The New Jersey Historic Tax Credit: Is Now the Right Time?

February 2012Articles In the Zone

Sitting quietly in the bill queue for the 2012-13 session of the New Jersey Legislature, A1450 and S141 are companion bills, identical in content, that seek to spur redevelopment by incenting the rehabilitation of historic structures as well as structures located within historic districts and certified by the Pinelands or designated by New Jersey’s State Historic Preservation Office (SHPO) as a significant resource. Phoenix-like, these bills are the progeny of A1851, which made its way to the Governor’s desk last March only to be vetoed. This report is the first part of an analysis of the draft Historic Property Reinvestment Act (Act) as set forth in these bills, and thus focuses on the primary elements of the proposed legislation as it affects businesses.

The Act seeks to create a state counterpart to the Federal Historic Tax Credit, which was established in 1976. Administered by the National Park Service (NPS), the Federal Historic Preservation Tax Incentives Program bestows a 20 percent tax credit on developers of eligible projects. The NPS partners with the Internal Revenue Service and State Historic Preservation Offices, typically referred to as SHPOs. For the past 35 years, the Federal Historic Tax Credit program has assisted in funding tens of thousands of rehabilitation projects, representing billions of dollars in private investment. The Federal Historic Tax Credit applies to a broad range of structures used for a multiplicity of residential and commercial uses; the common denominator is a historic designation.

The Act targets both homeowners and businesses. They provide a tax credit for homeowners capped at $25,000 per property and a tax credit for businesses with no cap. Thus, these two programs offer incentives on a quite different scale. This article will focus on the business tax credit.

As presently drafted, the Act would offer a significant incentive to businesses that seek to rehabilitate a qualifying historic project. For a project to qualify, a property must be listed on the National Register of Historic Places or the New Jersey Register of Historic Places or be certified by the Pinelands Commission as located within a district of historic significance. Also, properties can be identified for protection as a significant resource by the municipality, which designation would be approved by New Jersey’s SHPO.

Upon successful application to the SHPO, a business entity will be allowed a tax credit for 25 percent of the cost of the rehabilitation of a qualified rehabilitation project. To be eligible, rehab expenditures must meet a threshold of greater than $5,000 or the structure’s adjusted tax basis under IRS rules. Additionally, the Act would allow projects to be phased and thus a business can select a 24-month or 60-month rehab period for the completion of improvements.

A business may apply the tax credits toward corporate business tax or insurance premium tax liabilities accruing during the accounting period when the final payment for rehabilitation costs is made in the 24-month option or in any period when a specific project phase is completed if the business entity has chosen the 60-month option. Further, at the election of the business, unused credits can be carried over for nine accounting or privilege periods immediately following the period in which the credit was initially acquired.

Tax credits are transferrable if the applicant’s tax liability is insufficient to take full advantage of the credit. As with many other New Jersey programs such as GROW NJ or the Urban Hub Tax Credit Program, the tax credits can be sold via a tax credit transfer certificate. Unlike other programs, the NJ SHPO administers the transfer program.

The draft legislation proposes the following caps for credits claimed under the program:

• $15,000,000 for 2012
• $25,000,000 for 2013
• $40,000,000 for 2014
• $50,000,000 for 2015.

There are also set aside requirements. At least 25 percent of the tax credits must be set aside for homeowners. Significantly, at least 65 percent must be set aside for business projects.

There are recapture provisions written into the Act in an event the property ceases to meet the Act’s rehabilitation requirements. Recapture is 100 percent in year one but falls to 20 percent between years four and five. If a business entity’s architectural plans change during the course of the project so that it no longer qualifies, then that entity’s tax liability for the applicable accounting period would be increased by the full amount of the tax credit that had been previously granted. Any other credits would be voided.

A1851 of the 2010-11 legislative session, the precursor to A1540/S141, was vetoed by Governor Christie in March 2011. Extensive costs analyses were produced by his administration and the Office of Legislative Services, calculating that the program would generate a substantial revenue loss. In his veto message, the Governor stated:

“These bills (A1851 and others) were combined and passed as a ‘comprehensive package’ that was touted by supporters in the Legislature as an effort to spur economic growth and job creation in this state. I applaud the intentions of the Legislature to make New Jersey a more business-friendly environment[.]

“The business climate in New Jersey has begun to show some early signs of improvement . . . In order to bring long-term, meaningful reform to New Jersey’s business climate, coherent legislative action to revise the State’s tax laws is imperative[.] However, by passing a package of bills that will cost the State over $600,000,000 in Fiscal Year 2012 by conservative estimates and billions over the next few years without identifying any corresponding reductions in the State’s budget, the Legislature has acted prematurely, irresponsibly and (recklessly)[.]”

The Governor then noted that A1851 was part of a package of bills that was passed without being brought into the budget process. He invited the Legislature to work with him during that process as the number of bills embodied “elements of laudable and worthwhile reforms.” After the veto message, certain bills in fact worked their way through the legislative process, were passed and then signed into law by the Governor.

There are numerous primary and co-sponsors who have endorsed A1450 and S141. At the present time, these bills have been assigned to the Environment and Solid Waste Committee of the Assembly and the State Government, Wagering, Tourism and Historic Preservation Committee of the Senate. Neither committee has scheduled hearings at the time this article was written.

For the March edition of In the Zone, Part II of our discussion of the New Jersey’s Historic Property Reinvestment Act will focus on the merits of this legislation.

For more information, please contact Daniel V. Madrid.