Historic Tax Credits: How Developers Can Maximize Incentives for Affordable Housing

At a glance

• The main takeaway: The Historic Tax Credit can provide affordable housing developers with opportunities to make their affordable housing projects more financially viable.
• Impact on your business: With careful planning and a well-executed strategy, developers can successfully leverage HTCs to transform properties and communities for generations to come.
• Action steps: Contact Aprio’s Affordable Housing team for appropriate guidance on how to approach a historic rehabilitation project.

Historic properties breathe life into communities — and for developers, they also present a valuable financial opportunity to enrich their property portfolios, thanks to the Rehabilitation Tax Credit, commonly referred to as the historic tax credit (HTC) or historic preservation tax credit. Aprio recently hosted the latest installment of its Developer’s Forum, where subject matter experts discussed this unique credit that helps revitalize neighborhoods while providing tax benefits and funding for developers.

Get a full recap of their discussion below and find out how to use HTCs to your advantage.

What are Historic Tax Credits (HTCs)?

The IRS created HTCs under Section 47 of the Internal Revenue Code to encourage the preservation and rehabilitation of historic buildings. Today, developers can receive a 20% federal income tax credit on qualified rehabilitation expenditures (QREs) related to significant renovations of historic properties.

QREs generally include expenses tied directly to a historic building’s structure and systems (like electrical, plumbing, and walls) — in other words, they encompass the parts of a building that would typically depreciate over 27.5 or 39 years.

Some states, including Georgia and South Carolina, enhance the incentive with their own historic preservation tax credits, further boosting project feasibility for developers.

Key steps in the HTC lifecycle

1. Planning and application phase
Before purchasing or starting rehabilitation work on a historic building, developers must assess their eligibility for HTCs. HTC-eligible properties must be listed or eligible for listing on the National Register of Historic Places. From there, the federal HTC application is a three-part process:

• Part 1: Confirm historic significance
• Part 2: Outline the proposed rehabilitation plan
• Part 3: Certify the completed work

Timing is crucial in this phase of the HTC lifecycle; it can take developers up to 5 months to complete Part 1 and Part 2 approvals, which are often essential for scoring extra points in affordable housing tax credit applications.  A consultant specializing in architectural history is critical in meeting these preservation filing requirements.

2. Development and construction phase
Once approvals are in place, developers collaborate with their project team — including legal and tax advisors — to discuss regulatory and compliance issues, organize the deal structure, and determine tax implications and considerations. Financial forecasts and analysis for potential investors are created by the accounting team and the attorney drafts operational agreements and can make important introductions to interested investors.

Most developers use two primary structures to monetize their credits:

• Single-Tier Structure: Simple, cost-effective, and ideal for smaller projects.
• Master Lease Structure: Complex and preferred for larger projects with institutional investors.

Throughout the construction phase, developers must monitor the project closely to ensure their rehabilitation efforts comply with historic standards. Any unauthorized changes can jeopardize the project’s eligibility for HTCs.

3. Completion and compliance phase
Upon project completion, developers must hire a team to perform a final inspection of the rehabbed property to submit Part 3 of the HTC application. Additionally, developers must:

• Complete a cost certification to determine QRE for investors.
• Meet ongoing compliance requirements for 5 years to maintain the credits.
• Plan for the “exit strategy,” in which investors are typically bought out after the compliance period ends.

Combining HTCs with other incentives

By strategically stacking their incentives, developers can supercharge their historic project’s financial viability. Keep in mind that the programs above come with their own unique rules and nuances:

• Low-Income Housing Tax Credits (LIHTCs): Many affordable housing developments use LIHTCs alongside HTCs to make projects financially sustainable.
• New Markets Tax Credits (NMTCs): NMTCs are eligible for projects located in low-income communities, although they require careful structuring.
• Opportunity Zones: Developers can use Opportunity Zone funds alongside HTCs to enhance project returns and even reap long-term capital gains tax benefits.
• State Credits: States like Georgia, South Carolina, and Virginia offer additional historic or abandoned building credits, which developers can layer into their capital stack.

Why having the right team matters

Throughout the webinar, one theme was clear: success in HTC projects hinges on having an experienced and collaborative team. To properly navigate federal and state requirements, structure deals to optimize credits, and avoid costly mistakes, developers must assemble a team that includes industry-specific CPAs, specialized architects, attorneys, and historic consultants.

“Once you make a mistake, you can’t put the genie back in the bottle,” the panel emphasized. Early, proactive communication among all parties is critical to keeping projects on track and maximizing returns.

The bottom line

HTCs offer developers a tremendous opportunity to revitalize their communities, preserve history, and enhance the financial viability of their affordable housing projects. With careful planning and a well-executed strategy, developers can successfully leverage HTCs to transform properties — and neighborhoods — for generations to come.

To plan your next project, contact Aprio’s Affordable Housing team today.

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