The rental and occupancy performance of historic office buildings rehabilitated for tax credit as compared against their modern counterparts

Abstract

Prior to the mid-1970's enactment of federal tax incentives designed to dove-tail the interests of developers and preservationists, the plight of historic structures seemed bleak. Recognizing that preservation had become a national imperative that could not be accomplished in a meaningful way without significant private investment, the federal government enacted a tax incentive program to encourage developers to rehabilitate, rather than eliminate, historically significant commercial buildings. In brief, the tax legislation attempted to make preservation profitable despite the additional costs and the sacrifice of leasable space. The financial performance of buildings rehabilitated for tax credit has not been examined in the United States. Whether these buildings gamer higher rent or attain higher occupancy rates as a consequence of their architectural and historic appeal remains unclear. Answering this question is critical to an understanding of the full economic value of rehabilitation tax incentives and is the basis of this thesis study. Twenty-six historic properties located within fifteen different metropolitan markets in thirteen states were compared against their respective modern counterparts on the basis of asking rent, occupancy rates, and rent capture rates to address the hypothesis. It was determined that the historic set did not perform as well, on average, as the competitive set in any category. General explanations for their underperformance are examined and recommendations are offered for future study that could confirm or challenge these initial results.