With the passing of SB-451, California is poised to become the thirty-sixth state to enact a State Historic Tax Credit program (edit: it was sent to the Governor’s desk on 9/19/19 and signed last week on 10/9/19). It combines many of the most successful features of other programs, as well as adds additional benefits and components that may become models for existing programs as well as future HTC programs to emulate. Though contentious (Curbed LA painted as “a deal to not only to preserve the state’s most expensive real estate, but to give the state’s wealthiest homeowners additional money to do so”), the passage of this credit should alleviate some concerns of the affordable housing and anti-gentrification community, as well as align with many of California’s environmental goals.
Historic Preservation Incentives
One of the biggest incentives available to historic rehabilitation projects is the Federal Historic Tax Credit, an income tax credit equal to 20% of qualified rehabilitation expenses (nearly all hard and soft costs associated with the rehab, minus acquisition and site work). The Federal credit has proved to be one of the most cost-effective stimulus programs; since 1978, $30.8 billion in (inflation adjusted) tax credits have created $162 billion in total investment, and generated $35.9 billion in Federal Tax receipts.
Many states have created additional incentives to redevelop historic properties, since in addition to those $35.9 billion in Federal Taxes, historic tax credit projects carry an additional $14.4 billion in state and local taxes created since 1978. These programs are all administered differently, with various levels of incentives and requirements, but the most successful programs allow developers to access as-of-right state credits that match the Federal historic tax credit. New York, for instance, has a 20% state income tax credit capped at $5 million per project, and while there can certainly be improvements, it also stimulated nearly three-times as much usage of the Federal credit as the next closest state.
Prior to this bill in California, the only major incentive to revitalize and maintain historic properties, outside the Federal historic tax credit, was the State’s “Mills Act.” This allowed “historic properties” (local, state, or National significance and designation) to receive a property tax freeze at the pre-rehabilitation rate for up to ten (10) years, and typically only available to properties with a value under $1-1.5 million (though some municipalities allow exceptions). While very lucrative in a state with high property taxes like California, the property tax freeze does not help developers, big and small, access other sources of capital often needed to make affordable housing or projects in riskier markets viable.
The New California Historic Tax Credit
The bill, which was proposed by State Senator Toni Atkins, meant to bring California in line with national trends in incentivizing the redevelopment and preservation of historic buildings. Even without a state HTC, California was 10th in the country in total usage of the Federal Historic Tax Credit from 2013-2017, but was 20th in usage in 2017, suggesting it is primarily used by fewer but larger projects generally than in other states.
The credit itself stacks up favorably to other states, as at its base, it will will:
- create a 20% historic tax credit allocated on a first-come-first-serve basis to applicants,
- allocate $50 million a year, with the balance rolling over to subsequent years,
- create a 20% homeowner credit for projects with at least $5,000 in expenses and capped at $250,000 (which would result in a $50,000 credit).
- require that Application note job creation totals (before and after rehab), expected increase in tax revenues (local, state, and federal), and what other incentives are being utilized.
From there, however the credit has several features which will not only help its success, but make it a model for other states:
While the program does not cap the per-project allocation (something most states use to prevent all the credits being used by one or two large projects), it does set aside $10 million for two subsets of projects:
- $8 million will be set aside for commercial projects with QREs under $1 million (surplus rolled over to subsequent years)
- $2 million for the historic homeowner credit program (surplus rolled over to subsequent years)
Commercial projects that include one of the following will be eligible for an addition 5%:
- The project includes affordable housing for lower income households
- The project is located in a designated census tract
- The project is a transit-oriented development that promoted high-density, mixed use within one-half mile of a transit station
- The project is on “Federal Surplus Property” or a part of a military base reuse
- Leverage the credits into $287 million in private investment
- Create 1,300 construction jobs and an additional 2,140 ongoing jobs
- Create $800 million in economic activity
Other Benefits of the State Historic Tax Credit
Though its goals do not directly state as much, the credit will have a huge impact on creating additional affordable housing as well as continuing California’s legacy as a leader in the environmental sustainability movement. Lastly, by incentivizing smaller projects in low-income census tracts, the program has the potential to drive employment to sectors often left-behind by the tech-boom.
In particular, the addition of an extra 5% for low-income housing projects is a huge incentive for developers debating whether to create affordable or market-rate projects. The ability for affordable housing projects to accumulate credits totaling 45% of their rehabilitation costs before any other incentive is counted can not only make otherwise unviable low-income projects manageable, but may even promote additional creation as well.
This extra 5% may seem small, but when taken in the context of how low income housing tax credits (LIHTCs) are allocated, it can make all the difference. California is allowed to issue only a certain number of LIHTCs by the Federal Government, so they are allocated to projects on a competitive basis, with project scoring based on a variety of factors, including the use of other sources that minimize the demand for LIHTCs.
In New York State, this has meant that projects that utilize historic tax credits (and thus require less LIHTCs) have become more and more common. This has the dual effect of 1) incentivizing the redevelopment of historic properties for low-income housing, but also 2) allowing more projects to utilize LIHTCs by lowering the requested amount per-project. Though many think of “historic preservation” as creating house museums and benefiting the wealthy, an adaptive reuse of an abandoned or underutilized historic warehouse, factory, or school building into affordable housing can add just as much density to a neighborhood as a high-rise, without many of the negatives (most notably displacement) associated with those new developments.
Another important benefit to remember when considering the impact of historic tax credits is the environmental component. Often environmental proponents advocate for new, LEED certified new construct, but this ignores that fact that not only can older buildings be updated to be more efficient, but there are other sustainability arguments to consider as well.
First we should consider the solid waste component, as it’s estimated that the average building demolition yields 155 pounds of waste per square foot. In addition to the solid waste is the embodied energy (the energy used to harvest materials, construct, and finish a product essentially) wasted when a building is demolished: the Advisory Council on Historic Preservation noted in 1979 that there are about 80 Billion BTUs of energy embodied in a typical 50,000 square-foot building, the equivalent of 640,000 gallons of gasoline. Lastly, older commercial buildings constructed before the widespread use of air conditioning, heating, and electricity were designed specifically to take advantage of natural daylight, ventilation, and solar orientation (key criteria when evaluating environmentally sustainable buildings today), and constructed with materials that often have much longer lifespans than modern materials.
The last important benefit we’ll consider when looking at the impact of the historic tax credit is job creation. In the latest report on the impact of the Federal Historic Tax Credit , it’s estimated that HTC-projects created over 129,000 jobs, with a majority of job creation in construction, manufacturing, and retail. The interesting thing to note, however, is that due to our interconnected economy, many jobs outside of directly related fields are impacted, with nearly 7,500 jobs created in the agricultural, forestry and fishing, mining, government, and transportation and public utility sectors. In California in 2018, even without a matching State Credit, 2,196 jobs were created as part of historic tax credit-funded projects, which we’d expect to increase dramatically (Texas, for instance, has seen the job creation from HTC projects skyrocket since the introduction of their credit in 2015, with 10,000 of the 17,000 jobs created since 2014 happening last year), with many of those jobs coming outside the tech-industry, and as far away from city-centers as rural farmland.
Despite some attempts to paint the passage of the California historic tax credit as a handout to the wealthy while other housing goals were not prioritized, there is a huge potential for the credit to catalyze further affordable housing creation, contribute to California’s status as a leader in environmentally sustainability, and create much-needed jobs in sectors left behind by the tech-boom (agriculture, retail, manufacturing) as well as thousands of entry-level and specialized trade construction opportunities. The credit is not only a great first step, but many of its features may soon be replicated in other states looking to create their own historic preservation incentive, or even looking to improve their historic tax credits.
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