Abstract: How Tax Credits Have Affected the Rehabilitation of the Boston Office Market

Volume 28, Number 4, 2006 of the Journal of Real Estate Research

How Tax Credits Have Affected the Rehabilitation of the Boston Office Market

James D. Shilling University of Wisconsin School of Business Madison, Wisconsin 53706 Email: jshilling@bus.wisc.edu	Kerry D. Vandell University of Wisconsin School of Business Madison, Wisconsin 53706 Email: kvandell@bus.wisc.edu
Ruslan Koesman University of Indonesia Jakarta, Indonesia	Zhenguo Lin University of Wisconsin School of Business Madison, Wisconsin 53706 Email: zlin@bus.wisc.edu

Abstract: This paper is concerned with the extent to which rehabilitation tax credits affect the conditional probability of commercial real estate rehabilitation. Very little has been written about the rehabilitation tax credit, despite the fact that it has been a feature of the U.S. tax code since 1978. Our analysis suggests that rehabilitation tax credits have been a significant determinant of the conditional probability of rehabilitation in the Boston office market. We also find that a significant portion of rehabilitation tax-credit investment is investment that would have been invested elsewhere, about 60 to 65 percent in certain periods, but rising to as high as 90 percent in other periods. We find that the rehabilitation tax credit has a significant and substantial influence on the conditional probability of rehabilitation. We also find that the greatest amount of slippage, not too surprisingly, generally occurs when the tax credit is low and when the gain from rehabilitation before the tax credit is high.