By Chuck Ross
November 7, 2006/—With today's growing interest in preserving resources, rehabilitating existing housing stock rather than tearing down and building anew makes more sense than ever. Historic properties deserve special attention because of their ongoing contribution to their communities' fabric and our nation's history. But even the humblest ranch house can offer an energy-saving starting point for updated residential comfort. Recognizing the value of reusing instead of building from scratch, federal and local government agencies offer incentives builders and developers should know about when planning project finances.
Taking credit for restoration
The Federal Historic Preservation Tax Incentives program is probably the best known of these efforts. The program, administered through the National Park Service (NPS) and local state historic preservation offices, is designed for income-producing historic properties. Owners of certified historic structures are able to deduct 20 percent of rehabilitation expenses from the income of the business related to the building.
Buildings must first be included on the National Register of Historic Places, a process that begins by submitting an application to the historic preservation officer for the building's state. The state reviews the application, which typically will incorporate a written description of the building's history, along with photos and renovation plans. The state then passes the application on to the NPS for final certification before work begins. This process can take up to six months, according to Sharon Park, FAIA, chief of technical preservation services for the NPS, but is generally shorter for buildings sited in previously certified national historic districts.
Meeting the standard
A similar state and federal review is required once renovations are complete to ensure all improvements meet the Secretary of Interior's Standards for Rehabilitation. These guidelines stress the importance of maintaining the essence of a building's character, even if its purpose has changed.
"After rehabilitation, the building should have the character-defining features of its historic use," Park says. So, in a former mill, evaluators might want to see the exposed brick and timber framing notable in the building's prior incarnation. "The guidelines are, if you're preserving the character of a historic building, it should still have that character."
Final NPS approval can be attached to the owner's tax return as documentation for eligibility for the 20 percent credit. However, Park urges applicants to work with a tax accountant familiar with the credit's provisions to ensure any applicable Internal Revenue Service requirements are met. Also, alternative minimum tax issues could limit an owner's ability to take advantage of the credit. Finally, the building must remain an income-producing property for at least five years, or owners could be forced to repay a pro-rated portion of the credit to the IRS.
Owners also should check with their state historic preservation office for information on state-based assistance for those renovating historic properties.
Single-family options
Buyers of single-family homes requiring renovations, whether historic or not, may be eligible for special financing programs available through the Federal Housing Administration (FHA). The 203(k) and streamlined 203(k) initiatives provide guarantees to lenders willing to fund mortgages based on a home's future, improved value, rather than its existing state. Homebuyers can use the extra funding to pay for repairs and improvements. (Information is available at www.hud.gov/offices/hsg/sfh/203k/203kabou.cfm.)
Closing a standard 203(k) loan application can take from 45 to 60 days longer than is typical with more routine financing, says Richard Bradley, an FHA senior credit policy specialist. This added time is needed to allow a 203(k) inspector to look over the property and provide a work write-up listing needed safety and code repairs along with possible optional improvements.
The program's streamlined version is available in cases where needed improvements are clearly defined—such as a new roof or heating system—and their added cost doesn't exceed $35,000. Financing for these loans may only add 10 to 15 extra days to the closing process, Bradley says.
In both cases, escrow accounts are established to pay for identified improvements once the loans close. Funds are released in stages throughout the renovations.
The two 203(k) versions were designed to encourage homebuyers in depressed areas to renovate existing housing stock and potentially boost neighborhood revitalization efforts.
"The program is available anywhere, but it's often used in older areas of cities," Bradley says. "It tends to be used with older properties."
Chuck Ross is a freelance writer based in Brewster, Mass.
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