New Markets Initiative Means New Business

April 1, 2001

It’s not often clear how a new federal community or economic development program will benefit commercial real estate practitioners.

But in the case of the New Markets Tax Credit--an NAR-backed program enacted in the closing days of 2000--the benefit is clear, say program supporters.

Look for a significant increase in commercial property development, both new construction and acquisition-rehab, in many of the country’s urban areas, opening doors of opportunity for commercial sales and management professionals.

It’s hoped that the kind of renaissance sweeping through Harlem, which has seen hundreds of millions of private investment dollars pouring into the area, will take hold elsewhere.

The Local Initiatives Support Corp., a New York--based nonprofit that helps local nonprofit developers build housing and commercial properties in low-income areas, has played a key role in the heralded turnabout of Harlem. LISC plans to use the New Markets Tax Credit as the foundation for a commercial property investment fund that will pump millions of dollars into new retail centers and other projects.

“With the new tax credit, private investors will be more confident than they would otherwise be that projected returns on their investment will be achievable,” says P. Jefferson Armistead, senior vice president of LISC.

A LISC affiliate last year used a $24 million investment fund to help nonprofit groups develop eight retail centers in low-income urban areas. Now, with the new tax credit available, such investment funds could flourish, because private investors will see urban commercial property investments as less risky.

“We think that if we can create a fund with investor returns based partly on tax credits, it should make it easier to put together and underwrite deals,” says Armistead.

The tax credit works on the same basis as the popular low-income housing tax credit but with some key differences.

Like the housing credit, the New Markets Tax Credit lets individuals and corporations get a credit against their federal tax liabilities in exchange for investing in companies that develop projects that meet a public policy goal, in this case commercial property development in underserved areas.

Unlike the housing credit, though, the New Markets Tax Credit goes to financial entities, so-called community development entities (CDEs), and not to the project developers. The CDEs, in effect, act as venture capitalists. So they have considerable latitude in the projects they finance, though there are some principal restrictions. For instance, the project must be in a low-income area (as defined on the basis of certain median-income considerations), and the project developer must demonstrate fairly deep roots in the low-income community.

Housing isn’t included as an allowable project to receive equity proceeds from the sale of the tax credits, but it may be possible that forthcoming program rules will allow the tax credit proceeds to fund the nonhousing portion of mixed-use projects, says Maurice Jones, former director of the Community Development Financial Institution (CDFI) Fund in the U.S. Treasury Department. The CDFI Fund will administer the new program.

What all this means to commercial practitioners is more business. To the extent that tax credit spurs private investment in areas that otherwise would see little incoming capital, new commercial properties will rise, along with opportunities in property sales and management.

Robert Freedman

Robert Freedman is the former director of multimedia communications at NAR.

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