Big Deals Coming Soon to Forgotten Areas

March 1, 2002

What a difference a cash infusion makes. That’s the sentiment behind the New Markets tax credit program, created by Congress two years ago and just getting underway in markets around the country.

The credits will offer investors an incentive to finance office, retail, or light industrial facilities in areas that haven’t seen much investor interest in a generation. Attracting such development is key to seeding the turnaround of a neglected area.

At the close of last year, the IRS and the CDFI Fund, the two U.S. Treasury agencies that administer the program, published their program rules. The CDFI Fund is expected to start taking applications for the first program phase in April, and the IRS is expected to start allocating tax credits by late 2002. New developments could begin shortly thereafter.

That may seem like a long way off, but the time to become involved in the program is now. The players are already being selected, and there’s a limited supply of tax credits available each year.

At the center of the program are special venture capital firms, called community development entities (CDEs), which are approved by the CDFI Fund to allocate federal tax credit authority to investors. These CDEs are financial institutions that have, or promise to have, deep roots in a neglected area. Their job is to search for low-income businesses in the areas that need money, either for start-up or expansion.

Having these CDEs searching for viable low-income businesses could fuel demand for retail, office, and light industrial space in areas that haven’t experienced such development in years.

To take advantage of the opportunities created, you must identify the CDEs in your area and the businesses targeted for investment. This information will provide a picture of the expected property needs of the area. Is the CDE expecting to invest a portion of its funds in a technology start-up, for example? Someone will need to help that business find the appropriate office space.

In many relationships between venture capital firms and their clients, it’s the venture capital firm that often takes the lead in matters such as finding space, at least until the new business gains the necessary experience. Therefore, you can expect in many cases to work with the CDE rather than the individual businesses.

Is the CDE looking for small businesses to occupy a planned retail center? Someone needs to work with that CDE to find the property and to lease the space.

To be successful, economic development should include affordable housing, but Congress explicitly excluded rental housing development as an eligible activity. That’s because rental housing is already eligible for federal assistance through the low-income housing tax credit.

Once additional IRS guidance is issued, however, there might be the opportunity to combine these two federal tax credits into one project. It’s expected that the IRS will allow projects with a mix of housing and commercial space, with the commercial portion using New Markets credits and the housing portion using housing tax credits. Also, it’s believed that for-sale housing will be eligible, so there could be condo or single-family projects in the works.

Look for additional IRS guidance to be issued once the current IRS temporary rules are replaced with permanent rules, possibly this spring.

Robert Freedman

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

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