Beyond the Build

Construction Trends

Historic Tax Credits: The Good, The Bad and the Ugly

Lately, we’ve been involved in several urban projects that have utilized historic tax credits. One is complete, one is almost finished, and one is just ramping up. While I feel the ins and outs of dealing with this system could easily fill a book, let me sum up our experiences with HTCs as briefly as I might.

HTCs are often the catalyst needed to get projects rolling through the tax credits they provide. A few experiences I might pass on for contractors considering this type of work:

  • HTCs require that a separate entity be developed. This LLC isn’t much more than a shell. Ensure you identify the correct entity that owns the dirt.
  • Get ready to jump through some hoops. Building requirements are very specific for these historic buildings, and must be followed in order to receive the funding.
  • Plan for your accounting team to deal with extra paperwork. For our HTC projects, it was required that materials be sourced through the Downtown Redevelopment Authority. This meant that material costs came through us instead of the subcontractors, requiring much more work from us.
  • Because of the long period for payout, HTCs can be (and usually are) bought and sold on a market. HTCs can be purchased at one time and funded another, which makes contractor timely payment less reliable. Build in a time cushion for subcontractor payment.
  • A tax credit investor must be in place prior to the property being put into service (This is normally measured as the issuance of a Certificate of Occupancy). Otherwise one will risk losing the tax credit. Not good.
  • Unless you have real faith in the building and its long term success, I would tend to say steer clear. FHTC (federal) are spread out over 5 years, and can be recaptured if the building is adaptively reused for another capacity in that timeframe. Depending on the way your agreement is structured, this could affect the contractor.

I’ve seen Historic Tax Credits nudge some legacy projects from non-starters into flourishing buildings. As contractors, what we leave behind is important, so I think it’s worth it to take this type of project. Just be advised that HTC work does come with some extra hiccups and risk.

Merrill Stewart Jr.

Merrill Stewart is Founder and CEO of The Stewart/Perry Company, a commercial building contractor based in Birmingham.