Overview

Historic property loans are not just another mortgage. Lenders, regulators, and preservation agencies treat designated buildings differently because of the goal to conserve historic character. That affects what work you can do, who must approve it, how you access funds, and which tax incentives are available. This article explains the preservation requirements, common funding sources, underwriting implications, and practical steps to getting a historic property loan.

Why preservation rules matter

Preservation rules exist to protect the architectural and cultural values of historic resources. The most widely used standard in the U.S. is the Secretary of the Interior’s Standards for Rehabilitation. Property owners who take federal or many state incentives must follow those standards when they rehabilitate the building (see National Park Service guidance) (https://www.nps.gov/tps/standards/rehabilitation/rehab.htm).

If a project receives federal money, requires federal permits, or claims federal tax credits, it may trigger a Section 106 review — a federal review process that evaluates effects on historic properties. For most privately funded projects not using federal incentives, local or state historic districts and preservation commissions still typically require design review and approvals.

Sources: NPS Standards for Rehabilitation (NPS) and IRS guidance on historic preservation tax credits (IRS) (https://www.irs.gov/businesses/income-tax-return-credits-historic-preservation).

Key differences vs. traditional loans

  • Design approvals and reviews: Historic loans commonly require a preservation plan approved by the State Historic Preservation Office (SHPO) or local preservation board before construction funds are released. Traditional loans rarely require design approvals beyond basic permits.
  • Restricted scope of work: Repairs and alterations often must preserve defining features (façade, windows, trim, masonry). Materials and methods may be specified or require reversible interventions.
  • Escrowed draws and milestones: Lenders typically use tighter draw schedules and may hold larger reserves until approved inspections confirm compliance with preservation plans.
  • Specialized underwriting: Appraisals need to assess historic value, and underwriters may require contingency funding for specialized craftsmen or conservation work. Some lenders accept future tax credits as collateral in underwriting, but rules vary.
  • Incentives and financing layers: Historic loans frequently combine mortgages with tax credits, preservation loans, grants, and tax-credit syndication — creating multi-source financing that traditional mortgages do not.

Common funding and incentive sources

  1. Federal Rehabilitation Tax Credit (20%): For certified historic structures used for income-producing purposes, the federal credit equals 20% of qualified rehabilitation expenditures after project certification by the National Park Service and the SHPO. Note: owner-occupied private residences typically do not qualify for the federal 20% credit (see IRS and NPS guidance).
  1. State historic tax credits: Many states operate credits that can apply to owner-occupied residences or commercial projects — rules differ by state and often stack with federal credits. See your state program for limits and transferability. (See our glossary: State Historic Tax Credit.)
  1. Preservation grants and low-interest loans: State Historic Preservation Offices, preservation non-profits, and local governments offer grants and loan funds for targeted projects (masonry repair, window restoration, roof repair). These often require matching funds and clear scope.
  2. Preservation/rehabilitation loans: Specialty lenders and some community development financial institutions (CDFIs) underwrite loans specifically for historic rehabilitation with features like flexible underwriting and longer draws.
  1. Community Development Block Grants (CDBG) and HUD programs: For projects with community revitalization objectives, federal block grants can be a funding source.
  2. Easements and charitable deductions: Donating façade or preservation easements to qualified organizations can yield tax benefits but impose long-term restrictions on property alterations.

Typical preservation requirements

  • Compliance with the Secretary of the Interior’s Standards for Rehabilitation when using federal or qualifying state incentives.
  • Review and approval by the SHPO or local historic commission for changes affecting character-defining features.
  • Use of historically appropriate materials and methods for visible elements (e.g., masonry repointing with compatible mortar).
  • Documentation and photography before, during, and after work to support certification or grant reporting.
  • Maintenance covenants or easements in some grant/loan agreements to protect the work long-term.

How lenders treat historic loans (practical takeaways)

  • Draw process: Expect a preservation consultant or architect to sign off at milestones. Lenders often require third-party cost verification.
  • Appraisals: Historic designation can be a value enhancer or limiter. Appraisers must value both historic significance and market comparables. Lenders look for demand for historic properties in the local market.
  • Interest rates and terms: Specialty preservation loans sometimes carry competitive rates, but costs can be higher if the project needs specialized trades or there are timing risks.
  • Risk factors: Non-compliance with preservation conditions can jeopardize tax credits and grant eligibility, potentially creating repayment pressure if anticipated funds fail to materialize.

Step-by-step checklist for borrowers

  1. Confirm designation: Get written confirmation of local, state, or federal historic status from SHPO or local commission.
  2. Hire a preservation architect/consultant: They’ll prepare a scope that follows the Secretary’s Standards and helps with tax-credit certification if applicable.
  3. Get lender pre-approval: Discuss how the lender underwrites historic projects and whether they accept tax-credit reservations or syndication proceeds as part of the financing plan.
  4. Apply for incentives early: Federal and state tax-credit certifications require prior approval before construction begins in many cases.
  5. Obtain approvals & permits: Secure SHPO sign-off and local permits before releasing construction funds.
  6. Track costs and documentation: Maintain rigorous records to support tax credits and grant draws.

Common mistakes and how to avoid them

  • Starting work before certification: Doing work before receiving required approvals can disqualify tax credits and grants. Always confirm timing with SHPO and NPS guidance.
  • Underestimating specialized costs: Historic repairs often require conservation techniques and experienced trades. Build contingency into budgets (10–20% recommended).
  • Relying on a single funding source: Combine grants, tax credits, and loans; have fallbacks if credit syndication or grant awards are delayed.

Short real-world example

A developer planned a mixed-use rehab of a 1910 commercial block listed on the National Register. They layered a conventional construction loan, a preservation loan from a CDFI, and the federal 20% rehabilitation tax credit. The lender required SHPO-approved plans and staged draws tied to certified milestones; the developer also contracted a tax-credit syndication firm to monetize the federal credit once the NPS certification was complete.

FAQs (brief)

  • Can homeowners use the federal 20% credit? No — the 20% federal rehabilitation tax credit generally applies to income-producing certified historic structures; homeowners should check state credits that may be available for residences.
  • Will historic status prevent modernization? No — modernization is possible, but visible historic features should be retained or treated per approved methods.

Professional tips

  • Start early with SHPO and your lender — timing is the most common source of problems.
  • Use a preservation architect familiar with the NPS certification process to reduce rework and cost overruns.
  • Document everything: before/after photos and contractor invoices are essential for credits and compliance.

Interlinks and further reading

Sources and authoritative guidance

Professional disclaimer: This article is educational and does not constitute legal, tax, or investment advice. For project-specific guidance, consult a licensed preservation professional, tax advisor, or attorney experienced in historic property financing.