Analysis

This article has been saved to your Favorites!

Proposed Historic Rehab Credit Expansion Gaining Steam

By Alan K. Ota · January 29, 2021, 5:33 PM EST

A bipartisan push to broaden the tax credit for rehabilitation of historic buildings has gained momentum on Capitol Hill, as lawmakers search for ways to encourage Main Street redevelopment during the novel coronavirus pandemic.

Democrats and Republicans have supported the rehabilitation tax credit since it was created by the 1978 Revenue Act but lawmakers have disagreed about the scope of potential upgrades. (AP Photo/Mark Tenally)

Proponents say an upgrade is needed to jump-start projects slowed by concerns about the pandemic's impact on construction timelines and on business plans of owners and tenants of buildings. But they face tough choices on how to expand the incentive in order to solidify support for including it in an emerging pandemic response package early in the session or other tax legislation later in the year.

Both Democrats and Republicans have supported the rehabilitation tax credit since it was created by the 1978 Revenue Act , expanded by the 1981 Economic Recovery Tax Act  and streamlined by the 2017 Tax Cuts and Jobs Act . The credit applies to certified historic buildings, including those listed on the Interior Department's National Register of Historic Places under the 1966 National Historic Preservation Act.

But lawmakers have disagreed about the scope of potential upgrades, with some Democrats backing an expansion of the incentive for all projects across the country, while some Republicans have argued changes should be focused on smaller projects and rural communities.

The push for a broader rehabilitation tax credit coincides with a broader discussion on Capitol Hill of other incentives for development, including potential legislative proposals and possible regulatory tweaks for opportunity zones.

Rep. Earl Blumenauer, D-Ore., a senior member of the House Ways and Means Committee, said he expected to keep pushing for a long-standing bipartisan proposal to increase the rehabilitation tax credit permanently to cover 30% of renovation costs — up from 20% — for smaller projects costing no more than $3.75 million.

But Blumenauer said he had not decided whether to broaden his campaign to push for a temporary expansion of the incentive for all projects, similar to an ambitious expansion of the credit passed by the House by a 233-188 vote last July in a five-year surface transportation reauthorization.

The House-passed bill, which died in the Senate, included Blumenauer's permanent expanded credit for smaller projects. It also had a temporary framework for increasing the credit rate for all projects to 30% through 2024, then phasing it back down to 20% starting in 2027.

"I would prefer to be more expansive, but I want to make sure that we get the reform taken care of," Blumenauer told Law360. He made clear he wanted to ensure there is a permanent expansion of the credit for smaller projects, and wanted to gauge the level of bipartisan support for combining such a proposal with a temporary expansion of the incentive for all projects and other items.

Blumenauer said he planned to discuss the scope of a draft bill with potential GOP allies on the tax-writing committee, including Rep. Mike Kelly, R-Pa., ranking member on the Ways and Means Oversight Subcommittee.

Kelly has emphasized his strong support for an expanded credit for smaller projects, but has not taken a stance on other items, including a proposed temporary credit rate increase for all projects.

The Joint Committee on Taxation estimated that the temporary increase in the credit rate for all projects passed by the House last year would cost $5.04 billion through 2030, and that a permanent expansion of the credit for smaller projects would cost an additional $858 million.

In the Senate, Sen. Ben Cardin, D-Md., a senior member of the Finance Committee, said he also was trying to decide how far to go in pushing for an expansion of the rehabilitation tax credit. Like Blumenauer, he said he hoped to build on the House-passed proposal from last year, but was trying to assess whether a temporary expansion for all projects would gain traction.

Several senior lawmakers in both parties said the push for expansion of the rehabilitation tax credit could come to a head soon as proponents try to include an expanded incentive in a pandemic response package. President Joe Biden has urged Republicans to cut a deal on a potential regular-order bill to advance components of his $1.9 trillion pandemic plan.

While weighing prospects for a deal on Biden's blueprint, which includes incentives for working families, Democrats are laying groundwork for a filibuster-proof reconciliation bill as an alternative way to advance parts of Biden's blueprint and other 2021 stimulus measures, if negotiations lose traction.

Sen. Mike Crapo, R-Idaho, the top Republican on the Finance Committee, said he was not yet ready to support any expansion of the rehabilitation tax credit. Advocates would need to need to show how such proposals would help businesses and investors hurt by the novel coronavirus pandemic, he said.

"The bottom line is, if they are trying to get it in a pandemic bill, then there has to be a connection to the pandemic," Crapo told Law360. He said any proposals for an expanded rehabilitation tax credit should be examined as part of an overall review of expanded incentives for businesses and investors that could be moved in a pandemic response package or a surface transportation bill.

As lawmakers begin to frame potential packages of tax proposals, Merrill F. Hoopengardner, president of the National Trust Community Investment Corp., which helps arrange financing for projects, said she and other representatives of stakeholder groups would point out that coronavirus-related restrictions have made it harder to develop business plans for projects and to attract investors. She serves as chair of the Historic Tax Credit Coalition, which represents stakeholders in rehabilitation projects, including architects, developers, syndicators, lawyers and investors.

"The pandemic has had significant repercussions on owners of historic properties who wish to revitalize their properties," Hoopengardner told Law360.
 
In addition to a broader incentive for smaller projects and a temporary increase in the credit rate for all projects, she also called for other changes. One would end a requirement for a historic building's base value to be reduced by the amount of the rehabilitation tax credit claimed, a $3.97 billion proposal included in the bill passed by the House.

As advocates emphasize the pandemic-related hurdles faced by historic rehabilitation projects across the country, several senior Republicans voiced mixed sentiments about the proposal for a temporary expansion of the tax credit for all projects.

Sen. Bill Cassidy, R-La., a member of the Finance Committee, said he backed an expanded credit for smaller projects, and was not ready to support a temporary upgrade for all projects.

"You want to know the fiscal impact as well as whether the additional incentive is required," Cassidy told Law360.

Sen. Jerry Moran, R-Kan., a former chairman of the National Republican Senatorial Committee, said he also was undecided about the proposal to boost the incentive temporarily for all projects, but he said the idea could gain some traction in the coming weeks.

Since before the pandemic, he said there were concerns that tweaks to the rehabilitation tax credit in the 2017 tax overhaul may have reduced its appeal, particularly for smaller projects. The law left in place the 20% rehabilitation credit for certified historic buildings, including those on the National Register of Historic Places, but required the credit to be claimed over five years after a rehabilitated building was placed in service rather than in a single year.

With such concerns in mind, Moran said he remained open to the idea of a temporary increase in the credit rate to help all projects overcome fallout from the pandemic.

"The pandemic does change things," Moran told Law360. "And the consequences are in lots of places."

--Editing by Robert Rudinger and Neil Cohen.

For a reprint of this article, please contact reprints@law360.com.