Historic Tax Credit Transactions

The Historic Tax Credit Program

The federal Historic Tax Credit (HTC) — authorized under Section 47 of the Internal Revenue Code — provides a 20% tax credit against qualified rehabilitation expenditures (QREs) incurred in the certified rehabilitation of a certified historic structure. The credit is intended to incentivize the preservation and adaptive reuse of historically significant buildings by making rehabilitation financially competitive with new construction.

The federal program is administered jointly by the National Park Service (NPS), which reviews historic significance and rehabilitation work for consistency with the Secretary of the Interior's Standards for Rehabilitation, and the IRS, which administers federal tax eligibility and credit-claiming rules. Illinois separately offers a state historic-preservation credit, subject to state allocation, certification, cap, utilization, and sunset requirements.

Historic tax credits are distinct from Low-Income Housing Tax Credits in program structure, investor requirements, and transaction mechanics — but HTC and LIHTC are frequently combined on rehabilitation projects that involve both historic structures and affordable housing, and the interaction between the two programs requires careful structuring.

How the Federal HTC Works

The federal HTC equals 20% of qualified rehabilitation expenditures (QREs) for a certified rehabilitation of a certified historic structure. Land acquisition, new construction, building enlargement, and other excluded costs generally are not QREs. For QREs paid or incurred after 2017 that are not covered by the statutory transition rule, the credit is determined when the qualified rehabilitated building is placed in service and is claimed ratably over five years. The investment credit is also subject to a five-year recapture period.

Certification Requirements

To qualify for the federal HTC, the project proceeds through a three-part certification process administered by the National Park Service in coordination with the applicable State Historic Preservation Office (SHPO). In Illinois, the SHPO is within the Illinois Department of Natural Resources:

Part 1 — Evaluation of Significance: Documentation of the building's status as a certified historic structure or a request for the necessary certification.
Part 2 — Description of Rehabilitation: NPS review of the proposed work for conformance with the Secretary of the Interior's Standards for Rehabilitation. Applicants are strongly encouraged to obtain Part 2 approval before beginning construction; proceeding without prior approval is at the owner's risk.
Part 3 — Request for Certification of Completed Work: NPS review of the completed rehabilitation. Approval certifies that the completed project meets the Standards.

Managing the NPS/SHPO process — including Part 1 status, Part 2 review, amendments to proposed work, and Part 3 completion certification — is a critical scheduling and risk issue. Material changes from the approved Part 2 should be submitted through the SHPO/NPS process because unapproved work can jeopardize certification.

The Substantial Rehabilitation Test

A building is substantially rehabilitated when QREs during the taxpayer's selected 24-month measuring period exceed the greater of $5,000 or the building's adjusted basis, determined under the statutory rules and excluding land. A 60-month measuring period may be available for certain phased rehabilitations completed under a written architectural plan and specifications. The test should be evaluated with tax counsel before and during construction.

The Illinois Historic Preservation Tax Credit

The Illinois Historic Preservation Tax Credit Program provides a state income-tax credit equal to 25% of qualified rehabilitation expenditures, subject to an allocation and a maximum credit of $3 million for a single qualified rehabilitation plan. The program is administered by the Illinois State Historic Preservation Office within the Illinois Department of Natural Resources. Under current Illinois guidance, the statewide credit is not transferable; unused credit may generally be carried forward for up to ten years. The program currently applies to qualifying taxable years ending on or before December 31, 2028, unless extended or amended by law. Federal and state credit percentages should not be added together as a statement of project equity because caps, basis adjustments, tax ownership, credit pricing, and other limitations affect actual proceeds.

HTC Transaction Structure

The federal rehabilitation credit generally follows the taxpayer that owns the qualified rehabilitated building, but the tax rules permit a lessor, in a qualifying transaction, to elect to treat a lessee as having acquired the rehabilitated property for credit purposes. HTC structures therefore require careful analysis of tax ownership, partnership allocations, any lease-pass-through election, and the economic substance of the transaction.

The Master Tenant Structure

One structure used in HTC/LIHTC combination transactions is a master-tenant or lease-pass-through structure. It is not required in every HTC transaction. In a qualifying structure, the building owner leases the property to a master-tenant entity and makes the applicable tax election to treat the lessee as having acquired the rehabilitated property for rehabilitation-credit purposes.

The HTC investor typically invests in the master-tenant entity and receives allocations associated with the passed-through rehabilitation expenditures and credit, while the LIHTC investor invests in the fee-owner entity and receives allocations of housing credits. The master tenant does not become the tax owner merely because it holds a leasehold interest; the lease, election, ownership, economic-substance, and partnership-allocation requirements must all be satisfied.

The master lease term, rent, fees, cash-flow arrangements, termination rights, and treatment of the leasehold must be coordinated with both credit programs, the financing documents, and tax counsel's structuring and opinion requirements.

Single Investor vs. Dual Investor Structures

HTC/LIHTC transactions may use one investor for both credit streams or separate investors in the fee-owner and master-tenant entities. The choice depends on investor appetite, tax capacity, pricing, risk allocation, and transaction structure. Separate investors require coordination of two sets of investment documents, closing conditions, consent rights, guaranties, and indemnities.

The Legal Work in an HTC Transaction

HTC transactions — and particularly HTC/LIHTC combination deals — involve a layered set of legal workstreams that must be coordinated across the NPS certification process, the investor closing, and the construction and rehabilitation schedule.

Entity and Investment Structure

Formation of the fee owner entity and master tenant entity
Master lease between the fee owner and master tenant
LIHTC investor documentation in the fee owner entity
HTC investor documentation in the master tenant entity
Intercreditor and coordination provisions between the two investor structures
Illinois state-credit allocation, certification, utilization, and carryforward documentation where applicable

NPS Certification Coordination

Review of Part 1, Part 2, and Part 3 certification status and timing
Construction contract provisions addressing NPS Standards compliance
Change order review for potential impact on Part 2 approval
Closing deliverable requirements tied to Part 2 and Part 3 status
Investor and lender requirements regarding certification timeline

Financing Documentation

Construction and permanent loan documentation at the fee owner level
Leasehold financing at the master tenant level where required
Lender consent to the master lease structure
SNDA and recognition agreements between the lender, fee owner, and master tenant
Title insurance covering both the fee and leasehold interests

Guaranties and Risk Allocation

Completion guaranty covering both LIHTC and HTC investors
HTC delivery guaranty and recapture indemnity
NPS certification guaranty (Part 3 completion)
Operating deficit guaranty at fee owner and master tenant levels
Coordination of guaranty obligations between LIHTC and HTC investor documents

Five-year recapture period. The federal rehabilitation credit is subject to a five-year recapture period beginning when the qualified rehabilitated building is placed in service. A disposition of the investment-credit property, a qualifying reduction in the taxpayer's ownership interest, or another event causing the property to cease qualifying can trigger partial recapture, with the recapture percentage declining over the five-year period. The investment documents should allocate this risk consistently with the tax structure.

HTC Counsel at Snow LLP

The firm advises developers and sponsors on Historic Tax Credit transactions — including standalone HTC deals and HTC/LIHTC combination transactions. This practice handles the transactional legal work associated with the master tenant structure, the investor and financing documentation, and the coordination of HTC and LIHTC workstreams in combination deals.

HTC investors and lenders commonly require specialized tax analysis and, depending on the transaction, tax opinions addressing credit eligibility, ownership, allocation, and any lease-pass-through structure. Snow LLP coordinates with tax counsel and does not provide tax opinions.

Illustrative Example

A developer rehabilitates a certified historic building as affordable housing using federal HTC and bond-financed 4% LIHTC. The fee-owner entity holds title and earns the housing credits. Under a tax-advised master-tenant structure, the owner leases the property to a master-tenant entity and makes the applicable election to pass rehabilitation expenditures through to the lessee for credit purposes. The HTC investor invests in the master-tenant entity, while the LIHTC investor invests in the fee-owner entity. The master lease, tax election, investor documents, financing, fees, basis calculations, and NPS certification process are coordinated across both credit structures.

This example is a simplified illustration of transaction structure and mechanics. It does not describe an actual engagement, is not legal advice, and does not predict any outcome.