Proven (But Not Yet Permanent)

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15 Years of New Markets Tax Credit success

  • “The New Markets Tax Credit Program has a history of success, leading to billions of dollars in investments and thousands of jobs in rural and urban communities around the state. I’m pleased to join my colleagues to introduce this bipartisan bill and make this tax credit permanent so that we can continue to encourage investment, job creation, and economic growth in low-income communities.…”
  • “[T]he New Markets Tax Credit program [is] a proven job creator. [It] has been incredibly effective in delivering capital to underserved communities. The program has provided over $6 billion in total project financing to our state, creating nearly 50,000 construction jobs and 20,000 full-time jobs over the last ten years. Development projects, like … a $42 million project that will add additional chemotherapy treatment chairs, additional breast cancer screening and treatment space, and new cancer research and clinical space—as well as other projects all across the state… have contributed greatly to economic growth ….”

These can’t-tell-them-apart statements were made recently by prominent U.S. Senators—one, a liberal Democrat; the other, a conservative Republican—in support of legislation [see sidebar, Inching Towards Permanence] that would renew the New Markets Tax Credit (NMTC) and keep it from expiring every few years. Despite such bipartisan appeal, NMTCs may be trapped in a strange new status quo in which such tax credits are routinely allowed to die, only to be revived—or not revived— while evidence of their success remains unchallenged.

The bipartisan idea behind this NMTC bill—that federal tax credits can attract private capital to, and help unleash marketplace potential in, the nation’s most distressed, undercapitalized communities—is built into NMTCs, which began in a compromise between President Bill Clinton and congressional Republicans in 2000: The GOP would support a federal program designed to improve life in the nation’s poorest neighborhoods; Clinton and his fellow Democrats would support doing this via a tax credit that attracted private capital (as opposed to allocating tax dollars) and removed control over this credit from federal bureaucrats.

The compromise was not especially painful for either side because it emerged from the ideas and work of liberal icon Robert F. Kennedy in the late 1960s, and Reagan apostle Jack Kemp in the 1980s and early 1990s. By wanting to attract private capital and emphasizing local control, RFK challenged liberal orthodoxy; and by arguing that market forces alone would never allow some neighborhoods to rise out of extreme poverty, Kemp questioned his party’s growing government-is-always-bad mantra.

The resultant NMTC, implemented in 2003 after two years of preparation by the George W. Bush Administration, has demonstrated what unleashing the marketplace can achieve: NMTC investments, for example, have leveraged more than twice their total value in overall revenue, generating close to a million jobs and tax revenues that exceed the costs of the tax credit. And virtually all of this has happened in urban and rural communities experiencing high unemployment and poverty rates.

And they have done this in a way that addresses the entire community. “Beyond creating jobs and generating economic activity, the NMTC helps enhance community revitalization efforts by financing community facilities and other important quality of life amenities,” says Bob Rapoza of the Washington, D.C.-based New Markets Tax Credit Coalition. “Between 2003 and 2012, more than 1,400 NMTC projects involved community amenities, like healthcare facilities, schools, nonprofit service providers, and daycare centers and more than 500 projects were manufacturing businesses and facilities.”

No one, not even those who oppose use of federal tax credits to pursue public policy goals, has challenged the accuracy or significance of such figures. Nor does anyone challenge the demand for NMTC. Since day one of the NMTC program, for every dollar of credits allocated, private investors have applied for more than eight dollars of New Markets credits.

Continuous Evolution
A partial explanation for this success is the NMTC’s continuous evolution. “The program has improved since the early days in a variety of ways,” says Rapoza. “In the early days, there were more traditional downtown redevelopment projects and retail projects. Now, thanks to a statutory change encouraging rural investments along with increased competition for NMTC allocation, the program is spread more evenly to rural areas and to a wider variety of projects in nearly every business sector. As investors became more familiar with the program, pricing of credits has increased. A higher price means more subsidy to projects in low income communities. We also have more variety in NMTC projects now. We have an increasingly diverse economy, and the NMTC reflects that economic diversity.”

Such flexibility emerges from the structure of the NMTC itself. Congress specifies an amount of NMTCs, which are allocated by the U.S. Treasury to nonprofit Community Development Entities (CDEs), which, in turn, attract private investors, who receive a 39 percent seven- year credit against federal income taxes.

“A CDE sees the demand and pipeline of projects in need of funding,” says Andrea Daskalakis, Chief Investment Officer of the Massachusetts Housing Investment Corporation., which has been involved in dozens of NMTC projects. “CDEs are typically well-positioned to see the local impacts projects have in communities they serve. They can see the network of relationships among various NMTC participants more clearly than others. CDEs work with a variety of projects, investors, and other funding sources, and they develop a dynamic network. Due to the variety and volume of investments that CDEs are responsible for, CDEs are well-positioned to match capital with deserving projects. They leverage their networks to help close deals, fill funding gaps and get deals done that might not otherwise be attractive to an investor, and set the stage for future NMTC projects.

“CDEs are also in a good position to evaluate the likelihood of whether possible NMTC projects will actually create local permanent jobs or otherwise transform a community or keep a community stable.”

The Investor Perspective
Investors add their perspective. “We typically have a national footprint, so we get to see deals across the country and with a variety of CDE partners,” says Leigh Ann Smith, Senior Vice President of Community Development Banking at Bank of America Merrill. “We see best practices and can help facilitate sharing of those amongst the CDEs. NMTC serves as a critical gap-filler financing tool for significant numbers of projects each year. So you’d see many projects simply never get off the ground because they don’t have the capital, particularly those involving thinly capitalized new businesses or non-profits. The NMTC has also been effective in steering development activity with significant job creation to rural and distressed communities that otherwise would have happened in higher income and urban communities.”

Adds, Matt Philpott, senior vice president of U.S. Bancorp Community Development Corporation, which has invested hundreds of millions of dollars in NMTC projects, “As a tax credit investor, we see a wide range of projects that are looking for financing. NMTC is a very flexible financing tool and, as a result, it has become very sought after to fill financing gaps. We work closely with over 200 CDE partners and we see how passionate they are to meet the mission of the NMTC program and to deploy this scarce source of capital into disadvantaged communities. Every year the industry gets more efficient at delivering the benefit of the NMTC. Even though these investments are made in some of the most distressed communities across the country, we find that there is a remarkably high level of success in the businesses financed. Not every business succeeds as projected, but in our experience, the default and loss rate is on par with, and sometimes better than, that experienced by market- rate lenders.

“The NMTC has been a key catalyst for getting projects financed in distressed communities,” says Philpott. “Given that there are few equivalent and flexible means of subsidizing private capital for businesses in underserved communities, it simply means that the developments won’t get built and services won’t be brought to these low income areas. Private market-rate investors and lenders will likely not fill the gaps tailor-made for NMTC due to the perceived higher risks of investing in these communities. The other casualty of letting the NMTC disappear is the potential loss of more than a decade of infrastructure that CDEs and CDFIs have built to attract private capital, deploy it into communities and manage/monitor the impacts over time. Many of these entities rely on the availability of NMTC to keep their lending/investing operations going. This is infrastructure that the federal and state governments don’t have to maintain on their own. So, when you consider the start-up costs to implement some other equally effective, flexible community development program poised to deploy capital quickly on a national scale in both rural and urban areas, one must consider the impact of letting this infrastructure deteriorate or disappear.”

The Developer’s Perspective
Developers, too, have valuable experience. “One of the things we have noticed is the difference in the impact that NMTCs can have depending on the size of the development,” says Kevin McCormack, President of St. Louis-based McCormack Baron Salazar, Inc., which has done NMTC projects since their inception. “For the big developments, a shopping center with an anchor tenant or a large office building, the NMTCs might encourage moving the project a few blocks to get into a Qualified Census Tract or allow the owner to give rent concessions or help in the negotiations for better wages and benefits for workers. The NMTCs are just one tool, an important tool, but not the only tool in the public sector tool box. For bigger deals, NMTCs are often combined with other subsidies to make the development possible. In smaller deals, the non-headline-grabbing ones, like mixed-use buildings anchored by a non-profit headquarters, schools, innovative healthy food providers, NMTCs make a big difference in the overall feasibility, timing, location and stability of the projects – many of these developments would not be possible without NMTCs.

There are not enough other subsidiaries and/or philanthropic donations out there to support these sorts of projects. Some of them might have gotten done, but they would have been smaller, less impactful and might be on less secure financial footing.

“There is really no assistance for these types of deals in low-income areas – especially the smaller projects. Philanthropy and CDBGs [community development block grants] are limited and are often not focused on driving benefits to low income persons. NMTCs are an important inducement to creating jobs and commercial development in qualified census tracts. Without NMTCs, the toolbox for making qualified census tracts an attractive place to invest is pretty small.”

Fear of Disappearance
Such worries about “letting it disappear” have become a defining characteristic of NMTC. When enacted in 2000, it was set to expire in 2008, and since then, amid the turmoil of the Great Recession and Obama era politics, its longest period of renewal has been two years. Hence, current efforts to make the NMTC “permanent.”

Of course, “permanent” is misleading because it simply means escaping the now-normal periodic death routine. Congress can kill any tax credit anytime it wants. Permanent primarily means what is always a high priority for the business community: predictability. “A long term or permanent authorization will provide investors and CDEs more time to plan and invest in the infrastructure necessary to support the program,” says Bob Rapoza, whose New Markets Tax Credit Coalition uses the phrase, put “on a longer time frame.”

Matt Philpott of U.S. Bancorp Community Development Corporation explains the importance of predictability: “Because many developments and growing businesses in disadvantaged areas can take much longer to arrange financing relative to an established economically stable community, a high level of certainty in the eventual availability of capital is the key to long-term success in community development finance. Having a known availability of NMTC would allow long lead time community development projects to be planned with greater certainty and for even better infrastructure to be developed to implement the program objectives. If the program ceases to exist when projects are ready to be financed, it’s very difficult to establish what the available sources of capital will be. If the need for NMTC is a critical source for a project, it then makes it difficult to attract other sources of capital if those providing the financing don’t have comfort that the other sources are available. It’s a bit of a Catch 22.“

The same holds true from the CRE perspective. With permanence, says Andrea Daskalakis, of the Massachusetts Housing Investment Corporation, “more CDEs might enter the market. Right now, those that have been in the market since the beginning know the ropes and do a great job — but it may not be worthwhile for new entrants to make the sort of investment needed to enter the market when the future of the program is in doubt. Permanency would likely attract both new CDEs and new investors. Additional investors in the marketplace could lead to improved pricing for NMTC transactions, and thus more money flowing into low income communities. Also, permanency would encourage all industry participants to commit to efforts to improve efficiency in closing transactions, e.g., standardized documents, thereby reducing transaction costs and, again, increasing the flow of money into low income communities. The certainty and stability of a permanent credit would allow CDEs and their investors to plan with confidence.”

Leigh Ann Smith of Bank of America Merrill summarizes the biggest impact of permanence in one phrase, “elimination of inefficiencies.”

Precedents for Permanence
A precedent for making NMTC permanent can be seen in the Low Income Housing Tax Credit, which was enacted in 1986 under Ronald Reagan and made permanent in 1993 by George W. Bush. “When LIHTCs became permanent,” says developer Kevin McCormack, “the pricing on the credits got better but, more importantly, the costs associated with the legal structuring were reduced.”
In the need to escape the trap of being “temporary,” NMTC are far from alone. A 2015 study by the Congressional Research Office documents “fifty-two temporary tax provisions [including the New Market Tax Credit] that expired at the end of 2014,” most of which have been “extended” by Congress. That a trap does exist can be seen in the research-and-development tax credit, which enjoys widespread, bipartisan support and has been allowed to expire at least fourteen times.

According to the CRS, Congress enacts temporary tax provisions primarily to give itself “an opportunity to evaluate [their] effectiveness”—which is ironic because according to people who work with NMTC, the best way to increase effectiveness would be to end the continual death-and-renewal-retroactively battles.

In addition to making it “permanent,” experience with NMTC has generated a long and varied list of suggested improvements. Included (not in order of importance) are clarifying what is permissible in order to reduce closing costs; creating a quality control mechanism to assess outcomes; easing complicated, technical rules such as those that define “true debt;” setting up regular working groups between representatives of the industry and Treasury Department officials to remove obstacles to use of the tax credit; increasing the credit to more than 39 percent; exempting NMTC investments from the Alternative Minimum Tax (AMT); and indexing NMTC allocations to inflation.

Summarizing all of this best is Kevin McCormack. “As someone developing urban communities,” he says, “we need more than housing – we need jobs, commerce, schools, health centers, recreational facilities, grocery stores – and there is no better, single tool that can address all of these non-housing needs available right now than the New Markets Tax Credit.”