Volume 3 Issue 2

Historic Preservation and Affordable Housing: Leveraging Old Resources for New Opportunities
By David Listokin and Barbara Listokin

"Maintenance and redevelopment of existing places is not an American value," according to urban researcher Thomas Bier of Cleveland State University. Dr. Bier's charge is supported by common development patterns: Developers favor "greenfields"—previously undeveloped land, generally farther and farther out from the city center—bypassing the more complicated and costly option of redeveloping existing places. But is this attitude changing? Is preservation becoming more valued? And is the popularity of smart growth strategies contributing to preservation? This article explores the history of historic preservation in the United States and its utility for affordable housing production, and suggests policy changes that could make it an even better tool for smart growth and affordable housing.

Historic preservation offers a natural tool in neighborhood revitalization for two main reasons: It makes use of the existing housing stock and the tax credits attached to it, and it sustains a sense of character and cohesiveness in a community. Thus, historic preservation allows for both financial and aesthetic improvements in older neighborhoods across the country, and has become an effective strategy in community development (see Sidebar 1). In the years since passage of the 1966 National Historic Preservation Act (NHPA), historic preservation has contributed significantly to residential rehabilitation of affordable housing. Many nonprofit organizations are taking advantage of the benefits, and the growing interest in historic properties—fueled in part by smart growth strategies that encourage urban redevelopment—which makes improving both the process and the policies advantageous.

The History of Federal, State, and Local Support for Historic Preservation
Until the mid-20th century, preservation sentiment was quite alien to an American society with a reverence for all things new. Partly in reaction to the widespread, often government-fueled loss of historic places and a growing societal sensitivity to environmental issues, a preservation system was developed in the 1960s. At the federal level, the NHPA created a National Register of Historic Places and a review process under Section 106 of the act to evaluate federal actions that might threaten historic resources. The National Park Service administers the historic preservation program and provides national standards, guidance, and technical assistance to state, tribal, and local historic preservation programs.

Parallel policy actions commenced at the state and local levels in the 1960s, and many such units of government created historic registers of their own and enacted similar "mini-106" protective procedures. Currently, 59 states, territories, and the District of Columbia are recognized State Historic Preservation Offices (SHPOs) and eligible for federal funding. A total appropriation of $46.6 million dollars was given collectively to those offices in 2001; the SHPO has discretion over 90 percent of those funds and 10 percent must be passed through for local preservation efforts. Also of note were new tax regulations and other policies that fostered preservation. Until the 1970s, federal tax law discouraged preservation. This began to change, and significant historic preservation tax credits were added in 1981 and amended in 1986 federal legislation.

Rehabilitation and Historic Preservation Contribute to the Affordable Housing Stock
As would be expected, rehabilitation is more prevalent in areas of the United States with older buildings. Rehabilitation constitutes a larger share of total construction in the Northeast than in other regions. In a similar fashion, in portions of metropolitan areas with older stock—namely cities—rehabilitation dominates. From 1990 through 1994 (the last year for which building permit census data were available), rehabilitation represented almost 80 percent of the total value of central-city construction in St. Louis and 50 to 60 percent in Baltimore, Cleveland, Detroit, Philadelphia, San Francisco, and Washington, DC. In many cities, rehabilitation is the dominant type of construction.

Rehabilitation may or may not be classified as historic, but historic preservation is an important contributor to rehabilitation. Some of the most prominent examples of residential rehabilitation in the United States, such as New York City's Greenwich Village, Philadelphia's Society Hill, and Boston's Beacon Hill, are historic districts or buildings. A study in New Jersey estimates that about 5 percent of that state's residential rehabilitation involves historic properties (properties already listed on national, state, and/or local historic registers). The incidence is higher in urban communities and mature suburbs, where historic rehabilitation amounts to 7 to 10 percent of all residential rehabilitation.

It is estimated that 5 to 10 percent of all rehabilitation is historic. According to the National Park Service, in the past five years more than $4.76 billion has been invested in projects it has reviewed and approved. With these funds, 27,851 low- to moderate-income housing units were constructed, constituting 44 percent of the total number of housing units completed through the historic preservation tax credit program in the same five years. These figures illustrate that there is not only considerable historic rehabilitation investment in the United States, but that it is also making an important contribution to affordable housing production.

In response to the growing need for affordable housing and recognizing the ability of historic preservation to address that need, the Advisory Council for Historic Preservation (which administers parts of the NHPA) in 1995 issued an Affordable Housing and Historic Preservation policy statement for application to historic preservation standards. It recommended that "Federal and State agencies, local governments, housing providers, and the preservation community in general actively seek ways to reconcile national historic preservation goals with the special economic and social needs associated with affordable housing, given that this is one of the nation's most pressing challenges." To advance this goal, the policy statement encourages a more flexible approach to affordable housing projects and comprehensive historic preservation training for federal, state, and local government staff and officials and housing providers who implement affordable housing developments.

Other tangible benefits have emerged from the increased interest in historic preservation initiatives. Historic rehabilitation can be a catalyst that encourages renovation in the nonhistoric stock of a neighborhood as well. In San Antonio, for instance, historic designation of the King William area encouraged property renovations in the Lavaca community. Additionally, historic rehabilitation contributes to the general rehabilitation industry by furthering development of retrofitting construction skills and materials. For example, the National Center for Preservation Technology and Training, operating under the auspices of the National Park Service, has funded research on such topics as lead paint abatement and similar issues important to historic preservationists and the rehabilitation industry at large. Finally, historic preservationists have developed incentives and programs for landmark renovation (e.g., tax credits) that can be successfully expanded to encourage rehabilitation in general.

How Is Historic Preservation Being Used?
Many community development corporations and other nonprofits utilize historic preservation incentives to rehabilitate the housing stock in their target neighborhoods. This strategy has challenges as well as rewards. The most significant single incentive for historic preservation and the production of housing (including affordable units), and the one for which the most comprehensive data are available, is the Historic Rehabilitation Tax Credit (HRTC). After 25 years, the HRTC program was recently acknowledged in a report released by the National Park Service as "one of the most successful revitalization programs ever created."

Historic rehab tax incentives have been available since 1976, with the first tax credit program enacted in 1981 and amended in 1986. Current law allows a 20 percent investment tax credit (ITC) for the rehabilitation of income-producing residential (as well as nonresidential) properties. For example, a $1 million rehabilitation of a historic apartment building would qualify for a $200,000 ITC, which investors could deduct dollar for dollar against their federal income tax liability. To qualify for the 20 percent historic ITC, the rehabilitated property has to be a "certified historic structure" (i.e., a building individually listed on the National Register, or located in, and contributing to the historic significance of, that National Register district); the rehabilitation has to be "substantial" (i.e., more than $5,000, or the adjusted basis of the renovated property, whichever is greater); and finally, the rehabilitation has to be certified (i.e., has to be consistent with the historic character of the building/district—with the Secretary of the Interior's Standards for Rehabilitation used as a guide).

Although the HRTC has been available for both housing and nonresidential projects, in practice, it has often involved housing or mixed-use (housing and nonresidential) investment. About half of the HRTC projects in the past few years were exclusively housing and another 20 to 30 percent were in the mixed-use/other category. The amount of federal investment in historic buildings reached an all-time high last year, and within the past five years, almost 3,000 historic buildings have been preserved. The figure shows the size of the federal investment and the rehabilitation applications approved since 1976.

Developers using the HRTC can most effectively produce housing affordable to low- and moderate-income households by "piggybacking" the HRTC's benefits with other subsidies, such as the Low-Income Housing Tax Credit (LIHTC). The gain in equity yielded from combining the LIHTC with the HRTC is illustrated in a hypothetical example from a book published by the National Park Service. In this instance, combining the LIHTC and HRTC yields $940,000 in equity, compared with $675,000 in equity from the LIHTC alone—a gain of $265,000. (Also see Sidebar 2)

The Challenges with Using Historic Preservation Incentives
Although historic preservation is an overwhelmingly positive force, fostering residential rehabilitation and, often, affordable housing, there is an inevitable downside. Developers often balk at historic preservation controls and regulations, which can increase housing costs, often without a clear historic preservation benefit. Illustrative is the experience of Isles, Inc., a nonprofit group, in rehabilitating row houses in a historic neighborhood in Trenton, NJ. Isles wanted to install vinyl windows modified to approximate the appearance of the original windows. The city, however, requested that Isles install wooden sash and frame windows, reflective of the row houses' historic character. The "historic" windows were more expensive than "standard" vinyl windows and added about $2,100 per house. The $2,100 cost against a total project outlay of $69,000 was not very significant, yet every increase meant that some families would be priced out of purchasing the unit.

New Haven Neighborhood Housing Services (NHNHS) in Connecticut encountered similar problems. NHNHS rehabilitates homes, many of them historic, to foster affordable homeownership opportunities. NHNHS taps many subsidies to make its housing affordable, including various federal funds (e.g., Community Development Block Grants). That federal subsidy utilization, in turn, evokes Section 106 review. NHNHS has encountered instances where the Section 106 review has delayed the rehabilitation process or has added to renovation costs by as much as $5,000 to $10,000 per rehabilitation job.

Policy Recommendations
A large part of implementing effective policies with regard to both historic preservation and affordable housing entails having a clear understanding of the priorities, needs, and constraints of both the preservation and housing communities. Community developers often have a good grasp of what impact their work will achieve. However, policy makers can focus heavily on the particulars and fail to see the larger effect and therefore, the greater good. We discuss below strategies to synthesize both perspectives.

As called for in the Advisory Council's Affordable Housing and Historic Preservation policy statement, greater preservation standards should be encouraged while allowing appropriate flexibility with regard to affordable housing. Among the concrete ways to meet that mandate: emphasize exterior treatments in Section 106 review, adhere to the Secretary of the Interior's Standards for Rehabilitation (SISR) when feasible, and develop alternative design guidelines tailored to the district or neighborhood when economic or design constraints preclude the application of the SISR. In response to the need for greater flexibility, in 1995 Community Partners (CP) of the National Trust for Historic Preservation (see Sidebar 3) led a public policy demonstration of the use of cost-sensitive affordable housing design guidelines—based on the SISR and developed through a resident participation process—as an alternative to individual Section 106 or project reviews. Six neighborhoods across the U.S. were selected, including the Dwight Historic District in New Haven, CT, where CP collaborated with local and statewide preservation organizations, the SHPO, the City of New Haven, Yale University, local community development corporations, and residents. The result was a set of guidelines that harmonized the goals of preservation with the activities of affordable housing providers, such as NHNHS.

The basic historic designation approach also may require rethinking. Currently, a property is or is not designated as a local landmark, and if it is designated then certain restrictions apply. As one alternative, a tiered approach could be followed, reflecting the fact that historic resources vary in significance. The most exemplary could be designated under a tiered landmarking approach as "significant"; a middle-level classification might consist of entities considered "important"; while the lowest threshold would encompass resources viewed as "contributory." Restrictions against demolition and alterations would then be gauged according to classification, with the greatest restrictions applied to the "significant" groups and much less stringent controls affecting the contributory properties.

A tiered approach, already adopted in such communities as Atlanta and San Francisco, may facilitate preservation's contribution to housing development. Tiering could also be connected to varying HRTC provisions, such as bringing back the previous 25 percent investment tax credit without passive income restrictions for rehabilitation on a "significant" property, while perhaps reducing the ITC to 15 percent for "contributory" properties (down from the current 20 percent), but allowing this latter work to be done under more flexible guidelines. While this strategy raises issues of its own, such as requiring a critical contextual application, it could facilitate greater use of tax credits and support historic rehab for affordable housing by allowing more flexibility in historic designations.

Revision of the Tax Credit System
Further, revisions to the tax credit system are in order. The ITC should be increased for HRTC projects involving low-income housing. (Currently, the same credit is granted to market-rate housing as to affordable units.) Additional encouragement, such as reducing or eliminating the current provision that reduces the LIHTC's basis by the amount of the HRTC in a joint HRTC-LIHTC project (see Sidebar 2), should be given to HRTC-LIHTC projects. Another approach to fostering greater HRTC-LIHTC usage is for state housing authorities, which allocate the LIHTC credits among competing applications, to favor historic preservation projects, perhaps by adding additional points to LIHTC applications for historic renovation. States should also consider the limitation of historic properties to meet some of the requirements favored by LIHTC applications, such as more bedrooms and high energy efficiency.

The nexus of historic preservation and housing would be furthered by extending tax credit benefits, now limited to income-producing properties, to rehabilitation of historic structures occupied by the taxpayer as a principal residence. The National Park Service estimates that roughly one-third of the 950,000 contributing buildings in historic districts around the country would benefit from such a provision, with nearly three out of five of these buildings in historic districts with a poverty level exceeding 20 percent.

Code and Regulation Revisions
Many inhospitable land use and housing regulations need to be changed to enable more historic preservation to take place. For instance, many communities' zoning regulations limit the ability to change a building's use (e.g., from industrial to housing) or to carve out smaller units from larger spaces (e.g., granny flats), yet such flexibility is important both for finding uses for older buildings and producing affordable housing. Certain communities, such as San Francisco, have worked to better integrate their preservation and land use systems, and others should follow their lead.

The building code is yet another barrier—and opportunity for change. In many American downtowns, often on the main street, there are older, three- to four-story commercial buildings with vacant but adaptable space for housing. Historic buildings, however, do not meet the requirements of new construction (e.g., having two means of egress). In response, some states, such as New Jersey, have adopted building code changes to permit such reuse. Federal research has led to the development of the National Applicable Recommended Rehabilitation Provisions (NARRP); if adopted by states and localities, the New Jersey/NARRP provisions would foster more flexible and affordable housing rehabilitation and historic preservation. These regulatory reforms and the programmatic and other recommendations described earlier will further preservation's contribution to housing development. Much has already been accomplished to ensure that preservation continues to grow and is used as a vital community development and housing strategy, but still much remains to be done.

Source: U.S. Department of the Interior, National Park Service

David Listokin is Professor at the Center for Urban Policy Research at Rutgers University. Barbara Listokin is a mortgage underwriter at the Office of Multifamily Housing Assistance Restructuring, U.S. Department of Housing and Urban Development (HUD). This article represents the views of the authors and does not necessarily reflect the views or policies of HUD or the U.S. government. The authors thank Heather Mahaley, a Research Fellow at Fannie Mae Foundation, and John Leith-Tetrault and Erica Stewart of the National Trust for Historic Preservation for their assistance in preparing this article.