Ohio Historic Preservation Tax Credits

Owners and developers of historic properties in Ohio may be very familiar with the provisions of the long standing Federal historic preservation tax credit program, but they may be less familiar with the much more recent Ohio Historic Preservation Tax Credit program.  These tax credits can be a significant economic benefit to an owner planning to rehabilitate an historic building.  But owners beware:  funds are limited and application deadlines are looming, so now is the time to start planning to take advantage of tax credits that could provide up to a $5 million benefit per project.

In December 2006 the Ohio legislature enacted the Ohio Bipartisan Job Stimulus Plan which provided for $1.57 billion in economic incentives to Ohio businesses.  Of this amount, $120 million was set aside for the Ohio Historic Preservation Tax Credit program.  Projects for these credits are approved in “rounds” where groups of applications are accepted, reviewed by the State, and then accepted projects are announced and awarded Tax Credit Certificates when the work is completed.  The program is administered by the Ohio Department of Development, Urban Development Division.

 Rounds 1 and 2 issued over $200 million in tax credits to 89 applicants for projects in 23 Ohio cities.  The application deadline for “Round 3” approvals is September 30, 2009, so it may be too late for owners to assemble the materials required take advantage of the $17.5 million in credits available to Round 3 applicants, but the good news is that “Round 4” will make an additional $24.2 million in tax credits available, and owners still have time to prepare applications that will be accepted from January 4 to March 31, 2010. 

The Historic Preservation Tax Credits can provide a credit towards an owner’s state income tax, “dealer in intangible” tax, or corporate franchise tax equal to 25% of the “Qualified Rehabilitation Expenditures” the owner expends in rehabilitating a qualifying historic structure.  The amount of the credit is limited to the amount of the estimated tax credit originally included in the owner’s application, with a $5 million credit cap per project.  “Qualified Rehabilitation Expenditures” can include both “hard costs” spent on the physical rehabilitation of the property (but not hard costs for additions to the historic property, or for site improvement costs such as parking and landscaping), and “soft costs” such as expenditures for design, engineering, survey, legal, and developer fees.  Acquisition costs are not a “Qualified Rehabilitation Expenditure”.   For building owners who are pass-through tax entities such as partnerships, S-corporations, or limited liability companies, the tax credit is allocated to the ownership entity’s members in proportion to their respective ownership interests, or as the members may otherwise mutually agree.
 
General Requirements

To qualify for Ohio Historic Preservation Tax Credits, a project must initially meet four general criteria.  First, the party applying to receive the tax credit must be the fee owner of the building, and not a tenant or other party.  Second, the building must be either:  (a) individually listed on the National Register of Historic Places, or (b) located in a registered Historic District and either certified by the Ohio Preservation Officer as contributing to that district, or listed by a Certified Local Government as being a local historic Landmark.  Third, all work to the property must be completed in conformance with the Secretary of the Interior’s Standards for Rehabilitation.  Finally, an Owner must demonstrate that the issuance of the tax credit is a “significant factor” in the owner’s decision to undertake the rehabilitation work.  To this end, the owner must provide an analysis in its application showing that receipt of the tax credit “makes it more likely than not” that the conforming rehabilitation becomes economically feasible.

New Criteria for 2009

As a part of the Economic Stimulus Package that went into effect June 30, 2008 (HB 554), the Ohio legislature revised the procedures for application and approval of tax credit projects that will be in place for Rounds 3 and 4.  Whereas in Rounds 1 and 2, applications for tax credits to be issued in each fiscal year were submitted once per year, the application process for tax credits to be issued in the State’s fiscal year 2010 is now bifurcated into two six-month application rounds within the same one year period (Rounds 3 and 4). 

The scoring criteria by which applications are selected has also been revised to add significant new criteria to better ensure that tax credits are equitably distributed geographically around the state, and to maximize the potential economic impact of the tax credits.  These new criteria award points to each project based on various categories of stated goals to determine which projects are most worthy of the limited funds available for Historic Preservation Tax Credits. These criteria may play a large role in deciding which projects get awarded Tax Credit Certificates, and can be summarized as follows:

• Regional Distributive Balance (accounts for 20 of 100 potentially awarded points)
  • Preference is given to those projects in geographic regions, counties and cities, where historic tax credits have not previously been awarded. 
• Potential Economic Impact (accounts for 80 of 100 potentially awarded points)
  • Financing and Speed of Development.
    • Financing Secured.  In order to ensure that an owner has financing and/or equity in place, and can begin work quickly, points are maximized for financing that secures 100% of the projected cost, while if financing only exists for 50% of such cost, no points are awarded. 
    • Leveraged Investment.  The ratio of project cost to the estimated tax credit is used to determine the leverage the tax credit provides.  A ratio over 10 receives maximum points, and a ratio under 4 receives no points. 
    • Jobs Creation.  Points range from 10 points if over 175 full time jobs are created, to 0 points if no new jobs are created.  (Construction jobs attributable to the work itself are not counted.)
    • Timeliness to Completion.  The state prefers a commitment to complete a project fully within two years or less over a project completed in phases over a maximum five years. 
  • Quality of Property.
    • Physical Scope.  In an effort to maximize the impact to a community and create more construction jobs, projects over 100,000 square feet in size receive ten points, and projects under 10,000 square feet receive one point.
    • End Use.  Points are distributed based on the extent to which the end uses of the project maximize economic development, with a preference for commercial uses, then retail and hotel uses, then residential uses, and finally, industrial uses.
    • Vacant Property.  Rehabilitating a building that is 100% vacant receives 5 points, while rehabilitating a building less than 50% vacant receives no points.
    • Green Building.  An owner that signs a commitment letter to follow Leadership in Energy and Environmental Design (LEED) criteria receives five points, where a failure to make such a commitment receives no points. 
  • Quality of Place
    • Strategic Plan.  More points are awarded if rehabilitation of the property has been specifically targeted by a municipality’s most recent strategic development plan.
    • Benefit to Low Income.  Greater points are awarded if poverty levels within the project’s census track exceed 60%, while no points are awarded if poverty levels are less than 15%.
    • Economic Development Innovation Zone.  Additional points are awarded if the project is located within a one mile radius of an existing University System of Ohio facility, a private four year university, a public hospital, or a non-profit research institution not owned by a university or hospital.   

Time for Action is Now

Round 4 applications may be submitted beginning January 4, 2010 and the application period closes March 31, 2010. Accordingly, owners of historic properties in Ohio, especially those projects that may score favorably according to the new criteria, may want to begin the process of engaging consultants, gathering information, and applying for their piece of the Ohio Historic Preservation Tax Credit “Phase 4 pie.”  Taft’s real estate attorneys can help you through this process and the many rules governing the availability and use of these tax credits.