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am HISTORIC REHABILITATION TAX CREDITS continued from page I to Gary Stenson, president of MetroPlains Development, LLC, based in St. Paul, Min - nesota: "It can be costly to reha- bilitate historic, often vacant, buildings. But the federal historic tax credits help greatly. In fact, there is a lot of develop- ment that wouldn't have gotten done without them, Also they can be used to leverage other funds. And so in the end, historic rehabilitation can be just as cost - effective as new construction." The National Trust and the National Housing and Rehabilitation Association have formed a new Historic Preserva- tion Development Council... to push for a set ofamendments to... make the tax credit a more effective tool, During the past 23 years, MetroPlains has completed more than 70 real estate devel- opment projects in 10 Midwest- ern states, about half involving substantial rehabilitations of historic buildings. MetroPlains has tackled the adaptive use of old schools, hotels, hospitals, office buildings, post offices, apartment buildings, and fire stations, inmost cases rehabili- tating these buildings into multifamily rental apartments. Federal historic rehabilitation tax credits were utilized in 32 of these developments, involving the preservation of more than 40 historic buildings which are now listed in the National Register of Historic Places. Typically, the federal historic rehabilitation tax credit has fit into a financing package that might also include state and local preservation incentives as well as financing programs for affordable housing and com- munity development. Based on his experience using the credits, Stenson has some suggestions for improve- ments to the existing tax credit program. "We should do what we can to make the historic tax credit more compatible with the low- income housing tax credit. We usually use the tools together, but there are some inconsistencies between the two, which should be resolved. "It would also be good for smaller projects to have an even larger credit because there is a lot of work involved in any rehabilitation project, regardless of its size. So if you have a small project, say a million dollar proj- ect, a lot of the transaction costs are going to be similar to a $10 million project, but your return is not as great, so it's a little tougher to make the deal work." Proposed Changes to the Tax Code Other organizations and individ- uals who have worked with the credits over the past 25 years also see the need for improvements to the existing program. As a result, the National Trust and the National Housing and Rehabilitation Association have formed a new Historic Preserva- tion Development Council. One of the goals of the council is to push for a set of amendments to the Internal Revenue Code. These would make the tax cred- it a more effective tool for attracting equity investment into historic rehabilitation projects, particularly smaller projects in community develop- ment areas. During a series of meetings held last year, a group of preservationists, developers, lawyers, and accountants dis- cussed the following amend- ments to the tax code: Eliminate the need to demonstrate a profitmotive "forundertaking historic rehabilitation projects, The IRS generally disallows any deductions associated with activities that have not been entered into for profit. But given that investors in housing credit transactions could not possibly demonstrate the requi- site profit motive because they invest solely for the tax benefits, the low - income housing credit program has a blanket exemp- tion. A similar exemption would be helpful for historic credit developments, where the tax credits are often the primary motive for making the invest- ment. This would go a long way toward raising investor confi- dence that the Internal Rev- enue Service will respect his- toric tax credit investments. Increase the tax credit for small projects andprojeets in `Difficult - -to- Develop Areas. " By any conventional standard, the historic tax credit is a shal- low subsidy, less than one- quarter of the credit allowed for the low - income housing tax credit. The shallow subsidy issue is particularly acute for smaller developments because the potential tax credit from such projects is simply too small to attract equity capital from insti- tutional investors. An increase in the credit to 40 percent is being sought for small historic projects (under $2.5 million in total development costs) to assure that there can be enough equity raised to cover the related transactions costs. continued onpage 6 jortim news Peter H. Brink Senior Vice President Programs Katherine Adams Director, Preservation Services Elizabeth Byrd Wood Program Manager, National Trust Forum Kerd Rubman Editor Bruce Yarnall Business Manager The mission of the National Tout ((it Historic Presenmtion is to provide leadership, cducatim, and advocacy to save America's diverse places and revitalim our communities. Fannie Neux ANews(etterof ate NationalTrast for Historic Preservation (ISSN 1079 -1-i i l; USPS Publi.timt No. 013- 083) is published bimonthly by the National Trust for Historic Pmervatian, 1785 Massachuseas Avenue, N.W., Washingmn D.C.20036 asa benelkofNationalTnut Forum membership. Pomm members also receive four issues of Forme Jorind and six issues pf PRESERVATION. Annual dues are $115. Periodicals postage paid at Washington D.C. and at additional mailing o6ice. Postmas- sent Send address changes to FonweNetur. 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