CAPITAL MARKETS: NEW MARKETS TAX CREDITS

APARTMENT FINANCE TODAY • NOVEMBER/DECEMBER 2007

Latest Round of NMTCs Announced

About $2.24 billion will be invested in major urban areas; about $951 million will be invested in minor urban areas; and about $720 million will be invested in rural areas.

By Donna Kimura

Sixty-one organizations have been selected to receive $3.9 billion in New Markets Tax Credits (NMTCs) this year in the fifth round of allocations.

Eleven organizations received $400 million in tax credits for redevelopment efforts in the hurricanedamaged Gulf Coast, according to the Community Development Financial Institutions (CDFI) Fund, which made the awards announcement Oct. 5 in New Orleans.

Allocation awards ranged between $12 million and $133 million, with the average being about $64 million per allocatee.

By far the most popular use of the tax credits is to finance real estate projects in low-income communities. Approximately $2.45 billion, or 63 percent, of the NMTC proceeds will likely be used to finance and support real estate transactions. Another $1.21 billion, or 31 percent, will likely be used to finance and support loans to or investments in businesses in lowincome neighborhoods, and about $243 million, or 6 percent, are expected to capitalize community development entities (CDEs).

The Local Initiatives Support Corp. (LISC), which assists nonprofit community development organizations, received the largest single allocation. LISC has already deployed most of the $295 million it raised from its previous NMTC allocations to support the development of more than 200 new homes, 2 million square feet of commercial space, and 7,500 jobs, said Michael Rubinger, LISC president and CEO.

LISC has closed on 27 NMTC projects, including the financing of a motorcycle parts manufacturer in rural Wisconsin, a new grocery store in Washington, D.C., and a child-care center in Woonsocket, R.I.

Other firms that received or had an affiliate that received a NMTC reservation included Bank of America; Capmark Financial Group, Inc.; JPMorgan Chase & Co.; Enterprise; Habitat for Humanity International; KeyCorp; Municipal Mortgage & Equity, LLC; The Related Cos., LP; SunTrust Banks, Inc.; U.S. Bank; and Wachovia Bank.

A total of 258 applications were submitted this year. The applicants requested about $27.9 billion in NMTC authority. That’s seven times more than the $3.9 billion in available authority.

The NMTC program aims to attract private capital into lowincome neighborhoods across the nation to help finance community development projects, stimulate economic growth, and create jobs. Established by Congress in 2000, the program permits individual and corporate taxpayers to receive a credit against federal income taxes for making qualified equity investments in CDEs. Substantially all of the investment must be used by the CDE to make qualified investments in lowincome communities.

The credit to the investor totals 39 percent of the cost of the investment and is claimed over a seven-year period.

The 2007 round was originally scheduled to be the final round of allocations. However, Congress and President Bush extended the program for one year, providing another $3.5 billion in authority for 2008. That move is important because it sets the stage for an even longer extension of the program.

NMTC supporters are campaigning to extend the program for even longer. Two extension bills (S. 1239 and H.R. 2075) were introduced this year to extend the program through 2013.

INSIDE THE INVESTMENTS

The Government Accountability Office (GAO) reported that as of January, the Community Development Financial Institutions Fund had made 233 New Markets Tax Credit (NMTC) awards totaling $12.1 billion in allocation authority to 179 community development entities (CDEs), which the CDEs have used to attract nearly $5.3 billion in investments.

As part of its report, the GAO surveyed investors. Nearly half reported that they also invest in the low-income housing tax credit. However, less than half of the investors that also invest in the housing credit view it as an alternative to the NMTC. “One explanation for this is that these investors may be making other low-income community investments as a means for complying with government requirements such as the CRA (Community Reinvestment Act),” said the GAO.

Workforce Housing Under Way

Seattle—Construction has begun on a mixed-use development that will include 59 apartments in the central neighborhood of the city.

The 17th & Jackson development will provide muchneeded workforce housing in Seattle and help boost the economic activity in the area. About half of the apartments will be restricted to families earning no more than 70 percent and 80 percent of the area median income.

Developed by Central Area Development Association (CADA), with assistance from development consultant Tim Abell of Pacific Housing Northwest, the approximately $22.4 million project is rising on a vacant city-owned lot. The development will also include about 5,800 square feet of retail space, 3,200 square feet for offices, and a parking garage.

About $15.5 million in New Markets Tax Credits (NMTCs) from Enterprise Community Investment, Inc., is helping finance the project, according to John Ducey, director of originations for structured finance. The tax credits generated a $4.8 million equity investment and an $8.3 million loan on flexible terms from Washington Mutual. By attracting private capital to this community, creating jobs, and spurring other market-rate developments in this neighborhood, 17th and Jackson will provide the outcomes that were envisioned when the

NMTC program was created, Ducey said. NMTCs are allowing CADA to do workforce housing, said CEO George Staggers, who grew up in the Seattle neighborhood. “The project could have happened with private forces but it would have been a market-rate development,” he said.

The project is part of CADA’s overall revitalization strategy for an area that has not attracted any significant private investments in 30 years, according to Staggers.

This is the private community-based development organization’s first NMTC transaction. The development is scheduled to be completed at the end of 2008.

“We believe it is spurring other developments,” Ducey said, noting that another developer is working on a nearby market-rate condominium project.

Enterprise helped structure the financing, which included bridging a federal Sec. 108 loan from the city. Sec. 108 allows cities to borrow against future allocations of Community Development Block Grants.

Enterprise received $100 million in credits in the 2007 round.