An Analysis of New Markets Tax Credits

Transcription

1 A Aalysis of New Markets Tax Credits BY J. RUSSELL HARDIN, PH.D., CPA; AND THOMAS G. NOLAND, PH.D., CPA INTRODUCTION CONGRESS ESTABLISHED THE NEW MARKETS TAX CREDIT (NMTC) Program as part of the Commuity Reewal Tax Relief Act of 2000 to ecourage ivestors to make ivestmets i impoverished, low-icome commuities that traditioally lack access to capital. Covetioal access to credit ad ivestmet capital for developig small busiesses, creatig ad retaiig jobs, ad revitalizig eighborhoods is ofte limited i ecoomically distressed commuities or i commuities with large low-icome populatios. The NMTC provides ivestors (idividuals, fiacial istitutios, other corporatios, etc.) with a tax credit for ivestig i commuities that are ecoomically distressed or cosist of low-icome populatios. 1 OVERVIEW OF THE FEDERAL PROCESS The NMTC Program is iteded to spur the ivestmet of private sector capital ito low-icome areas by permittig taxpayers to receive a credit agaist federal icome taxes for makig qualified equity ivestmets (QEIs) i desigated Commuity Developmet Etities (CDEs). The credit provided to the ivestor totals 39 percet of the ivestmet i a CDE ad is claimed over a seve-year credit allowace period. I each of the first three years, the ivestor receives a credit equal to five percet of the total amout paid for the stock or capital iterest at the time of purchase. For the fial four years, the value of the credit is six percet aually. Ivestors may ot redeem their ivestmets i CDEs prior to the coclusio of the seve-year period. About the Authors J. Russell Hardi, Ph.D., CPA, is a professor of accoutig at the Uiversity of South Alabama i Mobile. He holds a bachelor of sciece ad a master s degree i busiess from Appalachia State Uiversity, ad a doctorate i accoutig with a cocetratio i tax from the Uiversity of Mississippi. Hardi is also a certified public accoutat ad teaches tax courses ad fiacial accoutig. He has published several articles ad books i the accoutig, tax ad iteratioal busiess fields. He performs cosultig i the real estate field. Thomas G. Nolad, Ph.D., CPA, is a associate professor of accoutig at the Uiversity of South Alabama. He holds professioal certificatios as a certified public accoutat, certified maagemet accoutat ad certified defese fiacial maager. Nolad has bee awarded both the Lybrad Broze Medal ad a Certificate of Merit by the Istitute of Maagemet Accoutats for his cotributios to accoutig research. He also has served as a Academic Fellow i the Securities ad Exchage Commissio Office of Chief Accoutat ad has worked for the Federal Deposit Isurace Corporatio. Nolad s research iterests iclude auditig, bakig, fraud ad tax policy. He is a retired lieuteat coloel from the Uited States Army Reserve. REAL ESTATE ISSUES 27 Volume 36, Number 3, 2011

2 A Aalysis of New Markets Tax Credits CDE CERTIFICATION To qualify as a CDE, a etity must be a domestic corporatio or partership that: has a missio of servig, or providig ivestmet capital for low-icome commuities or low-icome persos; maitais accoutability to residets of low-icome commuities through their represetatio o a goverig board of, or advisory board to, the etity; has bee certified as a CDE by the Commuity Developmet Fiacial Istitutios (CDFI) Fud. Applicats may submit CDE certificatio applicatios to the CDFI Fud throughout the year. A low-icome commuity (LIC) is ay populatio cesus tract that meets the followig criteria (as reported i the most recetly completed Deceial Cesus published by the U.S. Bureau of the Cesus): a) the poverty rate for such cesus tract is at least 20 percet; or; b) the Media Family Icome (MFI) of such cesus tract does ot exceed 80 percet of: the statewide MFI, if the tract is ot located withi a metropolita area, or; the greater of statewide MFI or the metropolita area MFI, if the tract is located withi a metropolita area. ALLOCATION OF NMTCS The CDFI Fud allocates NMTCs to CDEs through a aual competitive applicatio process. Throughout the life of the NMTC Program, the CDFI Fud allocates tax credit authority to support ivestmet i CDEs. See Figure 1 for a list of the largest 2010 allocatees. A complete list of allocatees ad more details cocerig each allocatee is available at USE OF QEI PROCEEDS A CDE that is awarded a allocatio of NMTCs by the CDFI Fud has five years from the date of otificatio of its allocatio to close QEIs with its ivestors. The CDE has 12 moths to place substatially all of the proceeds from the QEIs ito Qualified Low Icome Commuity Ivestmets (QLICIs), which geerally are: loas to, or ivestmets i, qualifyig busiesses (icludig certai real estate projects); loas to, or ivestmets i, other CDEs; Figure 1 Largest Federal New Market Tax Credit Allocatees 2010 (i alphabetical order) Allocatee Name Headquarters Predomiat Markets Allocatio Amout Capital Oe Commuity Reewal Fud, LLC McLea, VA DC, LA, MD, NJ, NY, TX, VA $63,000,000 City First New Markets Fud II, LLC Washigto, DC DE, DC, MD, PA, VA $70,000,000 Coastal Eterprises, Ic. Wiscasset, ME ME, MA, NH, NY, OR, VT, WV $77,000,000 Commuity Hospitality Healthcare Services, LLC Placida, FL FL, KY, MD, NC, PA, VA, WV $63,000,000 ESIC New Markets Parters LP Columbia, MD CA, DC, LA, MD, NY, OH, WA $62,000,000 HEDC New Markets, Ic. New York, NY CT, IL, NY, OH, TN, TX, WA $63,000,000 Local Iitiatives Support Corporatio New York, NY CA, DC, IL, LA, MA, MI NY $70,000,000 MHIC NE New Markets CDE II, LLC Bosto, MA CT, ME, MA, NH, RI, VT $63,000,000 Midwest Miesota Commuity Developmet Corporatio Detroit Lakes, MN MN, ND, SD, WY $74,000,000 Natioal Commuity Fud I, LLC Portlad, OR CT, IN, IA, MN, NY, OR, PA $77,000,000 Natioal New Markets Tax Credit Fud, Ic. Mieapolis, MN CA, CO, FL, MN, OR, TX, WI $77,000,000 Rural Developmet Parters, LLC Maso City, IA IA, KS, MO, NM, ND, TX, WI $77,000,000 Source: REAL ESTATE ISSUES 28 Volume 36, Number 3, 2011

3 A Aalysis of New Markets Tax Credits the purchase of qualifyig loas origiated by other CDEs; couselig to low-icome commuity busiesses. CDEs have used NMTC proceeds to fiace a variety of activities i distressed urba ad rural commuities throughout the Uited States, icludig alterative eergy compaies, charter schools, health care facilities, affordable housig, timberlads, childcare providers, supermarkets, restaurats, museums, hotels, performig arts ceters, maufacturers, processors, distributors, busiess icubators, office buildigs, shoppig ceters, substace abuse treatmet facilities ad facilities for the homeless. IMPACT OF FEDERAL NEW MARKETS TAX CREDITS The followig iformatio was gathered by the NMTC Coalitio through a Freedom of Iformatio Act request filed with the CDFI Fud of the Departmet of the Treasury i September The NMTC Coalitio issued its report i December The iformatio was based o projects fiaced by federal NMTCs from 2003, whe the first allocatios were made, through 2009, the last full year of allocatios. This iformatio icluded data o more tha 4,000 trasactios that fiaced early 3,000 busiess eterprises. From the New Markets Tax Credit 10th Aiversary Report Key Fidigs: 2 While the NMTC statute requires that projects be located i cesus tracts where the poverty rate is at least 20 percet or media family icome does ot exceed 80 percet of the area media, i fact, the prepoderace of NMTC activity is i extremely disadvataged commuities with high distress factors far exceedig the miimum requiremets i the law. Over 61 percet of ivestmets are made i commuities with uemploymet rates exceedig 1.5 times the atioal average, 57 percet are i commuities with poverty rates exceedig 30 percet ad 60 percet of the ivestmets are i places where media icomes are at or below 60 percet of the area media. Betwee 2003 ad 2009 NMTC leveraged $8 i private ivestmet for every $1 of cost to the govermet. The New Markets program geerated almost $50 billio i fiacig to busiesses i low-icome commuities. Of that amout $15.5 billio came from direct NMTC ivestmets, which cost the federal govermet $6 billio i lost reveue (39 percet of $15.5 billio). The balace, totalig $34 billio, came from other public ad private sources of capital. NMTC fiaced a wide rage of projects, from the first supermarket i a geeratio i southeast Washigto, D.C., to a loa for a school i Florida, a health ceter i rural Louisiaa, a solar compay i New Mexico, ad a series of revitalizatio projects i Iowa, Michiga ad Virgiia. While a substatial portio of projects fiaced by the Credit were real estate commuity facilities, idustrial ad commercial facilities, mixed-use buildigs with affordable housig may were o-real estate projects that provided fiacig to operatig busiesses for equipmet ad workig capital. Demad for NMTC far exceeds availability. To date, CDEs have requested a total of $202 billio i allocatio authority sice 2003, a demad of more tha seve times credit availability. Usig federal Recovery Act stadards, the NMTC Coalitio estimates that NMTC-fiaced projects have created or retaied up to 500,000 jobs, at a cost to the federal govermet of less tha $12,000 per job. The vast majority of NMTC ivestmets (89.5 percet, or $13.8 billio) have bee made i commuities with at least oe factor of higher ecoomic distress tha required by law. STATE-LEVEL NEW MARKETS TAX CREDITS ACTIVE As of Jauary 2011, oly four states have state-level NMTCs i place. Those states are Florida, Illiois, Mississippi ad Ohio. Two states Louisiaa ad Missouri had NMTC programs but have defuded them. The state NMTC programs basically parallel the federal program ad usually require the CDE to be federally certified before it ca be certified by the state. Also, most of the same defiitios cotaied i Iteral Reveue Code Sectio 45 for NMTCs are applied at the state level. Florida Florida House Bill 485, which became effective July 1, 2009, authorizes tax credits for ivestmets i low-icome commuities. The program is desiged to ecourage private ivestmet i low-icome commuities i the state, ad is modeled after the federal NMTC Program. Ivestors who make qualified ivestmets are eligible to receive tax credit allocatios to offset corporate icome or isurace premium tax liabilities. The program is desiged to make Florida more attractive to atioal ivestors who are decidig where REAL ESTATE ISSUES 29 Volume 36, Number 3, 2011

4 A Aalysis of New Markets Tax Credits to ivest fuds raised uder the federal program. A CDE eeds to be a CDE for federal purposes ad eeds to be authorized to serve busiesses i Florida. The state of Florida charges a $1,000 orefudable applicatio fee. The aual state cap uder this program is $20 millio, ad a qualified active low-icome commuity busiess may ot receive more tha $10 millio i qualified low-icome commuity ivestmets uder this program. The credit is 39 percet of the purchase price of the qualified ivestmet, makig the total credit (federal plus state) 78 percet of the qualifyig ivestmet. The credit is take agaist the state corporate tax or the state isurace tax. The state NMTC is claimed as follows: years oe ad two: zero percet; year three: seve percet; ad years four through seve: eight percet. A Qualified Active Low-Icome Commuity Busiess (QALICB) i Florida is defied usig federal requiremets. Uder the federal requiremets, a QALICB is a busiess i a low-icome commuity where: at least 50 percet of total gross icome of such etity is derived from the active coduct of qualified busiess withi ay Low-Icome Commuity; a substatial portio of the use of the tagible property of such etity (whether owed or leased) is withi ay Low-Icome Commuity; a substatial portio of the services performed for such etity by its employees are performed i ay Low-Icome Commuity; less tha five percet of the average of the aggregate uadjusted bases of the property of such etity is attributable to collectibles (as defied i IRC 408 (m)(2)) other tha collectibles that are held primarily for sale to customers i the ordiary course of such busiess; less tha five percet of the average of the aggregate uadjusted bases of the property of such etity (as defied i IRC 1397C (e)) is attributable to oqualified fiacial property (e.g., debt istrumets with a term of more tha 18 moths). I additio to the federal requiremets, Florida added the followig requiremets: Performs a substatial portio of its services through its employees i a low-icome commuity for ay taxable year; Does ot derive or project to derive 15 percet or more of its aual reveue from the retal or sale of real estate; Will create or retai jobs that pay a average wage of at least 115 percet of the federal poverty icome guidelies for a family of four; A qualified commuity developmet etity may ot make a qualified low-icome commuity ivestmet i a busiess uless the pricipal activities of the busiess are withi a eligible idustry. (The Office of Tourism, Trade, ad Ecoomic Developmet, i cosultatio with Eterprise Florida, Ic., shall desigate idustries, usig the North America Idustry Classificatio System, that are eligible to receive low-icome commuity ivestmets.) Illiois Illiois Seate bill 2015, which established a NMTC for the state of Illiois, was siged by the goveror o Dec. 31, 2008, ad took effect i The bill established a ew state icetive for ivestmet etities that have bee approved for the federal NMTC Program. The law supports small ad developig busiesses by makig capital fuds more easily available ad makes the state more attractive to possible ivestors. Oly a CDE that is certified by the federal NMTC Program ad has etered ito a allocatio agreemet with the CDFI is eligible to apply for the Illiois NMTC Program. The CDE must apply to the Departmet of Commerce ad Ecoomic Opportuity (DCEO) o a first come, first served basis, with a o-refudable $5,000 applicatio fee. Oce eligibility is determied, DCEO will issue a prelimiary letter of approval to the CDE which will iclude a allocated amout of Illiois NMTC cotiget upo QEIs beig made withi 30 days of the date of the prelimiary letter of approval. 3 A perso or etity that makes a QEI ears a vested right to tax credits. O each credit allowace date of the QEI, the purchaser of the QEI, or subsequet holder of the QEI, is etitled to a tax credit durig the taxable year. The tax credit amout is equal to the applicable percetage of the purchase price paid to the issuer of the QEI ad is claimed as follows: o credit for each of the first two credit allowace dates; seve percet for the third credit allowace date; ad eight percet for the ext four credit allowace dates (total credit is 39 percet). This credit is additio to the federal credit, so the credit is doubled to 78 percet of the qualifyig ivestmet. 4 The aual cap uder this program is $10 millio REAL ESTATE ISSUES 30 Volume 36, Number 3, 2011

5 A Aalysis of New Markets Tax Credits with o limit (other tha the aual cap) o how much ca be allocated to oe trasactio. A credit may be claimed agaist ay icome, frachise or isurace premium tax uder Illiois law. A Qualified Active Low-Icome Commuity Busiess (QALICB) is defied the same as federal requiremets. Mississippi The state of Mississippi eacted a state-level credit called the Equity Ivestmet Tax Credit [EITC] which is essetially a NMTC. The credit to Mississippi icome or isurace premium tax is available for eligible ivestmets made by CDEs i desigated low-icome cesus tracts i the state, as defied by the U.S. Cesus Bureau. These credits are state credits that act as compaio credits to the NMTC Program. Mississippi allows a state credit equal to 24 percet of the QEI i additio to the credits awarded through the federal program. Equity Ivestmet Credits are calculated as eight percet of the QEI, ad are available as of the Mississippi Credit Allowace Date, ad aually for two additioal years, so the credit is eight percet for the first three years of the ivestmet. Credits are based o a Mississippi ivestmet beig maitaied for a miimum of seve years, as required uder the federal program. If all state ad federal program requiremets are ot met, all credits may be recaptured by the State Tax Commissio. Aual program reportig requiremets must be met. The maximum ivestmet eligible for credits o ay project caot exceed $10 millio. The total Mississippi EITCs that ca be awarded is capped at $15 millio per year. Credits ca be used to offset up to 50 percet of the etity s icome tax liability after all other credits have bee take, ad uused ivestmet tax credits ca be carried forward up to five years. Mississippi EITCs must be awarded ad certified by the Mississippi Developmet Authority prior to fudig. Usage of credits is admiistered by the Mississippi State Tax Commissio. 5 Ohio The Ohio New Markets Tax program is desiged to leverage the highly successful ad iovative federal NMTC Program by offerig state tax credits to attract additioal federal tax credits ad private ivestmets ito Ohio busiesses. The program will help fiace busiess ivestmets i low-icome commuities by providig ivestors with state tax credits i exchage for deliverig belowmarket rate ivestmet optios to Ohio busiesses. Ohio has already attracted more tha $1.1 billio dollars i federal NMTCs. The state believes the Ohio program will give itself a sigificat competitive advatage atioally because very few states have a compaio program to leverage ad attract federal New Markets ivestmets. As private credit markets have struggled, fiacial mechaisms like NMTCs have become icreasigly importat for busiesses that eed access to capital. The Ohio NMTC program passed the legislature i 2009, with the first allocatios made o or after October The tax credits are structured to be used for ivestmets over the course of seve years. The total tax credit value will be 39 percet with the yearly percetage of tax credits as follows: zero percet for each of the first two years; seve percet for the third year; eight percet for the ext four years. The amout of tax credit claimed shall ot exceed the amout of the taxpayer s state tax liability for the tax year for which the tax credit is claimed. The maximum state tax credit impact i ay fiscal year shall ot exceed $10 millio (state aual cap). There is a $4 millio limit per CDE, ad the maximum amout of state tax credits for oe project shall ot exceed $1 millio. The state credit is i additio to ay federal credits allowable. 6 The credit is allocated oly to isurace compaies ad fiacial istitutios. A QALICB is defied similar to federal requiremets. Excluded are busiesses that derive or expect to derive 15 percet or more of their aual reveue from retal or sale of real property. A exceptio is made for Sigle Purpose Etities pricipally owed by a pricipal user of the property that is formed solely for the purpose of retig or sellig the real property back to such pricipal. STATE-LEVEL NEW MARKETS TAX CREDITS INACTIVE Louisiaa Louisiaa had a state-level NMTC available from July 1, 2007, through the 2010 fiscal year. As of Jauary 2011, the credit had ot bee exteded. Uder the Louisiaa law, a CDE had to be federally certified ad apply to the state of Louisiaa. Ivestors were required to make applicatio to the Louisiaa Departmet of Reveue ad the credits were allocated o a first come, first served basis. Ivestors were eligible for the tax credit if the CDE met federal guidelies, the CDE made qualified low-icome commuity ivestmets, ad o more tha 25 percet of its ivestmets i low-icome commuities were i the form of loas. REAL ESTATE ISSUES 31 Volume 36, Number 3, 2011

6 A Aalysis of New Markets Tax Credits The cap o the credit for iitial ivestmets made after July 1, 2007, was $50 millio. The $25 millio dollar cap for ivestmets made i the 2008 fiscal year was reached. The $12.5 millio dollar cap for ivestmets made i the 2009 fiscal year was also reached. Fially, Act 463 of the 2009 Regular Legislative Sessio made the last $12.5 millio i NMTCs available o or after Dec. 1, The maximum amout that could be issued by a sigle busiess could ot exceed $7.5 millio. The credit was 25 percet of the qualified equity ivestmet as follows: five percet i year oe ad 10 percet i years two ad three. The credit was i additio to the federal NMTC. The QALICB had to meet federal requiremets ad the credit had a seve-year compliace period similar to the federal NMTC law. The credit could be carried forward for up to 10 years ad could be trasferred. It was admiistered by the Louisiaa Departmet of Reveue. Missouri The state of Missouri eacted a NMTC i The credit provided supplemetal fudig for ivestmet etities that had bee approved for the federal NMTC Program i order to direct more fudig to Missouri projects. The Program provided state ad federal tax credits to ivestors who made ivestmets ito approved fuds that made ivestmets i eligible projects located i low-icome cesus tracts i Missouri. Eligible applicats were CDEs that had bee allocated federal NMTCs for the state of Missouri. The tax credit amout was equal to the applicable percetage of the adjusted purchase price paid to the issuer of a qualified ivestmet as follows: zero percet for each of the first two years; seve percet for the third year; eight percet for the ext four years for a total credit of 39 percet. This credit was i additio to the 39 percet federal NMTC. The amout of tax credit claimed could ot exceed the amout of the taxpayer s state tax liability for the tax year i which the tax credit was claimed. The maximum state tax credit i ay fiscal year for all CDEs (state cap) was $25 millio. There was o limit per CDE, ad state tax credits were allocated o a first-come basis. A QALICB was defied by federal law. The Missouri NMTC was admiistered by the Missouri Departmet of Ecoomic Developmet. SAMPLE SUCCESS STORIES RESULTING FROM FEDERAL NEW MARKETS TAX CREDITS The followig success stories are amog the 50 detailed i New Markets Tax Credit: 50 Projects 50 States. A Report by the New Markets Tax Credit Coalitio, December The full report ca be foud olie at Etrepreeurial Ceter, Ic. Birmigham, Alabama A old Sears store that lay vacat for more tha 20 years is the ew site of the Etrepreeurial Ceter located i the heart of Birmigham s Dowtow West Urba Redevelopmet District. The $17.8 millio reovatio project icludes the redevelopmet of a etire city block i a rudow sectio of dowtow Birmigham. The Sears buildig has become the cosolidated space for the Busiess Icubator for the Etrepreeurial Ceter (EC) ad the Uiversity of Alabama at Birmigham s (UAB) Biotechology / Life Scieces Icubator. The combied effort was reamed The Iovatio Depot. The CDE, Wachovia Commuity Developmet Eterprises, offered NMTC fiacig of $14 millio from its 2005 allocatio. The EC is a public/private, ot-for-profit ecoomic developmet orgaizatio ad its purpose is to provide a eviromet i which emergig busiesses ca develop, grow ad succeed. The EC received cash ad multi-year fudig commitmets from the City of Birmigham, UAB ad Jefferso Couty. The EC curretly houses the Birmigham Busiess Resources Ceter ad works closely with the UAB Research Foudatio ad various UAB departmets. Some prospective etrepreeurs who were located i the two previous facilities were cosolidated ad relocated to the ew buildig. It is estimated that approximately 755 idividuals will beefit from the EC, ad the facilities will employ workers who are low-icome residets i the commuity. Additioally, the project has provided a greater demad for local goods ad services, resultig i idirect job creatio for residets of the lowicome commuity. As a o-profit edeavor, the EC geerated eough reveues to cover its cost of operatio but could ot attract private capital sufficiet to accomplish the substatial $17.8 millio acquisitio ad reovatio project. Wachovia Commuity Developmet Eterprise s NMTC loa of $14 millio was the key igrediet that made this project viable. It is havig a eormous impact o revitalizig dowtow Birmigham while fosterig the growth of ew etrepreeurs that, i tur, will provide ew ecoomic stimulus to the area. Real estate: rehab mixed use; Total project cost: $17.8 millio; REAL ESTATE ISSUES 32 Volume 36, Number 3, 2011

7 A Aalysis of New Markets Tax Credits NMTC: $14 millio debt (amout available for 39 percet credit); Other Fiacig: City of Birmigham, Borrower; 100-plus compaies have graduated from the two busiess icubatio programs; $1 billio ecoomic impact for the Birmigham regio. Decatur Street Project Atlata, Georgia The Decatur Street project is located withi a ecoomically disadvataged commuity i Atlata s cetral busiess district, four blocks from the State Capitol. The site lies withi a federal Empowermet Zoe, Reewal Commuity, Eterprise Zoe, ad special Tax Allocatio District. The CDE, Wachovia Commuity Developmet Eterprises, provided a $7.5 millio NMTC loa that was used to fud costructio of a 40,000-square-foot, three-story commercial office buildig ad a additioal 12,000-square-foot facility; replace existig costructio fiacig; ad reimburse the guarator for equity ifused ito the project for direct costructio costs. The property site cosists of three commercial buildigs: a three-story, brick, 100-yearold buildig reovated ito loft style office space ow occupied by the city of Atlata; a factory buildig reovated for Excellatro, a start-up maufacturer of advaced multilayer lithium io batteries; ad a third buildig, a 80,000- square-foot metal ad brick buildig, reovated for telecom switchig operatios. Space will be made available to a regioal oprofit agecy, the Georgia Alliace for Childre. The developer, as part of its busiess strategy, is committed to creatig jobs for low-icome citizes. With NMTC, the project was able to secure a sigificat portio of the fudig with a substatial reductio i iterest/fiacig costs. Wachovia served as both ivestor ad leder for this $8.7 millio project. The deal team has worked closely with the developers sice 2001 to fid a appropriate fiacig vehicle for this project. With the NMTC Program, Wachovia was able to provide creative solutios to make this project a reality. Real estate: commercial rehab; Total project cost: $8.7 millio; NMTC: $7.5 millio (eligible for 39 percet credit); Other fiacig: developer; Jobs: 100 created/retaied. The Sydicate Buildig St. Louis, Missouri The Old Post Office historic district of dowtow St. Louis is the site of revitalizatio projects icludig the Sydicate Buildig, cosidered a key historic buildig that was i a state of advaced deterioratio. I fact, the coditio of the buildig ad potetial threat it posed for the future of the surroudig buildigs caused the city s Lad Clearace for Redevelopmet Authority to purchase the property i Turig this problem ito a revitalizatio opportuity, the CDE, Valued Advisor Fud (VAF), provided a oe percet NMTC loa of $2.19 millio i partership with the local CDFI, the Cetral Bak of Kasas City, for the market-rate uits ad commercial space portio of this ambitious project. The project produced cosiderable chages: redevelopmet of a blighted corerstoe property; 28 affordable retal uits, 42 market rate uits; 102 for-sale codomiiums; 19,600 square feet of commercial space; 125 ew uits of dowtow parkig; ad a estimated $1.5 millio of ew tax base withi the commuity. The property icluded several eergy-efficiet ad gree features icludig a water loop ad efficiet HVAC ad lightig systems. VAF assembled the fiacig package for the project that icluded a NMTC, low-icome housig tax credits, tax icremet fiacig, historic tax credits ad private sector debt. VAF worked directly with the city ad also worked i coordiatio with the developers, ivestors, its local CDFI parter ad other fiacial resources provided to help structure the complex layers of the trasactio. Real estate: historic rehab for mixed use; Total project cost: $70 millio; NMTC: $2.19 millio (eligible for 39 percet credit); Other fiacig: TIF, historic tax credits, low-icome housig tax credits, private sector; Jobs: 207 costructio, 133 permaet. Golde Belt Complex Durham, North Carolia Throughout the late 19th ad ito the 20th cetury, dowtow Durham was a vibrat maufacturig ceter egaged i the tobacco ad textile idustries. As these idustries declied i the 1960s, so too did the vitality of dowtow Durham. Steady disivestmet led to physical deterioratio, made worse by the idustrial waste left behid. REAL ESTATE ISSUES 33 Volume 36, Number 3, 2011

8 A Aalysis of New Markets Tax Credits Golde Belt was a textile factory that produced pouches for Bull Durham loose leaf tobacco ad the paper cigarette cartos. Whe tobacco moved out, the Golde Belt complex was doated to the Durham Housig Authority (DHA). DHA provided space for the Ceter for Employmet Traiig s operatios ad sought parters to redevelop the larger facility. The DHA evetually sold a majority of the facility i 2006 to Scietific Properties, LLC, a North Carolia-based real estate ad developmet compay. Scietific Properties approached Self-Help with a pla to covert the historic site ito a mixed-use commercial, arts ad residetial space. Self-Help recogized the project s potetial to achor the area s revitalizatio, ad worked with Wachovia to share the loa by borrowig a portio of Wachovia s NMTC allocatio. Self-Help made a $8.15 millio loa ad secured $3.85 millio from Wachovia s NMTC allocatio to reach the $12 millio ecessary to make the project viable. The loa was a seve-year term, amortizig over 25 years with a iitial 18-moth iterest-oly period ad a 5.4 percet fixed iterest rate. The $12 millio loa, combied with $10 millio i state ad federal historic tax credit equity, eabled the project developers to esure affordable rets ad leases for the commuity. This project will put six warehouses back ito use, has utilized evirometally friedly desig features ad is seekig silver LEED certificatio. The Golde Belt complex will provide affordable commercial ad office space for local busiesses ad o-profits that serve commuity residets, icludig the Ceter for Employmet Traiig. The project will provide 35 artist studios at below-market rets, a art gallery, 37 affordable loft apartmets, office space, a live music veue ad groud floor retail space. Real estate: rehab for mixed use; Total project cost: $26.3 millio; NMTC: $12 millio (eligible for 39 percet credit); Other fiacig: federal ad state historic tax credits; Jobs: 140 costructio ad 400 permaet. SAMPLE SUCCESS STORIES USING STATE AND FEDERAL NEW MARKETS TAX CREDITS Kress-Kox-Levy Project GO Zoe Bato Rouge, Louisiaa The Kress-Kox-Levy Project is amed after the three historic buildigs beig revitalized to accommodate the growig populatio i Bato Rouge s cetral dowtow district, a area with a 27 percet poverty rate. Bato Rouge has bee affected by a chagig ecoomy due i large part to a iflux of residets from devastated coastal areas ilad, icludig the more tha 250,000 New Orleas residets that fled to the viciity after Hurricae Katria. This migratio icluded idividuals ad families as well as commercial busiesses. I the log ru, Bato Rouge s populatio is expected to icrease 20 percet or by 50,000 residets. The Kress-Kox-Levy buildigs are o the Natioal Register of Historic Places ad the reovatio will rejuveate 65,000 square feet as mixed-use developmet, icludig office ad retail space, 16 retal apartmets ad three codomiiums. The buildigs lie o the edge of the city s primary etertaimet ad retail strip, but are surrouded by uderutilized property. I additio to meetig the demad for high quality office space ad housig brought o by the iflux of New Orleas residets ad busiesses, it will also prompt the revitalizatio of the area. Without the NMTC, the project would ot have moved forward because rets i the area would ot have supported the acquisitio ad reovatio of the buildigs without a below-market compoet. The NMTC is helpig Bato Rouge address three importat issues: a lack of high quality commercial ad residetial space; preservatio of its architectural history; ad revitalizatio of its cetral busiess district. Usig Chase New Markets Corporatio NMTC fiacig, it provided a $7.6 millio costructio ad mii-perm loa with a seve-year iterest-oly period, a seve-year o amortizatio period, ad a iterest rate that was 300 basis poits below JPMorga Chase s covetioal rate. Oce completed, the Kress-Kox-Levy Project will create 150 costructio jobs, save three historic buildigs from demolitio ad brig them back ito use, ad create 75 ew permaet jobs i a growig commuity. Real estate: historic rehab for mixed use; Total project cost: $21.7 millio; NMTC: $7.6 millio (eligible for federal ad state credit); Other fiacig: Chase federal ad state historic tax credits; Jobs: 150 costructio, 75 permaet. Kig Edward Hotel Jackso, Mississippi Built i 1923, the historic Kig Edward Hotel is a icoic buildig. Oce the hub of social ad political activity i the REAL ESTATE ISSUES 34 Volume 36, Number 3, 2011

9 A Aalysis of New Markets Tax Credits Jackso dowtow busiess district, the hotel sat vacat for 41 years, becomig severely blighted. Citizes of Jackso were divided betwee watig to demolish or preserve the site, give the costs. The abadoed buildig has had a substatial egative impact for decades, cotributig to the dowtur i this sectio of Jackso. Ultimately, preservatio prevailed ad NMTC fiacig came from several CDEs, icludig the Natioal New Markets Fud (NNMF) for $15 millio. All of the CDEs ivolved were committed to makig the Kig Edwards Hotel reovatio a reality. The $89.5 millio Kig Edward restoratio has trasformed the historic Kig Edward Hotel (313,000 square feet) ito a 186-room hotel with restaurats ad a state-of-the-art busiess coferece ceter, with developmet of 64 apartmet uits ad additioal retail space. Sixtee oebedroom uits will be set aside for idividuals earig less tha 60 percet of the area media icome, retig at a $200 per moth market discout. This project is regeeratig the surroudig commuity ad is a catalyst i brigig i ecessary commuity ad busiess ameities to support focused redevelopmet of the area. The CDEs worked with the lead ivestors, the state of Mississippi, co-allocatees, ad the developer to secure the ecessary fudig sources available for the project. This eabled the developer to utilize tax-exempt bods, historic ad NMTCs, grats ad other below-market loas. NNMF worked to esure that the developer would commit to reach out to local wome- ad miority-owed subcotractors ad give priority to low-icome employees for the hotel ad its costructio. The iteral costs of capital ad the required retur o a traditioal equity ivestmet far outpaced the available retur to ivestors, give the very high cost of reusig the historic buildig, ad created a sigificat gap i the project s fiacig. The NMTC fudig has eabled the redevelopmet of the historic Kig Edward Hotel to become a reality. Real estate: historic hotel rehab; Total project cost: $89.5 millio; NMTC: $74.1 millio (eligible for federal ad state credit); Other fiacig: historic tax credits, GO Zoe bods, MS Developmet Authority, tax icremet fiacig. PROBLEMS WITH STATE NEW MARKETS TAX CREDITS Oe of the problems with state ew markets tax credit programs is that most of the states do ot have ay mechaism i place to track the effectiveess of the state-level programs. Two of the states icluded i this report were cotacted by the authors, ad the directors said they did ot keep that kid of data because it was ot required by the state law that authorized the state NMTC. This makes it difficult, if ot impossible, to determie how may jobs were created or how much moey was attracted for ivestmet because of the state-level credits. Aother problem that makes it difficult, if ot impossible, to determie the umber of jobs that were created through a state NMTC program is the fact that the NMTC is ofte combied with umerous other icetives such as historic tax credits ad Small Busiess Admiistratio loas. State legislatures should establish procedures that require state ecoomic developmet offices to measure the effectiveess of state-level NMTCs i terms of jobs created, ivestmet dollars attracted, square footage improved, property tax base icrease or other appropriate measuremet. CONCLUSION AND RECOMMENDATIONS Federal NMTCs help accomplish three objectives: brig additioal fudig ito low-icome commuities; bridge fudig gaps i projects; provide strog returs o ivestmet to those willig to risk their capital. The federal govermet beefits from NMTCs through jobs creatio, while states beefit by havig more taxpayers i the state pool ad a higher property tax base from property improvemets. A additioal beefit is the reductio of urba sprawl ad the improvemet of livig/workig coditios i previously distressed commuities. States such as Mississippi, Louisiaa, Florida, Illiois, Missouri ad Ohio that have leveraged state NMTCs with federal credits have see much larger ivestmets i their states tha they would likely have had with oly the federal NMTCs. As oted above, most states do ot track job creatio ad other ecoomic impacts of the state-level NMTCs. This is a item that should be a compoet of ay legislatio that creates a state-level NMTC. The relevat state developmet office ca be charged with this task ad ca report aually o the effectiveess of the program to the goveror ad the legislature. Does the political will exist to cotiue offerig the NMTC REAL ESTATE ISSUES 35 Volume 36, Number 3, 2011

10 A Aalysis of New Markets Tax Credits i the future ad ecourage ivestig i commuities that are ecoomically distressed or cosist of low-icome populatios? It appears that there is political will for various govermets to cotiue offerig the NMTC. For example, Presidet Obama s budget proposal released o Feb. 13, 2012, icluded a provisio to exted ad modify the NMTC. The budget proposal would exted the NMTC through 2013 with $5 billio allocated for the credit. I additio, U.S. seators Rockefeller (D-West Virgiia), Sowe (R-Maie) ad Meedez (D-New Jersey) added a amedmet to a bill o Feb. 7, 2012, that would exted the NMTC through with $3.5 billio available for the credit. Also, several state legislatures have recetly proposed bills to add or exted NMTC at the state level. These states iclude Califoria (Ja. 6, 2012), Idiaa (Ja. 16, 2012) ad Hawaii (Ja. 27, 2012). OTHER SOURCES Commuity Developmet Fiacial Istitutios Fud, Commuity Developmet Fiacial Istitutios Fud, Performace ad Accoutability Report FY2010. Commuity Developmet Fiacial Istitutios Fud, Recovery Act ad 2009 New Markets Tax Credit Program Allocatios. Louisiaa Departmet of Reveue, Tax Exemptio Budget Novogradac ad Compay, LLP, CPAs. The Urba Istitute, Aalysis of Selected New Markets Tax Credit Projects: Fial Report, Jue Prepared for the U.S. Departmet of the Treasury Commuity Developmet Fiacial Istitutios Fud. ENDNOTES 1. Uited States Govermet Accoutability Office (GAO), Report to Cogressioal Committees, New Markets Tax Credit, Jauary December showbym.cfm?sid=2&y=2008&m= Illiois Seate Bill Mississippi NMTC Leg., 2008, Ohio New Markets Tax Credit Legislatio State Legislative Guide: Ecoomic Developmet. REAL ESTATE ISSUES 36 Volume 36, Number 3, 2011