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Historic Building Rehab: A Viable Option for Relocating or Expanding Business

Those wishing to rehab an historic building can take advantage of various tax credits, while also building good will in the community.

Directory 2013
The historic Fort Point Channel area of South Boston
The historic Fort Point Channel area of South Boston
Given that the northeastern United States generally, and the Greater Boston area specifically, are well developed at this point, there is no longer an abundance of available developable land. In urban centers that were historically port cities, trading outposts, or early industrialized sites, there are structures that are well located for current business purposes, but which require substantial rehabilitation to be brought back to current use.

When businesses are considering expansion or relocation venues, some of their considerations may include properties that have historical significance to the area or neighborhood and are listed on the National Register of Historic Places. This may provide an opportunity to restore an historical property and garner certain tax advantages or income to offset rehabilitation costs along the way.

Examples of companies and organizations that have discovered historical property and chosen to renovate it are not uncommon. The Fort Point Channel area in South Boston is a good example of an area comprised of several buildings built and designed by the Boston Wharf Company that were used as warehouse space for shipping and receiving functions and other port- and trade-related uses in the early 20th century. The buildings, which are historically significant to the city of Boston, are now being adapted for re-use as residential apartments, storefronts, restaurants, and office space. Whether the owners or developers made the choice to renovate an historic property deliberately, so as to connect both the locale’s and the organization’s past and present intrinsically through the architecture of the structure, or because the building happened to be a perfect fit for that user’s inflexible criteria (such as size or location), any entity undertaking the rehabilitation of an historic property will encounter some challenges, but there are considerable advantages as well.

Meeting the Challenges

One of the biggest challenges to historic property preservation is cost. Fundamentally, the expenses associated with historically rehabilitating a building are much higher than renovating a building that is not subject to rules and regulations that maintain its historical character. For example, if the windows in an historical rehab need replacing, chances are they cannot be replaced with just any big-box product; rather, they have to be replaced by windows that duplicate those that would have been found on such a building during its historically significant time period. Typically, such installations would be much more expensive. As one can imagine, with these types of parameters, there’s a risk that the residual value of the building may not fully reflect the cost of the rehabilitation.

Along similar lines, putting together a team that has the knowledge to successfully — and compliantly — preserve an historical building can be a challenge. The professionals involved, including the architect, historical consultant, tax credit syndicator or investor, attorney, and others, will need to be well-versed in the universe of historical remediation.

In addition to the typical bureaucracy associated with building a work space (such as acquiring permits and scheduling inspections), one should expect even more inspections and reviews of any work done to historically preserve a structure. Coordination with various entities is critical toward achieving steady progress during construction.

Reaping the Benefits
Given the looming burdens of additional oversight and almost definitely higher costs, why would anyone even consider rehabbing an historic building, as opposed to renovating an older, but historically insignificant structure, or starting from scratch with a new design?

The decision to move forward with the renovation of an historical structure can have special appeal as well as some significant financial benefits. For starters, an organization may look to the selection of an historical structure as a way to demonstrate its commitment to a specific city, state, or region. Investing funds into saving or restoring a significant structure of some kind and preserving the history, culture, and values of the area could build a great deal of good will for a company, as well as strengthen their overall brand image. This is a particularly applicable rationale for high-end restaurants and hotels (which can incorporate the history into part of their brand’s “story”) as well as service providers such as law firms, accounting firms, and architectural or engineering firms.

Additionally, circumstance could dictate such a choice. Finding the perfect location or the perfectly sized building, that just happens to be historical, may be your motivation or the result of your search. The previous use of the building, especially if unusual in nature, may also make a difference if the planned future use of the building is similar.

And then there is a matter of financing. Certainly if there was one lesson learned by virtue of this recent recession, it has been that financing is not an easy proposition. Although banks are starting to loosen their lending requirements, securing the needed amount of financing to build a new structure, or to buy an already-constructed building, might prove a challenge.

As an example, a company may only be able to secure a loan from a lending institution for 50–60 percent of the project’s costs. The company might not be able or willing to commit a significant amount of its equity to cover the costs of the acquisition of the property as well as its rehabilitation. Historic rehabilitation tax credits help to neutralize this challenge, and may even offer a more favorable financing situation.

Tax Credits
As developers, owners, and managers require innovative financing solutions to fill gaps in project funding, state and federal tax credits, together with depreciation and other available grants, can offset as much as 45 percent of a construction project’s budget, and they can make or break the feasibility of resurrecting a building that has significant community value.

The historic rehabilitation tax credit program is one of the nation’s most successful and cost-effective community revitalization programs to date, as tax credits encourage private-sector rehabilitation of historic buildings. But the benefits of these tax credits go beyond urban renewal. They can help fund a project that might not otherwise get off the ground, and they can create new construction jobs for the community (which builds further good will in the process). In addition, being designated as an historic place may increase surrounding property values, enhancing the economic viability of an entire neighborhood. In addition to historic rehabilitation tax credits, there are other tax credits worth mentioning that — depending upon the specific construction needs of the site — may be applicable. These tax credits may be used together for the same project. Brownfields tax credits (for remediating contamination) and renewable energy tax credits (for investing in or producing renewable energy) are two tax credits, in particular, that may provide an added benefit, depending upon whether the site also requires the cleanup of contamination, or whether renewable sources of energy — including solar, biomass, and wind — will be used to power the building.

The process of applying for and securing historic preservation tax credits, grants, or any other applicable tax credits can be complicated and requires certain specialists, such as those mentioned above, i.e, an architect, lawyer, consultant, and a syndicator. Seeking out information about this process before the project commences is critical in allowing for the developer to factor the potential tax credit equity into a proposed budget or development pro-forma, which can lead to more control over financing costs.

Both the federal and most state governments recognize that encouraging the rehabilitation of historical properties is beneficial to our communities. Through tax incentives such as the historic rehabilitation tax credit, they offer a solution that manages some of the inherent challenges in preserving an historical building, and potentially provide added financial incentives as well. The value of such credits goes far beyond monetary figures.

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