In an era of declining subsidies and mounting funding gaps, developers have begun turning in a new direction for assistance — the New Markets Tax Credit (NMTC). This program is designed to drive capital into low-income communities. The tax credit helps developers secure financing for the construction or rehabilitation of office buildings, retail centers, charter schools, industrial facilities, and a range of mixed-use projects.
Why would investors put their money in these tax credits? NMTC projects tend to serve as a catalyst, often creating additional business opportunities beyond an initial project, and they can help investors diversify their portfolios.
Tax credits put to use
Among the first NMTC projects completed were the restoration of the historic Ford Model T factory in Omaha, Neb., and the redevelopment of the industrial riverfront in Monessen, Pa. Model T is a mixed-use project that includes commercial space and multifamily housing. Monessen Riverfront is a manufacturing facility that brought hundreds of jobs back to a community working hard to revitalize itself.
Meanwhile, ESIC Realty Partners used tax credits to bring capital into the East Baltimore Redevelopment Plan. This capital will be used to create a Life Sciences Park — a state-of-the-art research facility and a key component of the revitalization of East Baltimore, which is expected to bring thousands of jobs to the community.
The legislation creating the tax credit — the Community Renewal Tax Relief Act of 2000 — authorized the allocation of $15 billion in New Markets Tax Credits by 2007. The credits are allocated by the U.S. Treasury Department's Community Development Financial Institutions Fund. The credits are awarded annually to qualified Community Development Entities, which may be for-profit or non-profit, but their primary mission must be to serve the residents of low-income communities.
Once they have received an allocation, Community Development Entities sell their tax credits to raise capital for their proposed investments. The tax credits are worth 39 cents to investors for every dollar that is committed to a project. The tax credits also can be used to buy down rates on loans, or reduce the yield requirements for equity investments. Investors range from banks and insurance companies to multi-national financial corporations.
Who qualifies?
Any organization may form a Community Development Entity. However, competition for the tax credits is fierce. The Treasury Department receives over 300 applications for this tax credit annually. In 2005, only 41 organizations received allocations.
Each application is reviewed to determine if there is a viable business plan to attract capital, adequate staffing to manage investments, reliable processes in place to ensure compliance with applicable regulations, and a reasonable timeline for using the tax credits. In general, entities that receive allocations will not receive additional allocations in future years until they have placed at least 50% of their tax credits.
Applicants that tend to do well in the annual allocations are those whose project proposals address areas of emphasis for the administration. Under the current administration, those areas of emphasis include job creation stemming from projects such as plant expansions, the redevelopment of urban brownfields, programs that benefit Native Americans and indigenous Alaskans, and projects that bring services to areas of very high need. Charter schools in inner cities serve as an example.
Because allocations are so competitive, developers and investors often align themselves with several Community Development Entities to improve their chances of gaining access to tax credits. In addition, developers and investors sometimes create their own entities and apply for tax credits directly. However, organizations whose central focus is not community development often find it difficult to pull together applications that are compelling enough to earn allocations.
Community Development Entities that receive allocations often combine their tax credits with multiple sources of financing to raise capital for large projects. Those other sources of funding include the federal government's Historic Rehabilitation Tax Credit as well as grants and tax credits available from local and state governments.
The program has evolved into a valuable private/public partnership that can be profitable for investors and developers while bringing employment opportunities, hope and pride to rural and urban communities that stand to benefit greatly from a helping hand.
Developers and investors that would like to participate in the program should call the NMTC support line at (202) 622-6355, or visit www.cdfifund.gov.
Charles Werhane is executive vice president of Baltimore-based The Enterprise Social Investment Corporation (ESIC). The for-profit company provides community development capital, tax credit investments and development services for affordable housing and mixed-use projects.