During the 2013 Legislative Session, the Texas Legislature established a state tax credit against franchise taxes equal to 25 percent of eligible costs and expenses incurred in rehabilitating certified historic structures. Combined with the 20 percent federal historic tax credit, owners and developers of historic properties in Texas have significant incentives to revitalize and rehabilitate rather than demolish qualifying historic structures.
Texas is not well known for preserving historic buildings. While the federal historic tax credit was enacted in 1986, this incentive alone was not enough to prompt owners and developers to negotiate the process of completing a certified rehabilitation with the Texas Historic Commission and the National Park Service.
Take for example Mike Sarimsakci’s 211 N. Ervay project located in Dallas. While the building is listed on the National Register of Historic Places and is an example of 1950’s and 1960’s architecture, prior to the enactment of the Texas credit, Sarimsakci did not consider utilizing tax credits because he could raise the capital privately.
Further, many tenant brokers indicated that many of the office tenants he sought were searching for unique spaces that had character and a story to tell. The enactment of Texas’ state historic credit altered this initial calculation.
The $20.4 million project is now anticipated to receive approximately 33 percent of its renovation costs in the state and federal credit equity. Combined with a $13 million permanent loan, Sarimsakci now has the capital sources to restore the unique patterned glass exterior, making the project more marketable to office tenants, and to reduce the amount of more expensive private capital he intended to raise, increasing his potential profit.
THC is responsible for administering eligibility for the new state historic tax credit program. Regulations adopted by THC outline a three-step process for a building to become a certified rehabilitation:
- Approval of Part A – Evaluation of Significance. THC evaluates whether the building is either listed in the National Register or otherwise designated under state law as historic or contributes to a historic district listed in the National Register or is otherwise a certified local historic district and is thus eligible to participate in the program.
- Approval of Part B – Description of Rehabilitation. THC evaluates whether the proposed rehabilitation is consistent with the U.S. Secretary of the Interiors Standards for Rehabilitation. If the project is also seeking Federal income tax credits, Part B will mirror the Part 2 application with NPS.
- Approval of Part C – Request for Certification of Completed Work. After the project is placed in service (i.e., has received a certificate of occupancy or is otherwise substantially complete), THC inspects the work performed and certifies that it has been completed in accordance with the approved Part B.
Once all three parts of the application have been approved, THC issues a certificate of eligibility to the owner for the purposes of claiming the state tax credit with the Office of the Comptroller. While the Comptroller has not adopted regulations regarding the administration of the state historic tax credit, Tax Code §171.093(c) provides that the owner must present the certificate of eligibility issued by THC along with an audited cost report certified by a public account itemizing the eligible costs and expenses.
Once eligible costs and expenses are determined, the comptroller issues a tax credit certificate to the owner who may then claim, allocate, sell or otherwise dispose of the credit certificate. The Texas tax credit offsets franchise taxes and may be carried forward for up to 5 franchise tax reporting periods.
The transferability of the state tax credit certificate is a critical aspect of the program because it allows the tax credits to be syndicated and spread over a larger group of investors who by themselves may not have sufficient franchise tax liability to utilize the full credit.
This has created a great market for Texas state historic tax credits where tax credits can be sold between $.80 and $.90 per credit. For example, if a project has $10 million in eligible costs and expenses that generates $2.5 million in state historic tax credits, the property owner can sell, allocate or otherwise dispose of those credits to third parties for between $2 million and $2.2 million.
Property owners and developers should be aware of two key issues when utilizing the state historic tax credit. One, the sale of the state historic tax credits is considered income for federal tax purposes and appropriate tax planning strategies should be implemented to minimize any income realization. Two, the proceeds from the sale of the tax credits will not be available to the project until it is placed in service, requiring bridge financing to provide liquidity during the construction period.
The enactment of the statute has created excitement within the development, tax credit investor, and preservation communities and has even encouraged experienced out-of-state historic developers to jump into the Texas market. For owners and developers, the program provides a key incentive to creating unique, marketable spaces at a cost that may improve their bottom line.