The document provides an overview of federal and state historic tax credits (HTC) for rehabilitating income-producing historic buildings. It discusses the qualifications for the credits, how to apply, calculating qualified rehabilitation expenditures, cost certifications, case studies, and tax implications. The 20% federal HTC is a dollar-for-dollar reduction in tax liability, while Pennsylvania offers a 25% state credit. Proper use of the credits can provide millions in equity for rehabilitation projects.

5. Today’s Presenters
Mike Eby, CPA
Senior Manager with
McKonly & Asbury
meby@macpas.com
Dan Kern, CPA
Senior Manager with
McKonly & Asbury
dkern@macpas.com
Bonnie Wilkinson Mark
Principal with Delta
Development Group, Inc.
bmark@deltaone.com

6. Overview
- 20% HTC is a direct, dollar-for-dollar reduction in tax liability
- Federal program created by:
• Tax Reform Act of 1976
• Updated with Economic Recovery Act of 1981
• Updated again with Tax Reform Act of 1986
• Recently updated with Tax Act and Jobs Act Bill of 2017
- Credit is available to owners and long-term lessees of income producing,
historic buildings
- Credit is taken when the work is completed on the owner’s
federal taxes with 4% each year for 5-years
Federal Historic Tax Credits (HTC)

7. Overview (continued)
- 3-Part Application
• Part 1 – Confirms that the building is historic
• Part 2 – Rehabilitation must meet the Standards
 Narrative
 Plans
 Photographs
• Amendment – If changes need to be made
• Part 3 – Work undertaken as you said it would
 Photographs
Federal Historic Tax Credits (HTC)

8. Federal Historic Tax Credits (HTC)
HTC Qualifications
- Must be Historic – Listed on National Register of Historic Places
- Used for income-producing purposes
- Rehabilitation must meet the Secretary of the Interior’s
Standards for Rehabilitation
- Cost of rehabilitation must exceed the adjusted basis of the building
- Owner must retain ownership for 5-years (60-months) after the
credit is taken

9. Federal Historic Tax Credits (HTC)
State Qualifications
- Same qualifications for federal credit plus the following:
- 25% of Qualified Rehabilitation Expenditures (QRE)
up to $500,000*
• Application are made through DCED Single Application (Electronic)
• Each DCED Region receives an allocation of $600,000*
(Total of $3,000,000 for each FY)
• Amount of reservation depends on submission
date and number of applications per Region (Lottery)
• Electronic application is usually available in the fall after the
State Budget is passed

10. Tax Implications for Federal
- The credit amount:
• 10%
• 20%
- Credit realized against either personal income tax or corporate
income tax
• Building is typically held in a partnership
• Credit is passed-through to the partners based on the profit %’s
- Reduction in depreciable basis of the building

11. Tax Implications for Federal (cont.)
Can an investor realize this credit on their return?
- Consistent tax liability
- Since 2008, credit can be applied against AMT
- Investment held “at-risk”
- Active vs. passive
- Real estate professional

12. Tax Implications for Federal (cont.)
Credit utilization calculation (form 3800):
Regular tax
Less: non-refundable credits
Equals: Net regular tax
Plus: alternative minimum tax
Less: 25% of Net regular tax that exceeds $25k

13. Tax Implications for Federal (cont.)
Credit utilization calculation (form 3800) Example:
- $75,000 of historic tax credits available
- Total tax liability is $50,000
• Net regular tax $45,000
• AMT $ 5,000
- Less: 25% of ($45,000-$25,000) = $5,000
- $45,000 ($50,000 tax liability less $5,000 excluded) of HTC
can be used in current year
- Taxpayer must still pay $5,000 tax in current year
- Remaining $30,000 of HTC is carried over

14. Tax Implications for Federal (cont.)
Other items to consider
- 5 year credit recapture if ownership not maintained
- Agreement in place to “buy out” the limited partner after 5 years or other
agreed upon timeframe
- 20 year carryforward, 1 year carryback, deductible at end of CF period
- Master tenant structure
• The tenant, not the building owner, receives the credit
• Annual income pick-up by tenant in place of building basis reduction

15. Tax Implications for Federal (cont.)
Tax reform
- 10% credit is repealed
- 20% credit is now recognized over a 5 year period (i.e. 4% credit a year)
• Transitional rules (Grandfathering provisions)
- Building must be owned as of 12/31/17
- Beginning of 24-month rehab measurement period must Occur within 180 days after
12/22/17 (6/20/18)
- Overall tax rate reductions, particularly c-corporations at 21%
• Individuals benefit from a smaller rate reduction but potential 20% QBI deduction
• No direct input on the actual credit value ($1 of credit is still $1 of tax)
• Perhaps less investor demand, primarily from financial institutions
- Interplay with reduced depreciation recovery lives for certain
commercial property (now 15 years vs. 39 years)

16. Tax Implications for Pennsylvania
- 25% credit (limited to prior approved cap for specific project)
- Can be utilized against personal income, corporate net income tax, bank shares
tax, etc.
- 7 year carryforward period
- Can sell or transfer the credit
• No waiting period before sale
• Buyer can utilize against 100% of its tax liability
• Credit must be used by buyer in year purchased (no carryover or transfer)
• Federal/state income considerations related to capital gains
- 33 Other states have a state-specific version of the HTC

17. Cost Certifications
State Level (Pennsylvania)
- Certification by a CPA required
- Includes verification of QREs by the examination of invoices, cancelled checks,
settlement sheets, contracts, agreements, and related documents
- Inquiries of management
- Accrual basis
- Calculates a 25% credit (capped by DCED at reservation letter amount)
- Certification must be filed with PHMC/DCED in order to obtain
a tax credit certificate
- $500,000 HTC cap per project; $3,000,000 total HTC cap
per fiscal year

18. Cost Certifications (cont’d)
Federal Level
- Certification not required
- Often requested from a CPA as an “insurance policy”
- Includes verification of QREs by the examination of invoices, cancelled checks,
settlement sheets, contracts, agreements, and related documents
- Inquiries of management
- Accrual basis
- Calculates a 20% credit (no cap)

19. Qualified Rehabilitation Expenditures (QRE)
- Layman’s Definition: In general, only those costs that are directly related to
the repair or improvement of structural and architectural features of the
historic building.
- Eligible Costs: “Hard costs” such as walls, partitions, floors (including glued-in
carpeting), ceilings, windows and doors, HVAC systems, plumbing fixtures,
electrical wiring, chimneys, stairs, escalators, elevators, sprinkler systems, and
fire escapes

20. Qualified rehabilitation expenditures (QRE) (cont’d)
- Eligible Costs: “Soft costs” such as construction period interest and taxes,
architect fees, engineering fees, legal fees, construction management costs,
and reasonable developer fees
- Ineligible Costs: Acquisition costs, appliances, kitchen cabinets, carpeting (if
tacked in place), demolition costs, fencing, feasibility studies, financing fees,
furniture, landscaping, and leasing expenses

21. Calculating Total QRE (example)
- Be aware of large ineligible
costs
- Keep it within the “envelope”
of the building
- Dig into the details
• Cabinetry
• Flooring
• Signage
- Soft cost allocations

22. Calculating the Historic Tax Credit
FEDERAL EXAMPLE
Total QRE $15,000,000
Credit Percentage 20%
Max Federal HTC $3,000,000
PENNSYLVANIA EXAMPLE
Total QRE $15,000,000
Credit Percentage 25%
Max State HTC $3,750,000
(subject to State Cap)
Important Points to Note:
• Total QRE could be different at the federal and state level based on (1) the nature of the cost included,
or (2) timing of the cost incurred.
• The state HTC is capped based on DCED’s reservation letter.

23. Substantial Rehabilitation Test
- Pass/Fail test
- Needs to be met during the Measurement Period
• 24 month period
• Must end within the tax year the rehabbed building is PIS
• Can be adjusted during the course of rehabilitation
- Total QRE incurred during the Measurement Period MUST EXCEED the greater of
$5,000 or the adjusted basis of the property (not including land value)
- IMPORTANT NOTE: QREs incurred outside of the Measurement
Period can still qualify for the HTC

24. - The History: Constructed in 1902 as a shoe factory for the Curtis & Jones Shoe Company.
The 5th and 6th Floors were added in 1908-1909 and a second addition was constructed
in 1911-1912 onto the south elevation. The building operated as a factory until 1973,
when it was converted to Reading Outlet Center 10 in 1974. It was used for retail purposes
until 2001. Subsequently, as a result of lack of maintenance, the roof collapsed onto the
6th Floor, which subsequently collapsed onto the 5th Floor. The 5th Floor then partially
collapsed onto the 4th Floor, leaving the remainder of the structural system intact.
- The Project: To use funding equity through the HTC program to rehabilitate the former industrial building for commercial
use on floors 1 and 2 and market rate housing on floors 3 to 6.
- The Strategy: Delta prepared an in-depth HTC application that addressed the heavy-timber structural
system, reconstructed roof, and deteriorated windows. After the building was 65% complete,
complications from a 4-alarm arson fire on October 18, 2014 required reconstruction of the 2nd and
6th floors as well a replacing all water-damaged fabric.
- The Solution: After 4 Amendments, the project received NPS final certification on December 15, 2016.
Curtis and Jones Shoe Factory Rehabilitation
702 North 8th Street, Reading, Berks County, Pennsylvania

25. Case Study:
Sources of Funds
Equity $ 2,900,000
Mortgage $ 4,200,000
Historic Tax Credit Equity $ 2,328,000
Pennsylvania HPTC Equity $ 250,000
New Market Tax Credit Equity $ 4,477,200
Total: $ 14,155,200
Berks County Capital
Investment in Housing Loan $ 1,100,000
Grand Total: $ 15,255,200
Curtis and Jones Shoe Factory Rehabilitation
702 North 8th Street, Reading, Berks County, Pennsylvania

26. Tax Credit Calculation
Project HTC
Total Construction Cost $14,000,000 $12,000,000
Tax Credit Calculations
HTC Equity 12,000,000 X .20 X .97 = $2,328,000
NMTC Equity 14,000,000 X .39 X .82 = $4,477,200
Case Study:
Curtis and Jones Shoe Factory Rehabilitation
702 North 8th Street, Reading, Berks County, Pennsylvania

27. - The History: Constructed in 1832 as a dormitory, the building is significant for association with the first day of the Battle
of Gettysburg on July 1, 1863. It was used by the Seminary from September 1863 to 1955. The Adams County Historical
Society operated their offices, museum, and research center in the building from 1961 to 2011.
- The Project: To find additional funding equity through the HTC program to rehabilitate the building as a museum that
discusses the first day of the Battle of Gettysburg.
- The Strategy: Delta prepared a comprehensive public funding strategy,
utilizing both grant and tax credit funding sources. Grants secured by
Delta included RACP, PennDOT, and Scenic Byways. An in depth HTC
application was prepared that addressed all of the issues associated
with innovative technology that was needed for a new up-to-date
museum.
- The Solution: The application was approved by the NPS with a single
condition relating to ongoing archaeology.
Case Study:
Schmucker Hall Rehabilitation
Lutheran Theological Seminary at Gettysburg, Gettysburg, Adams County, Pennsylvania

28. Sources of Funds
Equity $ 1,195,662
Bank Line of Credit $ 1,236,000
Bridge Loan (debt) $ 1,621,937
RACP Grant $ 4,000,000
PennDot Grant $ 215,000
Scenic Byways Grant $ 960,000
Historic Tax Credit Equity $ 1,700,385
New Market Tax Credit Equity $ 4,057,560
Total: $ 14,886,534
Case Study:
Schmucker Hall Rehabilitation
Lutheran Theological Seminary at Gettysburg, Gettysburg, Adams County, Pennsylvania

29. Tax Credit Calculation
Project HTC
Total Construction Cost $13,417,361 $7,229,527
Tax Credit Calculations
HTC Equity $ 8,675,433 X .20 X .98 = $1,700,385
NMTC Equity $14,450,000 X .39 X .74 = $4,057,560
Case Study:
Schmucker Hall Rehabilitation
Lutheran Theological Seminary at Gettysburg, Gettysburg, Adams County, Pennsylvania

30. Useful Web Addresses
www.NPS.gov/tps/tax-incentive
www.phmc.pa.gov/preservation/grants-funding
Internet Search: “historic tax credits”

31. Questions?
Mike Eby, CPA
Senior Manager with
McKonly & Asbury
meby@macpas.com
Dan Kern, CPA
Senior Manager with
McKonly & Asbury
dkern@macpas.com
Bonnie Wilkinson Mark
Principal with Delta
Development Group, Inc.
bmark@deltaone.com