Federal New Market Tax Credits lure developers and lenders, but are they worth keeping?
In Berlin, the former Fraser Papers mill is being replaced by a biomass plant that will not only result in hundreds of construction and permanent jobs, but will also buy $27 million worth of wood every year from local timber owners.
In Concord, the development of the two downtown buildings has pumped $35 million of economic life into the city’s new arts district.
And in Plymouth, MidState Health Center and a medical office building next door provide primary care to 85 percent of the residents in that underserved area.
Those who built these projects say none of them would have happened without federal New Market Tax Credits, an obscure program that wasn’t even in place a decade ago, and may be a quiet casualty in the politicized budget wars in Washington.
The program -- which allows a bank or finance company to take 39 percent off its taxes -- is the kind of complicated corporate tax break that has gotten a bad name lately, both in presidential and congressional debates, because it enriches banks, developers, attorneys and consultants.
But in New Hampshire alone, the New Market program has contributed to a dozen projects, resulting in more than $200 million of economic activity -- from hotels in Concord and Portsmouth and the redevelopment of old mill buildings in Claremont and Newmarket, to a strip mall in Derry and the acquisition of conservation land in Errol.
Once blessed with bipartisan support -- a compromise that brought together people like Bill Clinton, Jack Kemp and Rick Santorum at the beginning of this century -- it is now grouped with many other tax breaks, which may or may not be extended.
These “extenders,” as they are called by Washington wonks, include the New Market credit’s much older and larger siblings, including credits for research and development, which cost taxpayers nearly 20 times more.
‘Winners and losers’?
A Bloomberg article last year that focused on the renovation of the luxury Blackstone hotel in downtown Chicago made the program a possible target.
“Things like luxury hotels are entirely contrary to what we set out to do,” Cliff Kellogg, a former senior policy adviser at the Treasury Department who helped design the New Market program, told Bloomberg.
U.S. Sen. Tom Coburn, R-Okla., took aim shortly thereafter.
“No conservative should support Republicans picking winners or losers through the tax code,” Coburn told Politico.
While not many within Coburn’s party -- including its presidential nominee -- openly talk about eliminating specific tax breaks, they do echo the general philosophy that it is better to close such loopholes and cut rates cross the board.
The New Market Tax Credit Coalition has taken such criticism to heart and has had “long debates” about dropping projects like hotels from the program, said the coalition’s executive director, Bob Rapoza.
But hotels account for less than 5 percent of the work funded through the program and do employ low-income workers, he said.
Instead, the coalition has pointed to such things as a $15,000 credit for a second chair at a hair salon in Portland, Oregon.
“Everything is more difficult this year,” Rapoza told NHBR. “In the past, it has mostly been a routine matter, but Congress is so divided, and there is a lot of concern about the debt.”
Even those like New Hampshire Republican Congressman Charlie Bass, who has favored the program in the past, hasn’t signed on to letters supporting the New Market credits. (The credits are included in a Senate extender bill, but the House has yet to come up with its own such bill).
“The (New Market Tax Credit) is among the numerous tax provisions that Congress must consider before our nation goes over the fiscal cliff at the end of the year,” said Bass’ office in a statement. “Having helped introduce the bipartisan Simpson-Bowles budget in the House, Congressman Bass is focused on finding solutions and providing the certainty businesses and families need and deserve,” he said in response to an NHBR question.
His fellow Republican, Congressman Rep. Frank Guinta, also issued a vague statement.
“When addressing a number of expiring tax provisions, Congress and the White House must work together to guarantee small businesses and job creators have the predictability in the tax code to grow and hire,” according to the statement.
Even those in New Hampshire who have benefited from the program have mixed feelings about it.
“I think the credits have done a very useful job,” said Concord developer and Republican activist Steve Duprey, who has used the New Market credits to help finance three projects whose total costs are about $50 million.
“It was helpful to me personally and to Concord -- a real economic shot in the arm. But it is more cost-effective to simplify the tax code,” said Duprey.
The credit process
Although Congress passed the New Market Tax Credit program in the waning days of the Clinton administration, it took four years for it to get off the ground under President George W. Bush.
When the complex regulations did emerge, it took more time for all those affected to figure them out. In addition, the program was at first skewed toward urban development, and it was only in 2006, when Congress required that a certain amount of the credits go to rural areas, that New Hampshire developers started using them in earnest.
In the last nine years, Congress allocated some $33 billion in credits nationwide, including some $3.5 billion in 2011, but it actually cost the U.S. Treasury (which runs the program) a lot less than that.
The investors -- usually banks -- get a break of 39 percent, and they have to pay taxes on the credit, reducing the break. That’s why $3.5 billion in credits translates to less than $1 billion in actual cost.
The Treasury doesn’t give out the breaks directly. Instead it hands them out to so-called allocatees -- both for-profit and nonprofit entities -- in an extremely competitive process.
For instance, of the more than 300 entities planning some $27 billion in projects, $3.6 billion was handed out last year in 2011.
The allocatees could be national organizations like CEI Capital Management, a for-profit subsidiary of the nonprofit Coastal Enterprises in Portland, Maine, or local and regional ones, like the New Hampshire Business Finance Authority.
These two are actually the largest allocatees for projects in New Hampshire, with more than $60 million in credits each.
After receiving the credits, the allocatees then start another competitive process for projects seeking funding. The criteria vary, depending on the allocatee, though all projects have to meet certain standards, such as being located in an area whose residents earn 80 percent of the state’s median income.
The developers of these projects then sell the tax credit to an investor, for some amount less than the tax break the investor would receive.
For example, on a $10 million project, a credit would be worth a $3.9 million tax write-off to a bank (it can be taken over a seven-year period). The bank, after deducting a half-million dollars for taxes and expenses, might be willing to pay $2.9 million for the credit, keeping the half-million dollars for itself. The developer now has a $10 million project that costs $7.1 million, making it much easier to raise capital.
That’s the simple explanation. In reality, said Duprey, “the deal diagram on these things makes the electrical wiring on a nuclear submarine look simple.”
For a $10 million deal, he estimated, the various legal and professional fees to put one together is about $500,000.
That’s why more than two-thirds of the 3,000 projects financed by the program tax credit have been under $1 million, and the smallest project in New Hampshire, the redevelopment of the Brown Block in downtown Claremont, was $2.7 million.
Nationwide, the credits range from $3,000 for a retail clothing store in Oakland, Calif., to $155 million for a Detroit redevelopment project that includes a charter school (though in 2012, the program imposed a $100 million tax credit cap.)
In New Hampshire, one of the first projects was the Mid-State Health Center in Plymouth, which had just spun off from Speare Memorial Hospital.
Since the program was so new, no bank wanted to take the whole risk, so three shared in the $3.2 million tax credit handed out by CEI Capital Management -- Franklin Savings, Woodsville Guaranty Savings and Community Guaranty Savings. The deal lowered the effective interest rate on the project from 9 to 5.25 percent.
“We aren’t a cash cow,” said Mid-State CEO Sharon Beaty. “Without this financing, we would have been dead in the water.”
But as projects in the state became larger, developers have had “to go on a national hunt” for the credits, put together deals held by different allocatees, and work through bewildering fee structures, said Duprey.
The BFA, which got its $65 million allocation in 2008 and has financed projects in Berlin, Claremont, Newmarket and Keene, has one of the cheapest up-front costs: about 2 percent (or $200,000 on a $10 million deal), but it also charges about a half a percent each year.
Other allocatees demand as much as 9 percent (or $900,000 on $10 million), said Jonathan Chorlian, a New Market Tax Credit expert who worked with Duprey as well as with Chinburg Builders on the redevelopment of the mills in Newmarket.
When all is said and done, the developer may end up reducing the cost between 20 and 25 percent, said Chorlian, but that subsidy gives an “economic tailwind to a project” that gets it “over the hump.”
“Not a single one of these projects would have happened if not for the New Market Tax Credit feature,” he said.
Often, the developer ends up using several allocatees.
Duprey’s current redevelopment of the former bindery property on South Main Street in Concord relies on $7.5 million from the BFA and $7.5 million from the Local Initiatives Support Corp. of Chicago.
The Berlin biomass plant used five allocatees -- including the BFA and CEI Capital Management -- to receive $75 million in credits toward the $275 million project
“Shopping for the credits,” is not easy, said the BFA’s executive director, Jack Donovan. “Some of these guys are really good hiding their fees. They are all over the map. You could charge usury rates and get away with it.”
Donovan favors some kind of cap on fees, which are especially problematic with multiple players when “everybody has his hand in the till. These projects are a huge catalyst to the community,” said Donovan. “But if you look at all the legal and other costs, there is a lot of wasted money. A lot of the public subsidy doesn’t get through. Lowering the tax rates and simplifying the tax structure would be more efficient. But then, these projects wouldn’t happen.”