rehabilitation,” it must be approved by the NPS following a three-part application process. Eligibility is also dependent on the property’s status as a “certified historic structure,” which requires that the building be listed individually in the National Register of Historic Places or be located in a registered historic district. Obtaining historic structure status is part one of the application process.

The other credit available is a 10-percent tax credit for the rehabilitation of non-historic, non-residential buildings built prior to 1936. Any property that is listed in the National Register of Historic Places cannot take advantage of the 10-percent tax credit. In order to be eligible for either of these credits, the building must be depreciable (i.e. income-producing) and the rehabilitation project costs must exceed the greater of $5,000 or the adjusted basis of the building and its structural components. Both the 10-percent and 20-percent tax credits are claimed on IRS Form 3468 for the tax year in which the rehabilitated building is placed in service.

There are exclusions to the types of businesses and companies that can take advantage of these tax credits, including government agencies, non-profit organizations, and real estate investment trusts (REITs). “Read up on the basic IRS requirements. And, of course, check with your accountants, tax advisor, or attorney, because not everyone who earns credits can use them,” advises Auer. For more information on these tax credits, visit the NPS website (www.cr.nps.gov/hps/tps/tax/index.htm).

If the facility you are rehabilitating is eligible, you can apply for a Low Income Housing Tax Credit to be used in conjunction with other tax credits or funding. According to the NPS, this credit is approximately 9 percent per year for 10 years for projects not receiving certain federal subsidies, and approximately 4 percent for 10 years for projects subsidized by tax-exempt bonds or below-market federal loans.

While these tax credits from the federal government can certainly help to control project costs, there are other tax incentives that are available as well. “At least a dozen states have historic tax credits of their own. So, over and above the federal tax credit, you can get a tax credit against your state taxes,” says Listokin. These credits are structured differently in each state. In order to find out whether state historic rehabilitation tax credits are offered in your area, visit (www.nthp.org/help/taxincentives.pdf) or contact your SHPO. The SHPO can also tell you if property tax abatements or moratoriums are available. A complete list of SHPO contact information is available on the National Trust for Historic Preservation’s website (www.nationaltrust.org); simply click on “State and Local Contacts” under the “Get Involved” heading. Another good place to look is the National Conference of State Historic Preservation Officers website (www.ncshpo.org).

Substantial tax benefits can be reaped by building owners via the donation of a historic preservation easement. In summary, an easement is a voluntary legal agreement whereby a building owner surrenders the right to control what happens to the property to another organization, one whose mission includes historic preservation. This organization then “owns” or “holds” the easement permanently, binding the current owner and any future owner. The organization must then be consulted prior to any alteration of the property, and only after approval is granted can work proceed. According to the NPS, as long as certain criteria are met, an eligible owner can receive a federal income tax deduction equivalent to the value of the rights given away to a charitable or governmental organization. However, much like the federal rehabilitation tax credits, not everyone can benefit. “Private property owners, including commercial and institutional owners can donate easements, although only owners who pay taxes can claim the resultant tax deduction,” explains Auer. To find out more about historic preservation easements, visit (www.cr.nps.gov/hps/tps/tax/easement.htm).

Forming Partnerships

Opportunities may exist that you are unaware of: establishing a dialogue with your SHPO office as well as local planning and economic development departments, is well worth the time and energy. “Communities want this to happen, so they’re willing to open doors,” says Listokin.

Before Stavneak and J. Development’s other co-owner, Jim Royer, undertook a project to convert historic property in downtown Council Bluffs, IA, into apartments and ground-floor retail space, they approached the city. “We had met with the City of Council Bluffs and the Chamber of Commerce and asked them about some buildings they would like to see [renovated], and this was one of them,” says Stavneak. “We sat down and asked, ‘Are there opportunities for funding?’ It happened to be perfect timing because they were working with a local foundation in town to set up a grant or low-interest loan for historical renovations.”

“The State [Historic Preservation] Office can very often give you a head start on finding out what local incentives there might be,” says Frish. Check to see if you are eligible for grants that are offered by the state, your local government, or the National Trust for Historic Preservation. These funding opportunities can help turn a commitment to preservation into the full-fledged rehabilitation of a historic property.

If you are not eligible to take advantage of the tax credits offered, consider forming a partnership with public and non-profit partners. “You need to be creative about this, in how you structure the partnership and in how you think about using the building. People underestimate the need for creativity,” explains Frish. While it’s not legal to buy and sell tax credits, forming a relationship can enable outside partners to share in the tax advantages.

Getting Listed

If the facility you are going to rehabilitate isn’t already listed on the National Register of Historic Places, make this one of the first steps in your project plans. Without this status, taking advantage of many funding opportunities will be difficult, if not impossible. “You can’t get [the 20-percent] tax credit unless your building is on the National Register,” says Frish. The National Register serves as the nation’s official list of districts, properties, and structures that are significant because of their contribution to American history, architecture, archaeology, engineering, and culture. According to the NPS website, approximately 78,000 listings currently make up the National Register – many of which are registered districts that include multiple historic buildings.

Contrary to what you might think, the building you plan to renovate doesn’t have to be Paul Revere’s old blacksmith shop in order to be listed on the National Register. According to the NPS, the criteria for listing a building include any of the following:

  • Buildings that are associated with events which have made a significant contribution to American history.
  • Buildings that are associated with the lives of significant persons of the past.
  • Buildings that embody distinctive characteristics of a type, period, or method of construction; represent the work of a master; possess high artistic values; or that represent a significant and distinguishable entity whose components lack individual distinction.
  • Buildings that have revealed (or are likely to reveal) information important in prehistory or history.
  • Buildings that are at least 50 years old or older. (While exceptions to this rule are made occasionally, the property must exhibit extraordinary significance in order to be considered eligible.)

The NPS administers the National Register; however, nominations completed by property owners should first be submitted to the appropriate SHPO. The proposed nomination is reviewed by the SHPO, and along with a recommendation, is sent to the NPS for the ultimate decision.

A Few Words of Advice

Before embarking on a historic rehabilitation project, do your homework. While there are numerous resources available to you, it’s important to complete a thorough analysis first. Think through all the costs, benefits, and research funding opportunities. “Start by talking with your State Historic Preservation Office,” Frish recommends. And contact the NPS to get any unanswered questions addressed. If the federal tax rehabilitation credits have you confused, visit the NPS’ Heritage Preservation website (www.cr.nps.gov/hps/tps/tax/IRSstaterep.htm) to get information on your state’s local IRS rehabilitation tax credit contact.

Remember that while projects in historic properties can present very unique challenges, they also produce very unique results. When at first there appears to be a shortfall in the capital budget, look again and consider the wealth of opportunity that lies waiting in available funding for these projects. It’s time to preserve the places of our past and provide new life to the buildings that reflect the craftsmanship, architecture, and history of centuries before – a time that was long ago but never forgotten. There’s no better time to honor the past than the present.

Jana J. Madsen (jana.madsen@buildings.com) is managing editor at Buildings magazine.


Massachusetts Historical Society, Boston
Project Team:
Massachusetts Historical Society (owner), Ann Beha Architects Inc. (architect), and Shawmut Design and Construction (construction manager).*
Project Cost: $10 million.
Fund Sources: Capital Campaign drive, Private
Foundations, Save America's Treasures (a federal grant
program), and a low-interest loan (via bonds) from the Higher Education Facilities Agency (a Massachusetts state agency).
Located in Boston's Back Bay, the Massachusetts Historical Society was originally built in 1898. This National Historic Landmark required careful rehabilitation work during the multi-phase project in order to protect visitors, staff, and the facility's priceless collections. New mechanical, electrical, and plumbing systems; a high-tech temperature control system; and a specialized fire suppression system were installed. Additionally, a reading room and offices (part of a 1960s addition) were renovated to match the historic fabric of the building.
PHOTOS: PETER VANDERWARKER PHOTOGRAPHS
*List is not all-inclusive

 


The Candler Building, New York City
Project Team: Massachusetts Mutual Life Insurance Co. (owner), Swanke Hayden Connell Architects (architect), Lehrer McGovern Bovis (general contractor).*
Project Cost: $25 million.
Fund Sources: Federal Historic Preservation 20-percent tax credit and New York City Incentive Commercial & Industrial Program (tax credits to train disadvantaged persons in the construction trades).
The Candler Building was built between 1912 and 1914 as a commission from Asa G. Candler, a founder of The Coca-Cola Co. It is located in Manhattan near Times Square. During rehabilitation, this 24-story, white terra cotta tower underwent restoration of the exterior envelope as well as a base building upgrade and interior modernization. Core spaces - including elevators, stairs, and restrooms - were replaced, relocated, and overhauled. State-of-the-art mechanical, electrical, plumbing, and fire protection systems were also installed.
Photo courtesy of Swanke Hayden Connell Architects
*List is not all-inclusive

The Hotel Montgomery, San Jose, CA
Project Team: Epicus Development/Divco West (developer); Joie de Vivre (operator); Page & Turnbull (architect); Howard S. Wright Construction Co. (construction manager).*
Project Cost: $12 million.
Fund Source: Federal Historic Preservation 20-percent tax credit.
The 4-story, 60,000-square-foot Hotel Montgomery was San Jose's most luxurious hotel in 1911. However, its status changed over the years. When the city moved the building 180 feet to allow development on its original site, much of the interior was demolished.
The subsequent $12 million rehabilitation of The Hotel Montgomery, completed in July 2004, involved the rebuilding of three guestroom floors in keeping with the basic configuration of the original hotel. However, the building's new function as a boutique hotel mandated larger rooms, guest amenities, and an upscale restaurant that fills most of the ground floor.
PHOTO COURTESY OF JOIE DE VIVRE HOSPITALITY
*List is not all-inclusive

 

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When choosing a metal-clad building for your next construction project, consider Morton Buildings, Inc., and their designBUILD team, we’ll make your dream a reality.

Visit our website today to learn about the design flexibility of a Morton building and the endless possibilities of partnering with our designBUILD team.

Wood construction is both cost and energy efficient. Check out Morton Buildings and our designBUILD team online today to discover all the benefits of post-frame construction.

We Can Help You Reduce Energy by 30%

Our mission is to help our customers manage their buildings' energy costs, improve reliability, and enhance performance while having a positive impact on the environment.
CLICK HERE to find out how.


Mitsubishi Electric’s H2i R2-Series heat pumps provide 100% heating capacity down to 0° F and simultaneous heating and cooling down to -4° F delivering year-round comfort, regardless of climate zone.

 
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