Texas is Getting Hot for Historic Tax Credit Projects

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The Federal Historic Rehabilitation Tax Credit (HRTC) was created in 1978 to tilt the preservation/demolition decision in favor of preservation and slow down “urban renewal” demolition, popular in the 1950’s and 60’s.  It recognized that restoration and rehabilitation of existing architectural details costs more per square foot than typical commercial construction.  Since that time, numerous states have piggy-backed on the Federal incentive with state subsidies, beginning with New Mexico in 1984.  Texas lagged greatly behind other Midwestern and Western states in the number of Federal Historic Rehabilitation projects per capita because it lacked a matching state credit.  From 2001 to 2012 Texas produced only 111 projects that earned HRTC’s.  Ohio, by contrast, with half the population but having a robust 25 percent State Historic Rehabilitation Tax Credit, saw 697 projects completed in the same period.  To create more historic rehabilitation projects and utilize more Federal HRTC dollars, Texas joined the thirty-three other states when it passed enabling legislation in 2013 for a state tax credit.  Combined with the 20% HRTC, Texas added a 25% credit so developers can recoup 45% of “qualified rehabilitation expenses”.  That’s a strong financial incentive to preserve existing architecture rather than tear down and replace a building. With modern technology in construction materials and building techniques, older properties are proving surprisingly adaptable to new uses.

Due to IRS passive income rules, most developers can’t effectively use the federal tax credits themselves. Therefore, a market has developed to bring in corporate investors to use the credits, effectively monetizing the awards and reducing the dollar amount of a developer’s own funds needed to complete a project.  To broaden the market for investors in its State Tax Credit, Texas recently added the Insurance Premium Tax to the Business Franchise Tax for those taxes which can be offset by the credit. This change is important because it greatly increases the size of the investor pool, and consequent demand, for Texas state credits.  Developers have noticed the increased demand for their credits, and have responded by aggressively pursuing older properties in established markets to use them.  The increased credit pricing and resulting profitability will likely bring more projects to cities like San Antonio with many historic properties but lower real estate values than Dallas and Houston.

While late to the party, Texas is off to a great start. Waco developer Jerry Dyer says, “Over the years I have had several interactions with the Texas Historical Commission (THC) ranging from multiple phone conversations…to a couple of on-site meetings to discuss the eligibility of a project.  Without exception, they have all bent over backwards to be accommodating to help get the project eligible and completed.  I can say the THC truly puts their money where their mouth is when it comes to getting historic tax credit projects funded in Texas.”

Clocktower Tax Credits is pleased to be connecting developers restoring Texas real estate with our deep pool of institutional tax credit investors. From the massive cleanup effort from Hurricane Harvey on the Gulf Coast, to the beautiful buildings all over the state in need of a freshening, many projects await.

For more information, please contact David Weinstein at (978) 793-9157 or DWeinstein@clocktowertc.com.