Using Missouri Historical Rehabilitation Tax Credits as a Real Estate Development Tool

By Elizabeth Fast, partner
Spencer Fane Britt & Browne LLP
Kansas City, MO

Missouri has a substantial number of tax incentives designed to encourage economic development. Missouri’s historic rehabilitation tax credit program is recognized as one of the most successful tax credit programs in the county for spurring economic development. This program can provide the extra cash necessary to make a real estate development project financially sound.

We have a rich heritage of rock-solid buildings that were built in the late 19th and early 20th centuries. Oftentimes, these old buildings are abandoned or underutilized. But, they can be renovated and updated to modern occupancy standards to provide decades of future use. For example, look at the luxury residential lofts that have been created from older commercial buildings in downtown Kansas City.

Missouri’s historic rehabilitation tax credit program awards state tax credits equal to 25 percent of the costs to rehabilitate these old buildings. Notice that this is a tax credit not simply a tax deduction. Tax credits lower the amount of tax owed, while tax deductions lower the amount of income subject to tax. Thus, tax credits give a dollar-for-dollar benefit against taxes owed.

One of the most important attributes of these tax credits is that they can be sold to investors for cash. This translates into equity for the developer. As a practical matter, the cash generated from the sale of the tax credits can provide the developer with equity to finance the project. Once the tax credits are issued, they can be carried back three years and carried forward up to 10 years, which makes them even more desirable to investors.

Qualified Buildings – To qualify for these tax credits, the building must be listed individually on the National Register of Historic Places, or it must contribute to the historic significance of a certified historic district listed on the National Register or a local historic district certified by the U. S. Department of the Interior. Listing on the National Register is not strictly limited to historic structures. It also includes structures significant in architecture, archeology, engineering, and culture. While federal historic rehabilitation tax credits are available for income producing property only, these state tax credits are also available for owner occupied residential property.

Substantial Rehabilitation – The rehabilitation work must follow strict standards prescribed by the U.S. Department of the Interior, which are intended to ensure historically accurate rehabilitation. Plus, the rehabilitation must be substantial to qualify for these tax credits. The total rehabilitation costs must equal or exceed one-half of the owner’s basis in the building.

Qualified Expenditures – Most hard and soft rehabilitation expenditures can be counted as qualified rehabilitation expenditures, including professional fees for the developer, architect, engineer, accountant and attorney, as well as insurance premiums, construction interest and taxes. Many people erroneously presume that since these are “historic” tax credits, the tax credits are only available for “historic” portions of the building such as the architectural façade or the grand entry hall. In fact, costs for updated mechanical equipment and related items such as new heating, air conditioning, ventilation, plumbing, electrical and elevators count as qualified rehabilitation expenditures. But, the acquisition cost of the building can not be counted as a qualified rehabilitation expenditure. Also excluded are costs for walks, fences, retaining walls, parking and landscaping.

Placed in Service – “Placed in service” is an important concept, generally meaning the date the completed project is put into use. These tax credits generally are taken the year the building is “placed in service” as selected by the owner.

Combination with Other Tax Incentives – These tax credits can be used in combination with other types of state economic development tax incentives. It is also common to combine these tax credits with federal historic tax credits or federal low income housing tax credits.

As a caveat, the facts of each development project are unique and no one should rely on this article as legal advice for their particular project. Anyone undertaking a development project of this type should seek guidance from an attorney knowledgeable about this subject.