Tax Credits and Tax Incentives

“Historic Rehab + Climate Adaptation = A New Tax Credit Coin” (895 words)

by Allen Kratz, Resilience Works, LLC

Historic preservation experts save buildings from yesteryear.  By contrast, climate-adaptation experts in New Jersey facing the future are eager to build protections against flooding caused by rising seas and increasingly intense rains.  Can both important policies – historic preservation and climate resilience – support each other for mutual gain?

Increasingly, yes.  Governor Murphy and key legislators are promoting a historic preservation tax credit for New Jersey owners who invest in repairing or improving the structural and architectural features of income-producing property that is associated with the history of New Jersey and is listed, or eligible to be listed, on the state or National Register of Historic Places.  That’s a long-overdue incentive for rehabilitating historic property.

But what about the boosting the state’s parallel imperative to adapt to a future of increasingly heavy and frequent rains?  For example, how does the proposed historic preservation tax credit help communities deal with standard undersized combined storm-sanitary sewer systems that choke in heavy rains, flooding streets, sidewalks and basements?

To envision the synergies of rehabilitation and resilience, consider a typical low-lying urban neighborhood with a historic, vacant factory.  The building is suitable for conversion into retail, office and residential space.  Because big storms frequently flood the neighborhood, the developer plans to excavate part of the factory site to create an underground rainwater storage chamber.  It will store excess precipitation until it can drain away later.  In addition, the holding tank will be designed to accommodate any overflow from the rainwater-detention park that the municipality already has built across the street.  Augmenting the versatility of the rainwater park is one of the developer’s expected givebacks to the community.

Recognizing that incorporating climate-adaption infrastructure into the factory-rehabilitation project requires supplementing conventional financing, the developer and municipal government collaborate on securing a low-cost loan from the New Jersey Water Bank, a partnership between the New Jersey Department of Environmental Protection and New Jersey Environmental Infrastructure Trust formerly known at the New Jersey Environmental Infrastructure Financing Program.

And yet, even adding the NJDEP’s loan proceeds to all of the other capital that the developer has been able to assemble, the funding still falls short of covering the entire cost of rehabilitation.  A problem?  Actually, here’s where the proposed historic preservation tax credit – New Jersey’s potential new program -- makes the project economically feasible.

The legislation enables the New Jersey Economic Development Authority, consulting with the state Historic Preservation Office, to authorize the state Treasurer to offset a portion of the developer’s Corporate Business Tax.

Several conditions apply.  The credit is available if the developer has put up at least 20% of the projected rehabilitation cost, a project financing gap exists, and “without the tax credit the project is not economically feasible."  In addition, the developer must agree to preserve elements of the property that have qualified the structure for historic-register listing because of those components’ “significant historical, architectural and cultural value.”

 Satisfying those requirements qualifies the factory owner for a tax credit, capped at $4 million and equal to 16% of the actual or proposed rehabilitation cost.  Eligible expenses include hard costs to repair or improve structural components such as walls, floors, ceilings, windows, doors, plumbing, wiring, and life-safety systems.  Soft costs, including architectural, engineering and construction-management fees, also qualify as the basis for the 16% calculation.

 The developer can enjoy an additional tax benefit:  the 16% credit rises to 20% when at least a fifth of the new residential units are reserved for low- and moderate-income households. The 20% credit also applies when the project includes a “collaborative workspace” of at least 2,500 square feet or 10% of the property, or an “incubator facility” of 5,000 or more square feet.

“Givers gain.” That truism highlights the multiple benefits that New Jersey stands to gain by giving the owners of historic property a tax credit that can be used for dual-purpose projects like the one outlined here.  With creative, synergistic planning and financing, the neighborhood gains expanded rainwater-detention capacity.  That capacity significantly reduces the risk of flooded streets, sidewalks and basements.  Less neighborhood flooding reduces the cost of emergency services, property damage and municipal insurance premiums. 

In addition, construction workers, suppliers, architects, engineers, project managers and other professionals earn additional income, increasing the state’s tax revenue.  Low- and moderate-income households gain new housing and the corollary economic benefits of stable housing.  Both the collaborative workspace and incubator attract new residents. The new residents augment the community’s economy and property tax base.

Both historic preservation and resilience gain community support when they advance complementary public policies.  New Jersey’s proposed historic preservation tax credit is a new tool to achieve mutual benefits.  The incentive honors New Jersey’s historic built environment.  It also can help address the state’s growing climate-change challenges. 

Groundwork for both policies is in place already.  NJDEP actively works to reduce flood risk throughout the state.  Elsewhere, 35 states provide historic preservation tax credits.  With enactment of historic preservation tax credit incentives to provide the final funding for projects that address complementary goals, New Jersey will join communities throughout the nation that appreciate the twin values of restoring historic buildings and making them and their neighborhoods resilient as well.

Historic preservation and climate resilience are two sides of the tax-credit coin. Enactment of the Historic Preservation Tax Credit Program will help New Jersey give the past a future -- and give the future a future.

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 Allen Kratz, of Hoboken, principal of Resilience Works, LLC, a climate-change consulting firm, served as a trustee of the New Jersey Historic Trust.

In a flood-prone section of Hoboken, an early 20th-century “daylight factory” — part of the former R.B. Davis Baking Powder Company complex. The N.J. Historic Preservation Office determined this manufactory eligible for listing on the New Jersey Register of Historic Places. It was one of only three factories in the state that produced an important leavening agent for products baked in Hoboken for the all-important Northeastern U.S. consumer market. The state’s first resiiency park opened in 2017 on the parking lot at the left.

In a flood-prone section of Hoboken, an early 20th-century “daylight factory” — part of the former R.B. Davis Baking Powder Company complex. The N.J. Historic Preservation Office determined this manufactory eligible for listing on the New Jersey Register of Historic Places. It was one of only three factories in the state that produced an important leavening agent for products baked in Hoboken for the all-important Northeastern U.S. consumer market. The state’s first resiiency park opened in 2017 on the parking lot at the left.