Maine’s Historic Rehabilitation Tax Credit
Paxton recently joined MEREDA members for breakfast in Lewiston to present on how Maine’s Historic Tax Credit has transformed Historic Rehabilitation in the State. Read on to learn more about Maine's Historic Tax Credit program.
Historic Preservation may be the least understood major economic development strategy in Maine, bringing numerous financial benefits to the state’s communities. Preservation drives downtown revitalization and neighborhood rehabilitation, enhances real estate markets, grows the tax bases, attracts heritage tourists and new retiree residents, and allows for a more sustainable reuse of infrastructure. But largely through historic tax credits, the understanding of preservation’s impact is growing.
The Maine Historic Rehabilitation Tax Credit passed in 2008. Since then, 62 privately developed projects have been completed or are underway, investing over a third-of-a billion dollars ($335million) in construction expenditures. These projects have facilitated creation of many new businesses and over 800 housing units, with 600 affordable housing. A total of 2.3 million square feet of rehab and new construction has been completed, increasing the property tax assessment of these sites from $37million to $127 million – a 350% increase in the tax base.
Many of these buildings were formerly vacant, dragging down the real estate market around them. After rehab they have raised the market and fostered additional nearby investment. 32 large and small cities and towns across the state host historic tax credit projects, with multiple projects in Bangor, Biddeford, Lewiston, Portland, Rockport, Saco and Waterville.
The credit is a dollar-for-dollar reduction in tax liability or a refund, for expenditures on the rehab of income-producing historic buildings such as commercial, industrial and residential-rental properties. The state credit is 25% of the total qualified rehab expenses, with affordable housing eligible for a 31% State credit. This is added to an additional 20% federal historic credit, for a total of 45%, or 51% for affordable housing.
How are projects approved?
Prospective projects apply to the Maine Historic Preservation Commission (MHPC) for both the federal and state credits. The MHPC then makes a recommendation to the National Park Service (NPS). The application is a three step process. Part 1 reviews the building to determine if it is or can be listed in the National Register of Historic Places, either individually or contributing to a historic district. Part 2 is an approval of the interior and exterior rehab plans, which must meet the Secretary of Interior’s Standards for Rehabilitation. Part 3 is approval that the completed work matches the previously approved plans.
Thus the oversight for this program includes review and approval of rehabilitation by both MHPC and NPS, performed both before and after rehab. The tax credit is not paid until after final approval of these expenditures and the property is being rented. Both Maine Revenue Service and IRS also review the tax returns for the projects. Also if the ownership changes or goes bankrupt within 5 years after completion, the credit payments cease and part of the credit is recaptured.
Who can use the tax credits?
The state credit, which is paid out over a 4-year period after the rehab project is complete, is available to any taxpayer who files Maine tax returns. Non-profits can be partners in projects to cut the federal tax on the state credit (including Maine Preservation). The federal credit is paid out in year-1, but it can only be used by real estate professionals, taxpayers with substantial passive income and C-Corps and Banks.
How are the tax credits deployed?
Syndication is regularly used to allocate tax credit benefits to a group of owners. Often corporate investors who can use the federal credit will provide up-front equity in return for the tax credits, while the developer receives most of the cash flow and appreciation. As such, the tax credit allows developers to raise equity, maximize tax benefits, minimize subsidy and, most importantly makes projects financially feasible that otherwise would not be possible. Syndication usually carries a costly legal fee and, therefore, is generally used on larger projects of $2.5 million or more. Alternatively, developers can engage C Corporations or banks to both finance the project and receive the federal credit.
A small project option allows projects costing between $50,000 and $250,000 to not use the federal credit, avoiding these complications.
What is the future for Historic Preservation?
Preservation has a strong history of broad, unqualified success and enormous economic impact. We need to train more building professionals and craftspeople to work in the field. Rehabilitation of historic buildings has a catalytic effect on community revitalization, by developing momentum for additional projects. Historic preservation is adaptable to current energy efficiency standards and also aligns well with other sustainability movements such as land conservation and smart growth.
