Developers face unique legal, design and physical challenges when rehabilitating historic properties. In addition to the usual issues associated with the development of new construction or non-historic properties, developers of historic properties must often address special legal hurdles, design restrictions and peculiarities, the effects of time on historic materials, public resistance to change and complex historic preservation laws governing the development of historic properties.

Failure to address these issues early in a project can lead to the denial of necessary approvals, additional construction costs or missed economic incentive opportunities. However, developers may avoid the pitfalls often associated with developing historic properties and greatly increase the odds for project success by performing the proper due diligence investigations and assembling the right development team.

Historic Status

The first issue facing developers is whether a property is in fact “historic,” or merely old. Public sentiment notwithstanding, the distinction is purely legal. A common misconception is that age, design or even association with historic events or persons alone confers historic status. While these qualities are often the basis for a legal landmark designation, a property’s historic status is the result of a formal legal historic designation at the local, state and/or federal level.

At all three levels, the historic designation process starts with a formal nomination that sets forth historical and physical facts about a property along with the nominee’s argument regarding a property’s historic significance. At the local level, the process usually involves the nomination of the property as a local landmark by a municipal historic preservation commission, and review and approval or denial by the city council. If the property is approved as a local landmark, an ordinance is adopted designating the property as such and describing the property’s historic significance. State designations are less common due to the primacy of the federal National Register of Historic Places (National Register) in this capacity.

The process for nomination and inclusion on the National Register is mechanically similar to the landmarking process at the local level, except that the principal agencies involved are the state historic preservation office, an independent state council and the Keeper of the National Register in Washington, D.C. Sometimes, entire local and/or National Register landmark districts — composed of hundreds of buildings — are created to encourage owners and developers to maintain the historic character of whole city districts. The most significant difference between local and National Register historic designations, however, relates to development restrictions and opportunities.

In general, a local landmark designation often confers more restrictions on development than eligibility for economic opportunities, while the federal landmark designation generally confers few restrictions on development and greater eligibility for economic incentives. To confuse matters more, a property may be designated as both a local and a national property, or it may simply be “determined eligible” for inclusion on the National Register — a status that carries some restrictions but few economic benefits. Therefore, proper due diligence of a property’s historic status requires knowing exactly what type of landmark designation a property carries and how that landmark status affects development plans.

Citizen and Public Considerations

Developers also must often address private and political concerns regarding alterations to historic properties. At the private level, citizen interest to proposed development can be nonexistent, well-supported, or highly opposed by energetic individuals and not-for-profit organizations. Citizen activity can be highly effective in applying political pressure to permit or resist proposed historic rehabilitation. Developers are advised to investigate past local citizen activity in connection with historic properties to determine whether private interests will be allied with or adverse to proposed rehabilitations.

Even if a historic property has escaped the notice of the citizenry, alterations to local landmarks generally require approvals from city-appointed historic preservation commissions via the building permit process. Local historic commission members may be well trained and experienced historic preservation professionals or seemingly untrained and arbitrary reactionaries. In either case, local historic preservation commissions can be highly influential to the success of historic rehabilitation projects. Developers are advised to do a thorough due diligence investigation early in a project’s life to distinguish potential development friends from foes.

Physical Investigations

Historic properties were often constructed with materials and methods that may seem unsophisticated by today’s construction standards. While buildings today certainly reflect decades of increased technological sophistication, historic properties were no less advanced for their time and were often constructed with time-proven methods using natural materials selected for their sustainability such as brick, stone and timber.

In the 19th and 20th centuries, advances in manufacturing permitted new products to imitate traditional designs and materials with unproven construction methods. Terra cotta, for example, was heavily used in the early 20th century as high-rise wall cladding and combined the ancient technology of fired clay with the relatively new technology of steel wall anchorage. Builders in the first few decades of the 20th century produced exquisitely detailed terra cotta-clad buildings, but also unknowingly sowed the seeds of flagrant and costly material failures for the future with the unproven technology. Decades later, years of water infiltration through the terra cotta wall cladding caused the steel wall anchors to rust, which split and loosened the heavy terra cotta units from the walls — often hundreds of feet above the street level. In Chicago, the failures and danger presented were so great as to compel the city to create an ordinance that required building owners to inspect downtown terra cotta-clad buildings for defects. This also resulted in the erection of extensive protective sidewalk scaffolding for pedestrians throughout the city, creating long-term visual and pedestrian traffic headaches. The costs, in terms of building restoration to owners, lost business revenue and property damage, have been enormous.

In other cases, some presently banned materials, such as asbestos and lead paint, were commonly used for centuries in building construction. Today, the costs of material testing, remediation, removal and potential legal exposure to owners unprepared for such expenses can be crippling. Also, hidden structural defects or problems in adapting existing structural load-bearing capacities for new uses can also be daunting to project budgets. Developers considering rehabilitating historic buildings are wise to perform a thorough due diligence physical investigation, including testing and analysis of a building’s construction type and physical condition to properly assess the associated costs and challenges.

Economic Incentives

Though historic preservation laws may often appear unduly restrictive, federal, state and sometimes local historic preservation laws provide for economic incentive programs designed to reward careful historic rehabilitation through tax credits, property tax relief, conservation donations and grants. Since each state and municipality has different programs, the economic opportunities should be investigated thoroughly.

At the federal level, the Historic Preservation Tax Credit Program, administered by the National Park Service, allows successful applicants to claim up to 20 percent of qualified expenses spent on the rehabilitation of income-producing, National Register-listed properties as federal income tax credits. These federal historic rehabilitation tax credits can sometimes be sold to commercial buyers for cash. Federal tax benefits can also be gained by developers donating a conservation easement over the historic property (often incorrectly referred to as a “façade easement”) to an approved not-for-profit organization or a municipality. The value of the easement, as determined by a qualified easement appraiser, can be taken as a one-time deduction against gross personal or business income taxes.

At the state and local levels, economic incentives generally take the form of property tax relief. It is also possible to combine historic preservation economic incentive programs on a single project, but the potential for running afoul of the IRS regulations encourages careful legal and tax structuring of deals to ensure the maximum benefits.

In almost all cases, historic rehabilitation projects seeking economic incentives (and at the local level even building permits) must comply with the federal guidelines for historic rehabilitation, “The Secretary of the Interior’s Standards for Rehabilitation” (Standards). The Standards are intended to codify contemporary historic rehabilitation philosophy in 10 general guideline statements. Promulgated by the U.S. Department of the Interior, the National Park Service has become the primary interpreter of the Standards’ often obtuse meaning and application to historic rehabilitation projects. State historic preservation laws and local historic preservation ordinances often incorporate the Standards into their requirements either directly or by reference.

Since the Standards are statements of general application, they are open to a wide range of arbitrary interpretation by local, state and federal agencies. However, though the intent of adopting a national-level criteria for historic rehabilitation is to promote uniformity in interpretation, the Standards’ lack of specificity allows them to be liberally construed at the state and local level. In any case, federal, state and local interpretations of the Standards must ultimately be able to survive challenges by a plain reading of the law and a reasonable, logical application.

Due to the importance of the Standards in the regulatory scheme of preservation incentives, developers are advised to retain special qualified legal or other professional assistance when seeking historic preservation economic incentives.

Special Development Team

Due to the special physical, historic and architectural challenges presented by historic rehabilitation, developers should carefully review the experience of attorneys, architects, contractors and other specialists considered for the development team.

Attorneys assisting developers of historic properties should be familiar not only with the regulatory framework of federal, state and local historic preservation laws but also with historic preservation’s specialized vocabulary and range of available economic incentives. Qualified attorneys can be invaluable when dealing with the historic designation process, construction contracts and special environmental challenges. They are also helpful in gaining approvals and permits, representing owners against private or public challenges to their projects, and properly analyzing the available economic incentives.

Project architects should be trained and experienced in working with a wide range of historic styles, and understand the special costs and technical requirements for repairing and replacing historic materials. Architects should also understand how to incorporate the Standards into their clients’ development programs and design solutions. Similarly, contractors should also be pre-qualified for their experience and understanding of historic construction methods and materials.

Gary Cole, AIA, Esq., is a licensed architect and an Illinois and Florida licensed attorney practicing in the Chicago office of Seyfarth Shaw law firm.


©2003 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.