Flexible new tool for cities

Urban Chronicle

Incentive: The New Markets Tax Credit aims to draw money to distressed areas.

March 21, 2002|By Eric Siegel | Eric Siegel,SUN STAFF

WHILE CITY officials and developers have been scrambling to prevent sharp limits in the state historic tax credit program that has so benefited Baltimore, a new initiative to spur investment in low-income areas is about to come on line.

The federal New Markets Tax Credit will give investors such as banks and loan funds write-offs for new investments in businesses and commercial projects in distressed urban, rural and suburban communities.

Established a year and a half ago in the waning days of the Clinton administration, the New Markets Tax Credit is envisioned as a way to draw new money into financially underserved areas where traditionally risks are high and returns hard to achieve.

How big a boost it turns out to be - for Baltimore and other areas - remains to be seen.

U.S. Treasury Department officials, who are administering the program, expect to begin taking applications next month, and could approve the first round of credits in the fall.

Unlike the suddenly scrutinized state historic tax credit program, which sets no limits on the amount of credits that can be offered in any given year, the federal program is capped from the get-go: It offers credits on investments of up to $15 billion through 2007, beginning with $2.5 billion this year, with the credit allocations to be funneled through for-profit neighborhood-based organizations.

Also unlike the state program, the New Markets Tax Credit is not restricted to historic buildings but can be used for projects to develop vacant land, to fund start-up businesses, to build or renovate properties for homeownership - almost anything but rental housing. The credits will be allocated through community banks, for-profit subsidiaries of community development corporations and venture capital funds.

"I think it's a great tool for inner-city urban development," said Gary C. Perlow, a principal in the Baltimore office of the accounting firm of Reznick Fedder and Silverman and author of a Ford Foundation-funded pamphlet on the New Markets Tax Credit program.

Perlow said he expects that most of the initial projects will not be investments in start-up businesses but in more secure "real estate products" such as warehouses, retail shopping centers and franchises like 7-Eleven stores.

Asked if the federal tax credits could be used to help fund a project like the proposed east side biotech park, Perlow said: "Most definitely."

Empower Baltimore, the organization that oversees the city's federal-funded revitalization effort, is joining with Harbor Bank and the city to explore ways to use the credit. And the Columbia-based Enterprise Social Investment Corp. has begun an Enterprise Communities Fund to raise money to invest in projects nationwide using the credits, said Michael J. Curran, the corporation's president and chief executive officer.

The fund has an initial goal of $50 million, but, "We're hoping it will grow significantly," said Curran. His organization has invested in such Baltimore projects as Tide Point and the American Can Co. using state historic tax credits, and in hundreds of affordable rental projects nationwide using the low-income housing tax credit.

"What credits do is lower the cost of money," he said. "What they do is provide an enhancement" for investors.

But even as he is raising money to take advantage of the New Markets Tax Credit, Curran is measured in his feelings about the program's potential impact.

"It's a helpful tool," he said. "It will begin to attract people - developers, other investors - to these underserved markets."

But he also noted that the New Markets Tax Credit is a "relatively shallow" (read: small) credit.

Investors - which are also expected to include insurance companies, utilities and other corporations - will be able to claim a tax credit equal to 39 percent of their investment over seven years. That translates to a "present value" of about 30 percent. By contrast, the federal low-income housing tax credit has a present value of about 70 percent.

The New Markets Tax Credit's "relatively modest size means that activities it finances generally will have to generate substantial benefits on their own, such as cash/flow and capital recovery/appreciation, to attract investors," according to an analysis of the program last month by Stockton Williams, director of public policy for the Enterprise Foundation.

Nonetheless, at least initially, competition could make the credits tough to come by.

Although there's no allotment of the credits by state, it's instructive - if depressing - to consider how many communities qualify for the New Markets Tax Credit, designated for areas with a poverty rate of at least 20 percent or with incomes not greater than 80 percent of a statewide or metropolitan area median.

Nationally, nearly 40 percent of the census tracts, containing about a third of the country's population, are eligible, according to Bill Luecht, a spokesman for Treasury's Community Development Financial Institutions Fund.

In Maryland, 436 of the state's 1,151 tracts, or about 38 percent, are eligible. In Baltimore, about three-quarters of the city's tracts are eligible.

Luecht said it's too soon to tell the value of the credits to be sought. But he added, "What I'm hearing anecdotally, it seems like we will be oversubscribed in the first year."

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