The Legislature has given the private sector a powerful tool to facilitate development in our cities and towns.
Following a growing trend in other states, Texas has established a new tax credit based on qualified rehabilitation expenditures on historic buildings. The new State Historic Preservation Tax Credit provides a credit against the state’s margins franchise tax of 25 percent of “qualifying rehabilitation expenses.”
The credit is designed to “twin” with the Federal Historic Tax Credit, which can amount to yield a credit of up to 20 percent of such expenses against federal income tax.
The state and federal historic tax credits, when properly used, can provide a cash subsidy for a project of up to 45 percent of the project cost, providing a powerful incentive for historic redevelopment in our cities and many small towns throughout the state.
The state credit generally follows the rules established in the federal program with respect to qualifying structures and expenditures. But it has a number of other features that make it much easier to qualify for and use, including the ability to freely transfer the credit to third parties willing to purchase the credit for cash.
To qualify for the 20 percent federal historic credit, a building must be listed or eligible for listing on the National Register of Historic Places or be located in an historic district and be designated as important to the overall character of the district. Only qualifying rehabilitation expenses are eligible for calculation of the credit.
Generally, qualified expenses are those costs that are added to the property basis. Common examples include the cost of work on the building structure, architectural and engineering fees, site survey fees, legal fees, development fees and other construction-related costs.
Qualified expenses, however, will not include acquisition or furnishing costs, the cost of any new additions or expansions, new building construction, parking lots, sidewalks, landscaping or other related facilities. In addition, if the rehabilitation substantially alters the original historic structure by, for example, adding multiple stories on a one-story historic structure, such expenditures will likely not qualify for the credit.
Adaptive uses, for example, converting a school building into a modern office structure or hotel, will generally qualify, assuming the exterior walls and other key architectural features of the buildings are preserved or enhanced by the renovation.
The 20 percent federal credit may be claimed by filing an application with the Texas Historic Commission. Ultimately, it’s filed with the National Park Service in Washington, D.C., which reviews and signs off on the project.
A 10 percent federal credit is available for buildings that are not eligible to be listed in the National Register, provided they were in service prior to 1936 and meet certain other requirements regarding the proposed rehabilitation.
The 10 percent federal credit requires no such application and can be claimed on qualifying rehabilitation expenses made to a building that was constructed prior to 1936.
To be eligible for the 25 percent state credit, an application must be filed with the Texas Historic Commission, which will certify the building and qualifying expenses. Only buildings in service after Sept. 1, 2013, may qualify for the state credit. Currently, the historic commission is working on rulemaking related to the state credit, and regulations governing implementation of the credit should be finalized later this year.
San Antonio has always been mindful of the importance of preserving historic structures. The recent call for development of abandoned or underused buildings in the city’s downtown is certainly consistent with that sensitivity, which has set us apart nationally.
This article is written by Patrick J. Kennedy Jr. The article appeared in the Guest Voices Column of the San Antonio Express News on May 19, 2014.