Affordable Housing Finance

FINANCE

New Markets Tax Credits

NMTCs Spur Bridgeport Revival

AFFORDABLE HOUSING FINANCE • March 2009

BY DONNA KIMURA

BRIDGEPORT, CONN.—The city’s old downtown used to be as quiet as a graveyard on weekends, but that’s starting to change as developers find ways to revitalize the neighborhood.

It used to be so bare that you could shoot a cannon on weekends, and no one would notice, says developer Eric Anderson. That’s no longer the case. “People are thinking of it as a place to go now,” he says.

Anderson is a partner at Urban Green Builders, a New York City-based company that specializes in affordable housing and community development. The group has revived several of Bridgeport’s neglected buildings and has plans to do more.

The firm started work in Connecticut’s largest city about five years ago and has delivered three buildings that provide a mix of office and retail space and 177 units of rental housing. Urban Green’s partner in the deal is Ginsburg Development Cos. of Valhalla, N.Y.

Two of the buildings, the historic Arcade and 144 Golden Hill structures, were redeveloped with the help of historic preservation tax credits and New Markets Tax Credits (NMTCs), a federal program aimed at spurring private investment in the nation’s low-income neighborhoods. In addition, NMTCs were used on the Citytrust building, the project’s first phase. It wouldn’t have happened without the tax credits, according to Anderson.

The “twinning” of the NMTCs and historic tax credits is a strategy being used to rehabilitate a number of urban historic structures into new complexes, according to Kevin Gremse, director of the National Development Council (NDC), a nonprofit community and economic development organization.

He used a portion of his group’s NMTCs in Bridgeport. NDC affiliate HEDC New Markets, Inc., has received a total of $380 million in NMTCs in four of the program’s six allocation rounds.

In short, the NMTC program allows its investors to claim a credit against their federal tax liability for making “qualified equity investments” in community development entities (CDEs). The investor credit totals 39 percent of the cost of the equity investment and is claimed over seven years. The CDEs, in turn, must use virtually all of the investment in low-income communities. NMTCs can be used for business development, but much of the money has gone toward commercial real estate projects.

In this case, NMTCs and historic tax credits netted about $7.5 million in equity or soft debt out of the original $22 million budget, says David Trevisani, manager of NDC’s tax credit program.

His group used its NMTCs to generate an approximately $3 million equity investment from U.S. Bancorp leveraged in part by a $6.7 million loan from the bank.

In a related move, the Local Initiatives Support Corp. provided another $4.5 million in historic and NMTC equity to the deal.

The NDC team initially considered using low-income housing tax credits (LIHTCs) but opted instead to combine NMTCs and historic tax credits. One reason is that the deal would have needed a significant portion of the state’s annual LIHTC authority.

Even without the LIHTCs, the new apartments are achieving rents close to those under the housing program, according to Gremse, who says rent for a one-bedroom apartment is about $1,000. Bridgeport is a lowincome community nestled in an affluent county, so the area median income (AMI) is high.

The rental housing created by Urban Green provides needed workforce housing for Fairfield County, says Anderson. Households earning between 60 percent and 100 percent of the AMI are the development’s “sweet spot,” he says.

Although NMTCs can be used for mixed-used projects, it is important to note that the income generated by the residential portion can be no more than 80 percent of the building’s total income.

Lessons learned

Several lessons can be taken from the Bridgeport deal, according to Gremse.

He says that equity and debt partners will expect strong personal guarantees for speculative developments. He also stresses the importance of healthy contingency reserves when redeveloping historically significant properties. Cost overruns are likely once the walls are opened up and the extent of the work is revealed.

The tax credits are key to financing many adaptive-reuse buildings, but Gremse adds that many of these projects need other incentives such as tax abatements, a streamlined approval process from municipalities, and additional subordinated funding sources.

Anderson also urges others to try to keep their deals as simple as possible.

“NMTCs are a powerful tool, but if the deal structure becomes too complicated, much of the credit’s benefits can be lost to transaction and structuring costs,” he says.