Right-Sizing Historic Tax Credits for Main Street Rehabilitations

Novogradac Journal of Tax Credits | February 2019 | Volume X - Issue II
By: Katherine Ferguson

Every year, the Annual Report on Economic Impact of the Federal Historic Tax Credit, produced by Rutgers University and the National Park Service, proves the success of the program. There are the big numbers –for fiscal year 2017 (FY 2017) those were $6.5 billion in total rehabilitation costs and 107,000 jobs created –and the state-by-state breakdown of economic and tax impacts. Additionally, we know from this report that 26 percent of the FY 2017 federal historic tax credit (HTC) developments were in communities with populations less than 50,000. These are communities that are preserving America’s Main Streets.

The phrase “Main Street” evokes the low-rise commercial streetscape in a hometown, a beloved vacation spot or that small town you once drove through. They were the flagship for economic development 100 years ago and the abandoned victims of suburbanization 40 years ago. They are now thriving cultural hubs for millennials and baby boomers alike in towns and cities large and small.

The phrase “Main Street” may also evoke the economic development movement that grew out of a trend toward sprawl that began in the 1970s. Led by a cry for authenticity and locally owned businesses when cookie-cutter buildings and big-box retailers were taking over, organizations such as Main Street America were created to advocate and assist communities and business owners looking to revive historic commercial districts.

Even though developments in small communities make up a quarter of federal HTC applications, quite a few properties do not take advantage of the program. The preservation of historic Main Street buildings is often taken on by local developers or the building owner that happens to also run the store inside. Because of the costs associated with using HTCs, such as structuring, consulting and legal fees, many owners forgo using them according to Patrice Frey, CEO of Main Street America.

“The transactional costs associated with federal HTC are so significant that they can be cumbersome for projects under $5 million,” said Frey. Main Street projects are often well below that size.

If building owners are not pursuing the federal HTC, they are likely to forgo available state HTCs as well.

How HTCIA Would Help Main Street

In 2017, John Leith-Tetrault, then of the National Trust Community Investment Corporation, wrote about the factors that influenced whether an owner used HTCs. These included the timeliness of receiving the benefit of the programs, lack of owner access to investor capital, the necessity to follow the Secretary  of Interior’s Standards for  Rehabilitation, the need to meet the substantial rehabilitation test for most programs and the preference of owners to deal with local county officials and programs rather than state and federal agencies. The goal of the article was to promote the Historic Tax Credit Improvement Act (HTCIA) that was introduced earlier that year and designed to incentivize the use of the federal HTC for smaller projects like those on Main Street.

Improvements proposed by the HTCIA include increasing the credit from 20 percent to 30 percent for projects that produced less than $3.75 million in qualified rehabilitation expenditures (QREs). The larger credit amount for smaller developments would help offset some of the soft costs associated with using the federal program. Another component of the bill would make the federal credit transferable, like many state credits. Transferability would create a market for smaller projects and would not require the legal fees and soft costs that are involved in syndicating a typical federal HTC development. It would allow owners that do not need the tax credit to transfer the tax certificate to an entity that would be willing to buy the credit. Lastly, the bill reduces the adjusted basis test from 100 percent of the property value to 0 percent like other redevelopment credits.

State HTC programs tend to be more user-friendly for smaller properties, as many are transferable, have a lower basis test and some can even be used by nonprofits without creating a for-profit development entity. Some states have taken the initiative to structure their own HTC programs to benefit Main Street projects in particular. Set aside funds of annual aggregate caps  are the most popular tool and are incorporated into legislation in states such as Maryland, Nebraska and West Virginia. Higher credit amounts for developments in smaller or economically depressed areas represent another tactic, such as the North Carolina credit that has a 5 percent bump-up to its 15 percent HTC for projects located in “Tier 1 or Tier 2 areas” or targeted investment sites.

A few other examples of targeted rehabilitation state incentives from recent years include:


To make its 25 percent credit more accessible for  small development applicants, Iowa’s 2015 Historic Preservation and Cultural and Entertainment District Tax Credit Program accepts applications for projects with less than $750,000 in QREs year-round, while those with more must apply in a registration filing window. It also sets aside 5 percent of the $45 million annual aggregate cap for those developments of less than $750,000.


The 2015 Georgia legislation caps the aggregate tax credit benefit of its 20 percent program for historic rehabilitation projects that receive more than $300,000 in credit but leaves those of less than $300,000 uncapped. The Georgia HTC is also transferrable, which is a way to encourage use of the program for projects of all size.


To encourage developments outside of urban areas, such as Birmingham and Mobile, the Alabama legislature passed in 2017 a 25 percent HTC that requires 40 percent ($8 million) of the annual credit be allocated to rural counties for the first half of the fiscal year. There are 60 rural counties in the state, each with a population of less than 175,000. Any unused funds can be allocated to the seven most populous counties in the state in the second half of the year. Alabama also made its credit refundable, which encourages owners with less tax liability to use the incentive. Unfortunately, the state limited the ability to transfer the credit to one transaction.


Colorado lawmakers got right to the point in legislation passed in 2018 called the Colorado Job Creation  and Main Street Revitalization Act. With an annual aggregate cap of $10 million and per-project cap of $1 million, it employs both a bump up from 25 percent to 35 percent for projects in “rural” communities of less than 50,000 in population and require that 50 percent of funds ($5 million annually) be allocated to projects with QREs less than $2 million.

Importance of State HTCs on Main Street, Beyond

A recent National Trust for Historic Preservation report on state HTCs highlights how the right incentive attracts redevelopment dollars into smaller communities, for both Main Street and other economically beneficial rehabilitations.

“A state’s investment in small cities and towns has an outsized impact,” said Renee Kuhlman, one of the report’s authors. One example Kuhlman cites is how the Ohio HTC incentivized a catalytic rehabilitation project in Hamilton, a city of 60,000-plus people 20 miles north of Cincinnati, which in turn sparked other renovations and the creation of 13 new businesses downtown. (Examples like these are a reminder that state programs can be structured to encourage both small and large projects.)

Main Street America is also joining the efforts to advocate for more effective state programs and create education opportunities for building owners.

“We are always looking for ways to connect business owners with the financing they need to make their projects successful,” said Frey. The annual Main Streets Now conference in Seattle in March will feature HTC topics and professionals and the organization also offers courses on the basics of financing small commercial rehabilitations through its Main Street America Institute in cooperation with the National Development Council.

After more than three decades of practice, innovative improvements can strengthen the federal HTC to make it more in line with many state HTC programs that recognize the need to support a diverse population of properties and communities. Rehabilitation developments bring new and exciting economic opportunities and are becoming increasingly important for societal trends that favor live, work and play in authentic spaces. Whether urban or rural, you cannot get a much more authentic experience than on Main Street. ;

 This article first appeared in the February 2019 issue of the Novogradac Journal of Tax Credits.

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