"A federal program designed to stimulate investments in commercial real estate and business ventures in low-income rural and urban areas is in play in Lexington. Non-residential projects in the city's revitalizing downtown area qualify for low-interest, and in some cases forgiveable, loans under the New Markets Tax Credit (NMTC) passed by Congress in 2000. Between 2001 and this year, $15 billion of investment capital has become eligible for tax credits totaling 39 percent of the investment, distributed over a seven-year period.
"What you think qualifies as an area that needs revitalization isn't always what stereotypically we think of," noted Kevin Smith, president and CEO of the Lexington-based Community Ventures Corporation (CVC). "The interesting thing is: what's a rundown area? When you look at census tracts, they have to have a certain poverty level and be in need of certain revitalization. All of downtown Lexington qualifies."
The U.S. Treasury Department's Community Development Financial Institutions Fund recently awarded to the CVC $45 million in New Markets Tax Credits. Earlier in the year, the regional National City New Markets Fund was awarded $75 million in the credits, and Fifth Third Bank was awarded $100 million. It was yet not known at press time, however, what portion of those allocations will be available to the Lexington market. The awards are part of a $3.9 billion allotment of tax credits given to 61 organizations under the 2007 round of the New Markets Tax Credit program.
How it works
According to information on the U.S. Treasury Web site, the tax credits can be used to finance community development projects but are off-limits to projects already benefiting from other federal tax subsidies. In certain circumstances, NMTC can be used to finance mixed-use projects where less than 80 percent of the gross rental income is derived from residential units. And NMTC funds may be used to finance businesses that purchase, rehab and sell single-family homes by investing in businesses that are involved in affordable housing.
"If a developer comes in, and let's say they have a $10 million project, we allocate $10 million in tax credits to it. We sell off those tax credits, and you get about 30 cents to the dollar. So, we get about $3 million for those tax credits," explained the CVC's Smith. "A lender comes in and makes a $7 million loan on that $10 million project, and then we put in our $3 million to make the deal work. That $3 million can go in at a very low interest rate or we can forgive it. So, basically they're getting $10 million for $7 million. And developers in Lexington have not caught onto that."
"I used them (NMTC) on the office portion of Artek," said Holly Wiedemann, president of AU Associates, Inc., referring to her new project on Georgetown Street. Wiedemann explained that many developers are turned off by the complexities of applying and obtaining financing. "They are very difficult to get, from a developer's standpoint, as we must fill out applications and match target strategies for development type, location and targets with the allocatee. The financial structure to utilize them is also complex."
"It's not easy," agreed David Howard, executive director and vice president of National City Bank's Community Development Corporation. "If you can get through the learning curve and the paperwork, I think the end result is very beneficial. I think that's the main concern: making sure you're within the regulations for the New Markets Tax Credit, and to make sure, tax-wise, you're doing the right thing."
Developers interested in exploring New Markets Tax Credit financing should be aware that the costs include origination and management fees. "You've got to stay in compliance for seven years," said Smith. "We have to assure the investors that the business will comply with all of its reporting requirements and that the CVC will comply and make sure all of its reports to the Treasury Department are correct." Smith said fees average three to four percent APR. "The fees can be financed, and everything still stays below the market rate. When you're forgiven $2 million or $3 million, the fees become miniscule at that point. Some deals, if you're asking for 50 percent of the loan to be paid back, then you may only have a 2 percent origination fee. And then management fees for the seven years are one to two percent per year."
Smith added that when multiple investors are involved in a deal, the requirement to report to the various entities drives up management fees.
Loans made under the NMTC do require collateral. "You have to be able to stand for the loan," Smith explained. "This isn't for less-than-market borrowers. Now, what it is for is, let's say that the numbers aren't working — you don't have enough collateral to where a bank will finance you for those reasons. Then a forgiveable loan makes all the difference in the world. So, New Markets Tax Credits can be used and should be used to strengthen good deals. It's not for subprime borrowers."
While no projects in Lexington are taking part in the program, Smith's organization is considering an ethanol plant in Henderson, Ky., as well as the revitalization of a block of downtown Bowling Green.
"It's a great way to get stuff started," he said. "Of course, when you're going into new venues and trying something new — whether it's new in the country or not — if it's new in your community, people are hesitant. If you can put forgiveable loans into projects, the risks go way down and people are willing then to try a little bit more adventurous things. So, it's a great tool to spur economic development."