Thursday, March 26, 2009

Who Profits from New Markets?

The new markets tax credit (NMTC) was introduced in 2000 as a vehicle to stimulate investment in qualified low-income communities. It’s a credit on equity investment claimed over a 7-year period (5 percent over the first 3 years and 6 percent over the next 4 ). A "low-income community" is basically a census tract with a poverty rate of at least 20%, or with median income of up to 80% of the area or statewide median, whichever is greater.

The NMTC is allowed for a percentage of a qualified equity investment in a qualified community development entity (CDE). A CDE is a domestic corporation of partnership, certified by the Dept. of Treasury, which is organized to provide investment capital for low-income communities or persons and which allows residents of the community to be represented on the entity’s governing board.

At its best, NMTC provides an important tool in the development of low-income housing and retail facilities in areas where both are needed. But as with every deduction or credit, the potential for abuse exists. And so it is perhaps no surprise that with a minimal investment of time, we found some NMTC projects which raised our (high-arched, well tweezed) eyebrows. We’re not saying these projects are abusing NMTCs, but we are wondering if this is what was really intended. We’ve also come up with a few suggestions which might help to curb any potential abuses.

White Stag Building Redevelopment is a project in the Old Town China Town part of downtown Portland, OR built with a $28.5 million NMTC allocation. It consists of three historic buildings, all of which were built before 1910. The White Stag building, named for former tenant White Stag clothing, had been vacant for many years. It’s connected to the Bickel and Skidmore buildings which now form a single complex. It houses several University of Oregon programs, as well as United Fund Advisors, which describes itself as providing “a broad suite of traditional and innovative investment banking services that provide triple bottom line returns to our client partners.” United Fund Advisors is involved with 10 NMTC projects.

What White Stag doesn’t house are low-income families, retail operations at which low income families shop, or significant employment for low income workers. The Univeristy describes the space it is occupying in the building as including “six classrooms, new event space for up to 250 people, a new library for architecture and journalism programs, a shared computer laboratory, and a new university book store and Duck Shop, which will also feature a café.” Yes, the building is green (it has a Leadership in Energy and Environmental Design Gold Certifcation), has won design awards and certainly spiffs up a blighted part of the city, but are we convinced that this really meshes with the true objectives of the NMTC?

Liberty Station is a mixed-use residential and commerical project located at the former Naval Training Center in San Diego built with a more than $14 million NMTC allocation. Even in the current economic climate, prices of Liberty Station townhomes and single family homes generally range from $500,000 (for approximately 1,000 sf of living space) to in excess of $1 million. Liberty Station has more than 170,000 square feet of retail shops, grocery stores (Trader Joe’s, Vons), no fewer than 11 beauty and wellness merchants, 19 fast food and fine dining restaurants, and office space. It has two hotels, a golf course, and a waterfront park. It may provide some employment to displaced workers, but what it doesn’t have is low income housing or retail establishments geared to low income individuals.

Indeed, the city of San Diego requires redevelopment areas to reserve 15 percent of homes for people of low and moderate in­comes, or else provide twice that amount of affordable housing elsewhere. However, Liberty Station contains no afford­ably priced homes, so the redevelopment agency was required to set aside tax revenue to provide housing elsewhere in the city for the kinds of people the NMTC was supposed to be assisting. (see:

It would appear that the only way this sort of project, located in an otherwise upscale neighborhood of prime real estate, would qualify for NMTC would be based on census figures which used the former military base residents in computing income for the area. We’re not aware of anything which requires that census figures be modified for redevelopment on former army and navy bases, and that may be a rather disturbing blind spot in the law. Excluding the median income of former military personnel from closed army bases would certainly seemed to be called for in light of the desirable locations of several of these closed bases.

The Sheraton Duluth Hotel in Duluth, MN was built with a $16.5 million NMTC allocation. It includes a 147 guest room hotel on 6 floors, on top of which the plans call for 35 market rate condominiums, and an adjoining Plaza ballroom for the hotel adjacent to the Greysolon Plaza senior housing project. So what exactly did the community gain for the $16.5 million? Well, a pretty hotel which will form part of a larger complex which may revitalize a part of downtown, arguably 83 permanent jobs (though there’s no indication these are only going to low income workers) and renovation of 150 existing units of senior housing. Oh, and the hotel will offer discount rooms for visiting doctors. But there appears to be no non-senior low income housing, and no low income community retail.

Without some demonstrable enhancement of housing or retail for low income communities it is questionable whether this kind of project should be authorized. Overall, NMTCs should require something beyond general revitalization, and its potential handmaiden—gentrification-- of downtown areas.

We’d like to identify other projects which are benefiting from NMTC allocations, particularly closed bases, to gain a better understanding of, and insight into, the issues before recommending concrete action. And if we’re wrong about all this, or missing some important benefits which projects like the ones described above provide- we want to hear that too!

1 comment:

NMTC said...

I work in the NMTC industry, though I haven't personally worked on the projects you list. From your brief descriptions, I can tell you that they all appear to meet the letter, and I believe the intent, of the law. Ideally, all projects in a low income community would directly hire or provide services or housing to low income people and many, many NMTC projects do just that. Most projects are required to sign a specific community impact agreement with the entity providing the tax credits outlining exactly how it will utilize the benefits to help the community.

This is not a black and white issue. Through long debate, the industry has generally determined that the program's intent was to generate investment/development/activity in areas that have not seen significant activity before. The subsequent "spill-off" affects of the activity are expected to be beneficial to the low income residents.

A vacant building seems a perfect example of such intent. What low-income residents want to fear for their safety as they walk past a blighted building? And who is to say a low income person wouldn't want to get an occasional coffee at a large coffee chain or occasionally splurge at a sit down restaurant? What makes some retail more or less appropriate for someone living in a low income area?

The hotel projects I've seen HAVE required hiring local or low income persons. Regardless, these are exactly the types of jobs from which low income people benefit. Many positions don't require higher education, provide benefits and draw from the local labor pool. Most hotel chains have excellent programs to train entry level employees to move up to management levels, so low income people don't have to stay low income. Hotel business additionally attracts income to the community, a benefit to local businesses.

As for Liberty Station, again, without inside knowledge, it is difficult to know what benefits were created. However, I have seen article after article about how difficult it is to redevelop vacated military bases and how devastating such a loss is to the surrounding communities. The redevelopment agency may have done a cost benefit analysis and determined that the additional revenues generated from the project more than covered the tax revenues it set aside for low income housing. In fact, the agency may have felt it came out the better, since it is creating twice the required low income housing in an area of its choosing.

Particularly in this economic climate, it is extremely difficult to move forward with development projects. The NMTC benefit is a relatively small boost to help. For example, the $14mm in allocation mentioned for Liberty Station generates only a $700,000 tax credit in each of the first three years and $840,000 in each of the subsequent four years. A total of $5,460,000 taken over 7 years. Considering the Liberty Station project you described--170,000 square feet of retail shops, grocery stores (Trader Joe’s, Vons), no fewer than 11 beauty and wellness merchants, 19 fast food and fine dining restaurants, office space, two hotels, a golf course, and a waterfront park--arguably cost millions and millions of dollars of private dollars, is it worth about $5.5mm of Federal dollars over 7 years? I'd wager the project repays that cost in multiples with new Federal tax revenues not previously generated by the former army base. And with that much new retail, it will undoubtedly create jobs for low income people.

Finally, I recommend contacting the Allocatees involved in these deals. They will readily have the answers you seek on why these projects receive Federal benefits. While every program may have a few bad apples, the NMTC industry by and large feels personally accountable to tax payers. We understand that a single instance of misuse could mean the end of the program.