Wright, Constable & Skeen Partner James Constable is Chairman of the Board and President of The Manor Conservancy, Inc., a local land trust in Northern Baltimore and Harford County.

Published in “Baltimore SmartCEO Magazine,” March 2002

There’s gold in those old buildings. Over the last twenty-five years, federal, state and local laws have been enacted to encourage preservation of historic structures, and to regulate and restrict uses of critical land and historic structures that might result in their destruction. Most restrictions are in the form of land use and zoning laws. Incentives are generally tax deductions or credits or cash payments. They can be substantial. If you are looking alternatives for locating your business, rehabbing an older building may have the financial edge over other options.

The historic tax credit is one such incentive that appeals to owners of income producing property. This credit is offered on the federal and state and sometimes local level. The federal credit is up to twenty percent of qualified rehab expenditures. It may be applied as a dollar for dollar credit against income tax. Thus, there can be a twenty percent savings on rehabilitation costs. The credit is available for almost any qualifying income producing property, including stores, restaurants, warehouses, apartments, inns, hotels, office buildings – virtually any property that is not a personal residence.

The highest credit is reserved for rehabilitation of certified historic structures. If a property is not certified, it may still be eligible for a ten percent credit if the structure was placed in service prior to 1936. A certified structure is one that is listed on the National Register of Historic Places or is within a National Register Historic District and supports the district’s qualification as historic. For example, a new McDonalds within the National Register District of Annapolis would not qualify, whereas the Maryland Inn would because it is part of the historic fabric of the area.

The credit applies to rehabilitation expenditures to the building and its structural components. The qualified rehab expenses must exceed five thousand dollars or the tax basis of the property as of the start of the rehab project, whichever is larger. These amounts are measured over a twenty-four month period which may be selected by the taxpayer and which ends with the tax year for which the credit is taken. This is the year that the structure is placed in service – for instance, the year that the certificate of occupancy is issued. The credit may be carried over for up to twenty years and carried back for one.

However, not all expenditures qualify for the credit. New construction or enlargements of the building are not included. Acquisition costs and the cost of land do not qualify. Nor do landscaping costs qualify. If the use of the property is exempt from taxes, the credit will not be available. Nor can the owner take a credit for expenditures towards improvements that are not considered qualified historic rehabilitation. Non-qualified historic expenditures include the costs of improvements that do not meet the Secretary of the Interior Standards for Rehabilitation. These standards are the ten commandments for historic restoration. They encourage maintaining distinctive materials, spatial relations and features, particularly, those that contribute to the historic character of the building. They encourage repair as opposed to replacement of historic features. They promote preservation of archeological resources. These standards are guidelines for appropriate historic rehabilitation. Putting a skylight on the roof of Monticello may not qualify. Repairing the roof to match the original would.

It is not all roses, however. There are downsides to utilizing the credit. In some cases architectural requirements for qualified historic rehabilitation do not suit the owners needs or are impractical for the end use. Depreciation may be reduced. Costs to qualify or make use of the credit can be high. The IRS may recapture all or part of the credit in certain circumstances such as if the property is sold within five years.

There is even a market for credits if the owner cannot use them. Sophisticated buyers such as real estate professionals and public companies are potential purchasers and may pay up to ninety-five cents for a dollar of credit. The larger the deal, the larger the price. Therefore, if you are the owner of a qualified structure but cannot use the credit for some reason, you may be able to structure a transaction that may yield you a financial benefit nearly equal to the credit itself. This generally requires partnering with a potential purchaser and paying the costs of setting up and consummating the transaction. The larger the deal, the easier it is to absorb these costs.

Credits are only available for projects that receive the blessing of the federal government’s certified agency. In Maryland, the agency is the Maryland Historical Trust located at 100 Community Place, Crownsville, Maryland. The MHT has what is called a certified local government status. It verifies that the property is listed with the National Register or is a supporting structure to a listed historic district. It qualifies the rehabilitation project as being entitled to the credit, that is, that it meets the Secretary of the Interior Standards. One needs to contact the Maryland Historical Trust prior to undertaking the project in order to receive approval of the proposed rehab work. The Trust can be reached at (410) 514-7627.

Maryland also offers a credit for income producing properties. The credit is up to twenty-five percent, and applies to qualified rehabilitation expenditures on “Certified Heritage Structures”. Generally, the same rules apply as to the federal credit. However, a Certified Heritage Structure for the purposes of the Maryland credit includes properties that may not be entitled to the federal credit. In addition to structures listed or recognized by the National Register, a Maryland Certified Heritage Structure includes structures listed in local landmark lists or support local districts or certified heritage areas so long as the MHT certifies that the structure contributes to the historic significance of the district or area. Most Maryland counties and Baltimore City have commissions that certify structures. Baltimore City has CHAPS; Baltimore County has the Landmarks Preservation Commission. Under the Maryland program, the credit may be carried over for up to ten years. It may be transferred to a mortgagee to reduce the principal balance with a tax savings to the mortgage holder that may be passed through to the owner. If the property is sold, the unused portion of the credit may be sold as well.

The Maryland credit also applies to owner-occupied residential structures so long as they are certified. Again, one must work through the Maryland Historical Trust. It is imperative to contact the MHT prior to undertaking the project and to submit completed applications.

If you find a suitable building for rehabilitation yet it is not qualified by being listed or supporting a listed district, do not give up. It might be eligible for listing on either the National Register or a local landmark list. You should contact the Maryland Historical Trust, the landmark commission in the county or city, or a local land trust. The procedures and paperwork can be tedious and time consuming, but the rewards can be substantial.

Some local jurisdictions offer their own credits. Baltimore City offers a real property tax abatement of the costs of qualified improvements. The added value of the improvements will not be used to raise the assessment of the property. Since the tax is a percentage of the assessment, it will remain at the lower level. The assessed value at the pre-rehabilitation level remains for ten years. The Baltimore City program applies to residential and business properties that are listed on the National Register or the Baltimore City Commission for Historic and Architectural Preservation or contribute to the historic significance of districts recognized by either of those organizations.

There is a wealth of other incentives for the individual and business. They include deductions and credits applicable to real property taxes, income taxes and estate taxes. In addition, programs exist that pay cash for development rights. For those interested in exploring these financial incentives and their availability for a particular project, there are lawyers, accountants and consultants that specialize in these areas. In addition, the Maryland Environmental Trust, the Maryland Historical Trust and the many local land trusts offer advice. To find a local land trust in your area, call the Maryland Environmental Trust at (410) 514-7900.