Economics of Preservation 101: Tax Incentives

By Stephen McNair, PhD

The intersection between historic preservation and economic revitalization often form a natural relationship within the context of urban centers and main street communities. Programs intended to preserve and protect the historic fabric of a structure or downtown community often require a commercial component, which in turn creates temporary and permanent jobs, boosts an increase in the tax base, and improves the quality of life. The process can often be expensive and requires patience and capital, but the payoff can last generations.

Historic Pepsi Building in Atmore used tax credits for renovations

Our firm often meets with municipalities and we encourage all communities to become a Certified Local Government, which opens the door for federal and state assistance to create and update National Register Historic Districts. The development of an accurate federally recognized historic district is often the first step in the revitalization of a downtown or main street community. Structures that are fifty years of age and have not been largely altered on the exterior are potentially eligible to be included in a historic district as a “contributing” resource. Not only does the certification protect historic structures from the encroachment of road expansions (see Section 106 of the National Historic Preservation Act of 1966), but it also opens the door for the potential to utilize Alabama and Federal historic tax credits for qualified structures and the Alabama ad valorem reduction program. Make no mistake, without historic incentives, the overwhelming majority of historic rehabilitation projects would never make it out of the planning phase.

Our firm has worked in communities ranging from major cities to rural hamlets, and the goal from property owners and developers is always the same: preserve historic fabric while finding contemporary solutions to bring a historic property fully into service. If a property owner does pursue historic tax credits, which in Alabama has been a major economic improvement program across the state, expectations have to be established early about the permeameters of the scope of work, budget, and timetable for a project. The tightrope walk between maintaining historic fabric and meeting code is often the most expensive and time consuming part of the process. Issues that we often face relate to fire and life-safety code, ADA compliance, and hurricane and wind regulations in the southern part of Alabama. A misconception exists that historic structures are somehow exempt or “grandfathered” into compliance based on their age. This could not be further from the truth, which requires creative problem solving when considering an adaptive re-use design and the proposed function of a building. 

All that being said, the expense and slow review process of receiving historic tax credit approvals is worth the effort when considering the economic benefits to a property owner and intangible improvements to a community. Aside from the preservation of a structure and the related job creation, the “halo effect” of development is something we often come across. This is when a single catalytic project inspires other property owners to develop their vacant or under-utilized structures or the encouragement of property sales to developers. The St. Louis Street National Register District in downtown Mobile is a textbook example where one rehabilitation project within a blighted corridor has led to millions of dollars in further activity. What was once a vacant and derelict street has now become the centerpiece for downtown apartments, restaurants, and retail, but it took a leap of faith by the first developer to move forward. The transition was only possible due to the placement of St. Louis Street on the National Register of Historic Places and the renewal of the Alabama historic tax credit program.

Bluebird Hardware & Seed utilized Alabama and Federal tax credits in this rehab project that will surely serve as a catalyst for other development in Midtown Mobile

If the Alabama historic tax credit program is renewed in 2022, I would expect to see more projects in rural and Main Street communities move forward, following the same pattern of St. Louis Street in downtown Mobile. Communities of all sizes are treated equally when it comes to historic preservation incentives, and Alabama has no shortage of incredible historic structures that are primed to receive the attention they deserve.

Our firm has not seen an impact on historic development projects as a result of COVID-19. Issues of designing interior commercial and residential spaces that account for “new normal” of human distancing and sanitation conditions (namely improved air ventilation systems) will probably become part of the equation, but this will not impede commercial development overall. New materials and construction methods are introduced into the rehabilitation conversation on a regular basis, so the historic preservation industry will merely have to adjust and keep moving forward. After all, preservation is progress!

Stephen McNair is the founding principal of McNair Historic Preservation, Inc. Prior to starting the firm in 2015, Stephen served in various government and non-profit roles furthering the cause of historic preservation in Louisiana, Scotland, and Alabama. He is currently serving on the Executive Board of Preservation Action, a Washington DC based non-profit that develops and advocates for historic economic development legislation. McNair received his Bachelor of Arts from the University of Alabama, a Master’s in Historic Preservation Architecture from Tulane University, and a Ph.D. in Architectural History from the University of Edinburgh, Scotland.