Numerous historic preservation programs are completed each year. Here, 1,700 windows were replaced in a historic maintenance building at the Pearl Harbor Naval Shipyard.
Image source: Flickr CC user NAVFAC
It is always nice to hear that a historic building was saved from the wrecking ball. These fading landmarks can be lighthouses, military bases, churches, schools, or factories. Even old garages and warehouses can attain landmark status because of their architectural significance or the companies and people who once used them.
It takes a special developer to take on these projects. Old buildings (particularly ones that have been deemed historic by federal and state governments) can be especially challenging to restore. The future of an old building — whether it is destined for the wrecking ball or to be transformed into a taxpaying and job-creating business — often depends on whether the developer can obtain tax incentives that make the project more attractive to lenders and investors. These tax credits are not the only piece of the puzzle, but a tax break sometimes functions as the crowning piece in a financing package, ultimately enabling the developer to close on a construction loan and move forward.
Tax Incentives for Historic Preservation Are Common in States
More than two-thirds of U.S. states offer income tax incentives for restoration projects, and with good reason. Conservation groups and the federal government estimate that for every dollar given in tax credits, at least four times the amount comes back in investment. Additionally, these projects often transform crumbling buildings that are blighting neighborhoods, putting them back into service as a business that create jobs.
Efforts to pass an incentive program in California have been largely unsuccessful. Developers in the business of restoring old buildings suffered a major blow last year when Gov. Jerry Brown vetoed AB 1999, a bipartisan bill with unanimous support in the state Legislature. This bill would have made a 20 percent tax credit available for historic preservation projects, in addition to one offered by the federal government. The governor cited a potential cost of more than $400 million over many years in his veto message, despite a provision in the bill that the developer would have to prove that the restored project would generate more tax revenue than cost of the tax breaks. However, California’s preservation groups vow to fight on until the incentive is approved.
Inside the Federal Government’s Incentive Program for Historic Preservation
Despite this setback, an effective federal tax incentive program remains in place. The 35-year old program, which is administered by the National Parks Service, provides up to a 20 percent federal income tax credit for projects involving historic buildings and structures. Developers can also obtain a 10 percent tax credit for buildings constructed before 1936, but that are not considered landmarks.
As one might expect, the competition to obtain these credits is high. As many private California developers have proven, however, it is not impossible. Outside of New York, California has seen the highest rate of investment in projects that qualify for the tax break. For example, the LA Conservancy estimated that $1.5 billion was spent on projects that qualified for the tax credits.
Only recently, for example:
- In Los Angeles, a $7.6 million project revamped the circa-1890s, rundown Boyle Hotel into 51 affordable apartments, a community center, and retail.
- In San Francisco, the Central YMCA was transformed into 174 apartments, corner retail stores, and a wellness center while still preserving the original historic auditorium and gym among other features of the 1909 building. That project reportedly cost more than $90 million.
- In Alameda County, a $6.5 million project revamped the East Bay Water Company Building with its distinctive Gothic Revival architecture. That building is now being used by Girls Inc. as an activity and education center for girls.
These are just three of the ten projects in this state that received a federal tax credit that year. In 2013 alone, the National Park Service approved more than 800 projects nationwide, which drew more than $3.4 billion in investment, according to federal reports.
Historic Preservation Is Rewarding, Lucrative
Aside from saving a landmark, what makes these projects so interesting is that developers have found creative ways to repurpose historic buildings. We have previously written about how developers turn schools into churches, or parking garages into homes, or warehouses into an office space. One example of this kind of repurposing is in San Diego, where a multi-storied former warehouse building was turned into loft apartments. The developer noticed that it was an ideal place for people to live; it was near the train depot and the city’s modern art museum.
While these projects will almost always be a labor of love, developers have proven that they can be profitable business opportunities. California has a rich history with many historic buildings to restore. However, these projects do come with hurdles, and a developer would be unwise to try to embark on such a project alone. Seeking that the help of professionals that can steer them away from blind alleys, and save them time on research and paperwork does much to alleviate the complications associated with historic renovation. For example, a commercial real estate consultant can help identify potential historic properties in a city. They can also help determine if these can qualify for the federal tax credit, or any other incentives or community grants that are sometimes made available for commercial projects.
If you are considering a historic restoration project, you don’t have to go it alone. You can get a thorough analysis of the market and all the available options from a consultant whose community values align with your own. Contact DCG Real Estate today to learn more.