The pros and cons of investing in historic landmarked commercial buildings

Buying a commercial building that is also a historic landmark can be a great investment. Depending on the building’s current state of repair and where it is located, the investment may even come with considerable financial incentives, including multiple tax breaks. But owning and managing a building that has been designated a historic landmark can also place additional burdens on owners that may ultimately limit one’s return on investment.

Municipal, State, and Federal Designations for Historic Buildings

A building or entire district can be designated historic at the municipal, state, and/or federal levels. Each level carries different implications, and of course, different cities and states also have their own unique restrictions.

• Municipal Regulations: At the municipal level, owners will discover a hodge-podge of different rules governing historic buildings. In New York City, for example, the exterior of any building designated as historic by the Landmarks Preservation Commission (LPC) can’t be altered without review by the LPC. While there are some exceptions (e.g., fixing a broken window), any major modifications first need to gain the approval of the committee first. Similar restrictions hold true in many other cities and localities nationwide.  
• State Regulations: Like many municipal regulations, state regulations can range from entirely honorific and entail few restrictions to considerably restrictive. In many states, including California, if you own a historic building but later modify it in a way that leads to a “loss of integrity,” your building will lose its historic designation and the many benefits associated with the designation.
• Federal Regulations: Somewhat surprisingly, if your building listed on the National Register of Historic Places, there are few restrictions at all. Even if your building receives this designation, you’ll be free to alter your property as you see fit and if you ever want to build something else in the same location, you’re free to destroy the original property. However, there are several incentives, including tax credits and grants, that may make the prospect of maintaining the old building more attractive.

Tax Credits

The Tax Reform Act of 1986 enables owners and in some cases even lessees of buildings listed in the National Register to take a 20 percent income tax credit on rehabilitation costs of industrial, commercial, or rental residential buildings.

At the state and even municipal levels, building owners typically also benefit when they choose to purchase and preserve a historic building. In Arizona, for example, commercial property owners who rehabilitate and maintain a property to preserve its historical integrity receive a substantial reduction in their annual state property taxes. To receive the tax reduction, the owner enters into a 10-year agreement with the state. During this period, they agree to rehabilitate the property and increase its value, but the state agrees to not modify the building’s current base assessment. In fact, modifications intended to restore or rehabilitate the property are nearly entirely tax-free and assessed at one-percent of full cash value rather than 25 percent. Many other U.S. states, including Washington State, also offer special tax valuations on properties with a historic designation.

Grants to Support Preservation Projects

If you own a building listed on the National Register of Historic Places, you’ll not only be eligible for a tax credit but also two other notable benefits: grants-in-aid and façade easement. Grants-in-aid are administered in conjunction with state governments (as an example, see New York State’s guidelines). Façade easements also involve another entity but in this case, a nonprofit. Essentially, the program enables building owners the right to grant control over any change in the property's facade to a nonprofit organization. In this case, the nonprofit essentially becomes a partial owner of the property, as it controls any façade changes, but it eases the owners responsible for keeping up the building’s external façade. Better yet, once the value of the easement is appraised, owners can take a tax deduction for his or her charitable contribution.

Other Reasons to Invest in Historic Buildings

Beyond the tax incentives and access to grants for capital improvements, there are a few other reasons to consider investing in a historic property. First, in some jurisdictions, owners of historic buildings can also take advantage of other unique perks, including zoning and building code relief. In Seattle, for example, an owner of a historic building doesn’t need to fully comply with established zoning and building codes. Second, investing in a historic landmark may also just be good for business relations. After all, when you buy and rehabilitate a historic building, you’re giving something back to the local community. For investors and developers, maintaining good relations with neighbors and local community leaders is always a good idea, and historic preservation is a great way to start.  

Lead photo of the Greenville Commercial Historic District courtesy of Wiki Commons