Financing high-tech centers with tax credits

Driven by the rise of the Internet and telephone deregulation, high-tech communications sites–also known as data centers, telecom hotels, and carrier facilities–have become a prominent and influential component of the commercial real estate industry.

These buildings, where Internet-related companies store and manage data and switching devices, house sensitive and expensive equipment, but very few people. Thus, they tend to be located in converted warehouses close to the major fiber-optic backbones and cables that reside along railroad right-of-ways and under some highways and city streets, often in neglected downtown areas.

However, what building owners may not realize is that some of these conversions may be eligible for federal rehabilitation tax credits that can be converted into equity dollars to finance the rehabilitation project. Calculated as a percentage of qualified rehabilitation expenditures, federal tax law offers a 10% tax credit for substantial rehabilitations of non-historic, non-residential buildings built before 1936 and a 20% tax credit for substantial rehabilitations of historic buildings.

These tax credits can be either used to reduce the building owner’s federal tax liability on a dollar-for-dollar basis or transferred to a corporate investor in exchange for additional capital that can be utilized for long-term financing of the project. Because the Internal Revenue Code’s Passive Activity Rules and Alternative Minimum Tax Regulations severely limit and, sometimes, prohibit the use of tax credits by individuals, most building owners syndicate the tax credits to a third-party corporate investor who can utilize the tax credits.

For qualified rehab conversions, federal rehabilitation tax credits can serve as a viable secondary financing source for the transformation of old commercial buildings into high-tech communications centers.

Adapted from Financing High-Tech Communications Centers with Rehabilitated Tax Credits by Robert Plotka, managing director, CityScape Capital Group, Princeton, New Jersey.

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