The historic tax credit has been called the nation's largest community reinvestment program. Yet it is also one of its least well known. Below, we look at six areas in which the historic rehabilitation tax credit outperforms most federal investments including job creation, cost benefit, economic stimulus, building reuse, financing, and neighborhood revitalization. One case study, the New Holland Apartments in Danville, Ill., brings these points home.
The Historic Tax Credit
Facilitates Projects that Create More, Better-Paying Jobs than New Construction
Since its inception, the federal historic tax credit program has created 2.3 million jobs. Historic rehabilitation creates more and better-paying jobs than new construction. This is due to the intricate nature of preservation work, which requires more of the project budget to be spent on labor than a new construction project requires. For example, Atlantic Cities reported research that shows repairing existing residential buildings produces about 50 percent more jobs than constructing new ones.
Is a Cost-Efficient Incentive
The historic tax credit more than pays for itself. As of 2011, it has cost the U.S. Treasury $19.2 billion over the lifetime of the program, yet it has produced $24.4 billion in federal tax revenue. In addition, $1 million invested in historic rehabilitation produces better economic impacts in terms of jobs, wages, and taxes generated than $1 million invested in highways, manufacturing, new construction, and other common job stimulus strategies.
Stimulates Local Economies
Over three-quarters of the economic benefits generated by historic [End Page 35] rehabilitation remain in the local communities and states where the projects are located. This reflects the fact that the labor and materials for historic rehabilitations tend to be hired or purchased locally, rather than purchased from an assembly line half a world away.
Rehabilitates Anchor Buildings
Historic tax credits work best on large-scale buildings,1 which are typically high-profile landmark buildings located in a highly visible area. Their rehabilitation signals to other developers and investors that an area is ripe for development, and as such, these projects are often the lynchpin for an area's revitalization.
Makes Rehabilitating Historic Buildings more Bankable
Banks remain cautious on how much they will lend on the rehabilitation of older buildings. But developers can transfer, or "sell" tax credits to investors in exchange for equity, (a process called syndication). This equity lowers the amount that needs to be borrowed, making historic tax credit-financed projects more attractive to lenders.
For example, consider a developer who spends $1 million in eligible, or qualifying rehabilitation expenses (called QREs) to rehabilitate a historic building into loft apartments and first-floor retail space. The $1 million in QREs would yield $200,000 in federal tax credits (20 percent of $1 million). Rather than waiting to claim the credit after the project is completed and taxes are filed, the developer may partner with an investor that has a need to defray his or her federal income tax bill by $200,000. The investor will negotiate a purchase price (say $0.85 for every $1 tax credit) and make equity (cash) pay-ins to the project as construction progresses. This is often critically important to developers who need to pay architects, builders, engineers, etc., during the construction phase— and critical to getting bank financing.
In the case of a nonprofit developer, such as a community development corporation, the availability of tax credit equity can help a nonprofit with fundraising by showing prospective donors that tax credit equity will reduce the amount of charitable funds that have to be raised. [End Page 36]
The HTC as a Catalyst for Neighborhood Revitalization—New Holland Apartments, Danville, Ill.
All of the qualities that make the historic tax credit such a vital community revitalization tool are evident in the example of the New Holland Apartment project in Danville, Ill. This project illustrates how the historic tax credit can be the lynchpin to assembling a financing package, and in turn, how the transformation of a prominent, highly visible landmark can do much to rehabilitate a downtown's image.
For years, the Holland Apartment stood as a vacant...