One of my first real estate investments was on a property that we were told had a historical designation.
However, unpacking what that meant and if it actually was – this was a journey into itself.
In the case of many investors, they will likely first go the National Registry of Historical properties. Our properties was not registered.
We research at the local level. We found out that there is a national level. Then we went back to the county and city to try and find where this property was located.
What we learned was that this property had a preservation easement on it, which a city historical preservation society had put on the property in exchange for money that was used to fund a restoration of the property many years ago.
The easement outlined that the exterior of the property could not be substantially changed but otherwise the interior was not restricted.
This is very common with historical regulations. While many investors would be wary about the cost and restrictions that historical designations bring, they can also bring many contributing factors of value.
The Basics: What Counts as a “Historic District”
A property can carry historic status at three very different levels.
- National Register of Historic Places listing is largely honorary.
It recognizes a district’s architectural or historical significance and opens the door to federal (and often state) rehabilitation tax credits, but it does not, by itself, restrict what a private owner can do to the exterior of a building. The only regulatory teeth attached to a National Register listing is Section 106 review, which applies solely when federal funding, permits, or licenses are involved in a project.
- National historic designation. These are areas that are designated at the national level and are typically a region of a city and not a particular property. There are national historical tax credits that are attached to properties that meet the requirements within federally designated historical districts.
- To read a full blog about Federal Historical Districts, visit our previous article at https://clearmultifamily.com/blog/historic-tax-credit-guide/
- Local (or “overlay”) historic district designation is a different animal entirely. It is created by city or county ordinance, and it comes with an appointed historic preservation or landmarks commission that reviews exterior changes. This is the designation that actually governs changes that property owners may want to make.
A building within a district is usually classified as either “contributing” (it reflects the district’s period of significance and character) or “non-contributing” (added later, or altered beyond recognition). That single classification determines how much design scrutiny a renovation will face.
Watch: Should You Buy a Historic Property? 5 Things Investors Need to Know
5 Keys to Making Money
Key 1: Know what you’re buying — before you are locked in to a property
Confirm what level(s) of designation your property has- and what tax credits or grants may be available.
- A National Register-only building in a metro with strong state tax credits gives you renovation subsidy with almost no design restriction — often the most profitable combination available.
- A locally designated building trades some renovation flexibility for a real competitive moat: your neighbors cannot cheapen the streetscape with incompatible construction, which protects your rent comps and your exit cap rate. We break down how this kind of valuation works in how fair market value is established.
Key 2: Stack the tax credits instead of avoiding them
- The federal Historic Rehabilitation Tax Credit returns 20% of qualified rehabilitation expenses on a certified historic structure used for income-producing purposes, claimed over five years under current law. For the rehabilitation work itself, C-PACE energy efficient retrofit financing is another option worth exploring in PA.
- Roughly three dozen states layer an additional credit — commonly in the 15%–25% range. This can range quite a bit from state to state- PA has no state level credit while MA has a worthwhile program.
- Many jurisdictions add property tax freezes or abatements during the rehabilitation period.
- Local non-profit historical preservation societies may have grants available to fund rehabilitation. There may be county as well as city-level historical preservation societies that this comes from.
For the property that I had purchased, a grant of $70,000 had previously been paid (in 1980 dollars), by a private non-profit at the city level. In exchange a preservation easement was put on the exterior of the property, protecting it from significant changes in the future.
By investing all options, investors may find that incentives to help with the cost of the restoration and renovation are well within reach. But, it will take time, which brings us to #3….
Key 3: Underwrite the entitlement timeline as a cost
While those credits and grants can make a huge difference in the cost- investors still have to factor in the longer timeframe achieving these will take, and the review and compliance steps they will have to proceed through.
- Historical Committee design review
- Tax-credit certification with the State Historic Preservation Office
- Demolition-delay periods
All these extend a project’s timeline in ways a conventional multifamily deal doesn’t face.
Build that time into your carrying-cost and construction-loan assumptions up front, and use it in price negotiations — sellers who list a historic property without accounting for this friction routinely overprice it relative to what a informed buyer can actually execute.
Key 4: Buy character, and price it into rent.
Original millwork, tall ceilings, masonry facades, and a protected streetscape are amenities a garden-style suburban complex cannot replicate at any price.
Renters increasingly pay a premium for that authenticity in walkable, mixed-use historic cores.
- Because local design review also limits how much competing new supply can rise nearby (or dictates that it must be compatible in scale and material), well-positioned historic assets often see steadier rent growth and lower long-run cap-rate expansion than comparable non-historic stock in the same submarket.
Modeling this in your proforma, and explaining this rent premium to your bank and investors will help to ensure the property meets a reasonable valuation relative to the market.
Key 5: Get ahead of the designation cycle
Neighborhoods may have designations, but still be in need of a revitalization.
Investors who identify a transitional area in the path of progress can acquire below market pricing, execute adaptive-reuse conversions under lighter review, and then benefit from the value stabilization a gentrification brings once it arrives. Our guide to the best areas for value-add investments covers how to spot these opportunities before they’re obvious.
This takes real local diligence — talking to the planning department about pending local changes— but it is where the largest spreads between purchase price and stabilized value tend to appear.
Making it look easy
As an investor, doing the work to revitalize old, tired neighborhoods into something beautiful that contribute to the community, can pay off very well.
But the most meaningful contribution is leaving a lasting impact on your community and the lives of those around you.
Many investors we work with have used these resources to growth their wealth and change their community. If you would like a valuation on a Multifamily property that you have improved, head over to www.clearmultifamily.com and tell us about your property to get started today.
This article is general information, not tax or legal advice. Historic tax credit rules, local ordinances, and design review procedures vary by jurisdiction and change over time — confirm current requirements with your State Historic Preservation Office, a qualified accountant, and local preservation counsel before underwriting a deal around them.
Sources:
cityblog.huntsvilleal.gov/historic-districts-national-register-vs-local-designation/
https://www.nps.gov/subjects/nationalregister/index.htm
www.nps.gov/subjects/taxincentives/tax-credit-basics.htm
https://www.pa.gov/services/phmc/request-local-historic-district-certification
