New Markets Credit New

February 13, 2004
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GRAND RAPIDS — The New Markets Tax Credit has made its way here.

Dwelling Place Inc. is putting the credit to good use in its plan to revitalize four nearly vacant buildings on South Division Avenue. The Local Initiative Support Corp. (LISC) was awarded the credit last year and made about $3 million worth available to the project.

The Division Avenue development marks the first time this credit will be applied to a building effort in West Michigan.

Signed into law by then-President Bill Clinton as part of the Community Renewal Tax Relief Act of 2000, the New Markets Tax Credit is designed to stimulate $15 billion in private equity investment in underserved communities by 2007.

When lawmakers passed the act, they believed this investment would create new jobs, spur economic activity through business development and revitalize communities.

LISC felt the New Markets Tax Credit has as much potential to transform the financing of economic development in low-income communities as Housing Tax Credits have done for affordable rental housing.

The U.S. Treasury allocates the credit through its Community Development Financial Institutions Fund. Treasury made two allocations last year to over 100 groups across the country, and LISC was one of those.

“We treat it almost as a boutique product. There are other organizations that are using it as a flat product. The National Trust for Historic Preservation is doing a 5 percent lending with it,” said Tony McGee, LISC program director in the Grand Rapids office.

“We have our own fund in-house that we do some subordinate financing with through the program,” he added. “But we also have it where we can work with local investors in the community, and we negotiate the rate for whatever that investor is willing to take for a particular project.”

Why negotiate? Because the rate of return is impacted by the 39 percent federal tax credit that can accompany a development approved for the New Markets program. The tax credit is good for seven years. Over the life of the investment, the tax credit will equal 30 percent of that investment, in present-day value.

“Typically, we’re expecting this to make capital available to projects at about 200 basis points below market. Because of that tax credit, the IRR at the end is pretty comparable to what you get in the market,” said McGee.

McGee told the Business Journal that the New Markets program isn’t a magic bullet, but he said the credit could help pull the trigger on projects that are on the bubble.

“This could make those go,” he remarked.

A qualified project has to be located in what Treasury considers an eligible census tract. McGee noted that most of the central city, except for a few sections, meets that standard. As for which type of investors can qualify, McGee said that is pretty wide open. What investors need most of all is a project that will benefit a low-income sector in a community.

“With our background we tend to work with nonprofit organizations and community development organizations, such as Dwelling Place,” said McGee.

Dwelling Place plans to renovate 104, 120, 122 and 126 S. Division into workspace and affordable loft-style rental apartments for artists. The project will fill 47,000 square feet and result in 23 two-bedroom apartments and 15,000 square feet of studios, galleries, retail space and a café.

The work will cost $7.5 million and is being seen as an economic catalyst for Division Avenue, the main street of the Heartside Business District.

“These have to be used on a commercial project. These can’t be used on a residential project unless the residential is part of a mixed-use development like this is,” said Dennis Sturtevant, of the New Markets Tax Credit.

In March, Treasury allocated $2.5 billion in credits to 66 qualified organizations. Then in October, the federal agency assigned another $3.5 billion.

For information and applications go to www.cdfifund.gov.

As for the name of the tax credit, “New Markets” surfaced after Clinton toured poverty-ridden sectors of the country — areas where investment was sorely lacking.

“The whole concept,” said McGee, “was to create new markets where they hadn’t been existing.”    

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