Both the state and federal government provide tax credits for creating affordable housing and historic credits to people who restore certified historic structures. A “new market” tax credit is also available to mixed-use and commercial projects in economically-vulnerable areas. These credits, singly and in combination, can provide much of the equity needed for a project.
Tax credit projects are best left to experienced developers. Matching the credits to investors who can use them, meeting the detailed requirements of the programs, and servicing the information demands of the investors and the IRS are all beyond the scope of most people who are not professionally trained in these fields. Teaming up with a for-profit developer, or a not-for-profit Community Development Corporation (CDC) can, however, bring expertise and project management. Therefore, it is always wise to consider the potential for tax credits, especially if the project is large, rental, located in an historic district, or a New Markets census tract.
Low-Income Housing & New Market Tax Credits
Every state allocates the Low-Income Housing Tax Credit (LIHTC) according to guidelines set forth by the state’s Qualified Allocation Plan or QAP. Massachusetts is very conservative in allowing its LIHTC’s to support affordable housing explicitly built for artists. As a result, people developing artist space typically forego the LIHTC.
New Markets Credits are designed to bring commercial investment into lower income areas. The credit is available for investments in mixed-use projects where more than 20 percent of the gross rental income is from non-residential rentals. New Markets credits are complex in their administration, because special entities called Community Development Entities (CDE) must be formed in the ownership structure to use them. To see if these credits might apply to a non-residential arts project, start by asking your local economic development director if your project is located within a qualified census tract that meets the median income standard. When properly managed, this kind of program can bring useful funds, but it’s complex and requires significant third-party expertise.
Historic Tax Credits
The Federal Government provides a 20% tax credit to developers of certified historic renovations. The federal government also provides a 10% tax credit to support non-historic renovations of non-residential buildings over 50 years old. Like affordable credits, historic credits are fairly easy to understand (this is arithmetic, not calculus), but they still involve many crucial details you must meet correctly. Federal historic credits are not suitable for condominium or co-op (owner-occupied) projects. They are good sources for income producing properties/rental projects only, which might be sold to occupants no sooner than five years after completion.
The Massachusetts historic credits may be granted for amounts ranging from 1% to 20% of the qualified rehabilitation costs. The total for Massachusetts credits was recently raised to $50 million per year. The state regulations are similar to those of the federal credit, but state credits do not require that the credit investor be within the partnership, making them applicable to condos and co-ops.
The 10% Rehabilitation Tax Credit
If you are rehabilitating an old building for a workspace, but the building isn’t certified historic and you intend to convert it to a live/workspace, then the 10% tax credit is a good fit for your project. It does not require historic approvals. Think of it as a sort of “green” credit. The federal government is subsidizing you to keep an old building standing rather than sending it and its embedded energy into a landfill. This tax credit is available for rehabilitating non-historic buildings placed in service before 1936.
This tax credit works by letting the project’s owners take a credit off their federal income tax bill in the amount of 10% of most of the construction and “soft” development costs. Like everything related to taxes, the details are important, so proceed with an open mind when considering this source of funds. You also need to hire an accountant as soon as you can use the credits. Don’t count your chickens before your accountant has hatched them.
What are the advantages of this 10% credit?
- You don’t need to submit your plans for historic review.
- You don’t need to get your building on any historic register.
- There is almost no bureaucracy involved.
- You can make major modifications to the building as long as they meet code. It does not add to the construction or design cost at all.
- There is almost no paperwork necessary to claim the credit.
- In small amounts this credit can be used by ordinary people, not just corporations.
What the challenges of this credit?
- In large projects, the credit gets too big to use for personal tax returns, meaning you would need to bring in investors, creating upfront legal and accounting expenses. These expenses will become annual if the investors become partners.
- You need to commit to keeping the project afloat for at least five years or pay back part of the credit if you used them all upfront.
- You need to have a Certified Public Accountant (CPA), not just a tax preparer, especially in the first year of using this credit. CPAs charge per hour.
Historic credits can be combined with other forms of credits, especially when the same tax-paying entity, whether an individual or a group, uses them together. Often, historic credits are packaged with the Low-Income Housing Tax Credit, but few artist projects in Massachusetts use the LIHTC .The historic credits may also be used in conjunction with New Markets credits to help fund mixed-use arts projects.
Larger projects fare better with tax credits since the documentation costs are comparable no matter what the size of the project. The legal and accounting overhead are, however, significant. Though complex, tax credits might be just the ticket for getting a major project started.