Fate of new market tax credits rests with Congress

by Ted Carter

Published: September 27,2013

Tags: Business, credits, Mississippi, tax

Money_rgb» Credits have brought nearly $300 million in investment to Mississippi since 2000

 

Hailed as an immensely valuable tool for Mississippi developers to use to cut project costs, new market tax credits could die at the end of the year – or they could live on as a permanent part of the U.S. tax code.

Congress must decide the fate of the Clinton-era tax incentives designed to spur new development and business expansions in low-and-moderate income urban neighborhoods and rural communities.

The issue will be closely watched in Jackson and the rest of Mississippi, which has been the recipient of several hundred million dollars in development money since enactment of the tax credits in 2000.

Funding gaps closed by new market tax credits made possible some of downtown Jackson’s most recent redevelopment successes, said Ben Allen, president of Downtown Jackson Partners, a public-private partnership created to promote and enhance downtown development.

“We would not have the Standard Life or the King Edward,” he said of the key role the tax credits had in the restoration of the Standard Life as an apartment building and the King Edward as a Hilton Garden Inn that includes upper floor apartments.

Further, the expected conversion of the circa 1924 Lamar Life building to a mix of commercial and residential use is expected to get an assist from $10 million in new market tax credits, according to Allen.

By the end of the last decade, 60 projects with an estimated value of $276 million had been completed with the tax credits awarded through the Treasury Department’s Community Development Financial Institutions Fund.

For this year, the Treasury Department designated three financial entities – MuniStrategies, the nonprofit Hope Enterprise Corp. and Trustmark Bank’s Southern Community Capital – to award around $100 million in new market credits. MuniStrategies got a $50 million allocation and Hope Enterprise and Southern Community Capital $25 million each.

Competition for the credits is intense, with the payoff being a sizable reduction in a development project’s overall cost.

For instance, an investor will buy $10 million in tax credits at 80 cents on the dollar. With the tax credit worth 39 percent of $10 million, the investor ends up with a tax credit of $3.9 million for which it paid $3.1 million (80 cents on the dollar).

Supporters of the tax credits say that with the federal share of community development spending having declined 75 percent over the past 30 years, new market tax credits provide an efficient method of injecting capital into projects in distressed communities.

With expiration of new market tax credits set for Dec. 31, Senators Jay Rockefeller, a West Virginia Democrat, and Roy Blunt, a Missouri Republican, introduced the New Market Tax Credit Act of 2013, a measure that would extend the tax credit indefinitely by making it part of the IRS Code. The legislation would also increase the annual New Market Tax Credit allocation

“A permanent extension would ensure that hard-hit rural and urban communities can continue to access billions of dollars in capital for job creating investments in business or economy development projects,” said the New Markets Tax Coalition, a nation advocacy group based in Washington.

The State of Mississippi has its own new market tax credit incentive. Administered by the Mississippi Development Authority, the program has awarded $264 million, including $125 million this year.

Jackson’s MuniStrategies won its first selection as a Certified Development Entity in 2011. With $50 million in tax credits to allocate this year it so far has closed on allocations of about $16 million, with the credits going for both development projects and business assistance.

Put simply, said MuniStrategies President Alan Lange, the credits enable investors to invest money they otherwise would not. Jackson’s soon-to-open Iron Horse Grill for which MuniStrategies allocated $4.5 million is an example, Lange said.

“The Iron Horse was absolutely unfeasible without new market tax credits (and historic tax credits),” he said.

“The only economic sense was to knock it down,” he added of the circa 1906 former Armor Smokehouse on West Pearl Street that had been closed for years after sustaining fire damage as a restaurant.

Typically, investors buy the tax credits because project developers seldom have a high enough tax liability to benefit from them. With the Iron Horse, Trustmark Bank bought the credits and will use them to defray its taxes over a seven-year period.

Basically, the Iron Horse developers got a lower principal on their loan from Trustmark, Lange said. “Trustmark got a return on its future revenue stream. So it was a win, win.”

As a Certified Development Entity, MuniStrategies has allocation authority for the credits but does not take an equity stake in the projects with which it works. “Where we come in is in identifying the investors” who buy the tax credits, Lange said.

This year, MuniStrategies is working a wide swath of Mississippi. “We are increasingly focused on rural areas in Mississippi, he added, citing projects in Columbia and Quitman.

Although nothing is certain in Washington these days except uncertainty, Lange said he is confident new market tax credits will survive. “This is pretty nonpartisan; it’s elephants and donkeys working together.

“The good news is there is not a hardened interest against it. The government is, in essence, buying money from the private sector because the money that can be discounted (as a tax credit in later years) goes to work today. The government is borrowing to stimulate invest that otherwise would not happen.”

 

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