Why did the New Markets Tax Credit Disappear?

At the end of July the CDFI Fund made data available about the last ten years of the New Markets Tax Credit (NMTC) program.

Tax credits are a bit complicated. For a full explanation as to how the NMTC program works, the CDFI Fund has you covered. The basics are that Community Development Entities (CDEs) apply for authority to sell tax credits to investors, then, using the funds raised through the sale of credits, the CDEs make loans for business or real estate development in qualifying census tracts.

The geographic specificity here is important – the investments are to be targeted in low-income communities. Some of the most readily recognizable community and economic development buzzwords are involved with NMTCs: public-private partnerships, job creation, small business development and of course, tax credits (meaning incentives, as opposed to actual money being spent or budgeted by the Federal government for projects).

Buzzwords aside, why do New Markets Tax Credits matter? They matter because for the last ten years they have been generating investment in low-income communities. Some of their notable local results include the Midtown Exchange and The Cowles Center.

Nationally, the amount of money invested, the number of jobs created, the number of businesses supported and value of real estate developed over the last ten years due to the existence of the NMTC program appears to be an endorsement for some kind of similar program in the future. One point from the report that I found particularly telling is that 69% of surveyed investors said they wouldn’t have made investments in these communities if it weren’t for the NMTC program. The initial report seems to indicate that the program has been at least somewhat successful in bringing new, otherwise lacking investments to low-income communities. Though of course, success is difficult to define and there are certainly those who would say that this program isn’t a success.

Both the House and Senate have introduced bills that would extend NMTC, but so far policy-makers haven’t passed an extension so the program officially ended December 31, 2013. Success aside for the moment, if a future NMTC program comes into being, how could it change?

Difficulties Around Community Engagement

One criticism of the program has been that CDEs aren’t required to go to the community or engage neighborhoods in any way when considering how to make loans available. A CDE with NMTC authority would still need to follow all the procedures and underwriting guidelines to make a good loan, there are still NMTC rules, not to mention banking laws and lending know-how guiding them. But not speaking to the community or neighborhood at all can be seen as a bit of a disconnect in a program that was specifically designed to benefit those neighborhoods. The neighbors are stakeholders and their cooperation and backing is critical for the projects to succeed, but changing the engagement process through policy may not lead to the kind of results advocates want. Requiring CDEs to get neighborhood approval before continuing with NMTC projects raises the question of who speaks for a neighborhood, how to define benefit and requiring community sign-off on a loan could make investors hesitate from the very beginning, stunting the program entirely.

Ideally the CDEs would already be engaging their neighbors. Of course, the CDEs still need to make the final decision as they need to make loans that meet underwriting criteria, but why not encourage CDEs to build better, proactive relationships with their neighbors? CDEs that are looking to make business loans or loans for real estate should be invited to community meetings and in turn they should show that they’re invested in the area, that they want it to succeed and CDEs should make clear their potential role in that success. If a neighborhood sees that you’re invested, that you’re willing to make resources available, it’s likely to also boost your visibility and increase business.

Additionally, we’ve seen what happens when financial institutions benefit, in a one-sided way, from lending to and investing in low-income neighborhoods. Efforts, from both sides, can be made to proactively avoid the need for more Community Reinvestment Act-like legislation if this program continues.

Changes to NMTC Program

One possible change, in a re-vamped NMTC program, that could be beneficial is an acknowledgement of the potential for development in low-income neighborhoods that are along new transit corridors or near other public infrastructure projects. The most recent round of NMTC awardees included $38 million in NMTC authority to St. Paul-based University Financial Corporation, whose parent organization is Sunrise Bank. In their application they stated explicitly that they were seeking NMTC authority in order to leverage the new Green Line to build business along the Central Corridor. The application process to receive NMTC allocation authority is lengthy and if you’ve ever done any type of Federal application, you know how detailed this kind of application is, how specifically points are awarded.

Nowhere in the 2013 application did it ask if the CDE intended to leverage or build upon new or existent public infrastructure, transit-oriented development projects or other municipal investments. This seems like a missed opportunity. The NMTC Program should capitalize on these types of investments – those purchasing tax credits would be investing in a community and its success, but also in a transit project and its success. Why do these investments have to be in silos? Why not build this type of incentive into the points system on the application?

Economic Development and Public Investment

The debates and arguments as to the actual economic impact of light rail or streetcar development projects are messy and go back and forth a lot, but one way to ensure a greater likelihood of positive economic impact is to create this type of incentive and encourage pointed, private investment that is coupled with public investment. We’d be getting private investment into communities and investors would be throwing their weight behind transit projects, too. Low-income communities could see a dual benefit – new infrastructure as well as new business development opportunities (which, in theory, means jobs, access to resources, increased community wealth, etc.).

This outcome is speculative, of course, since even if other CDEs in the last decade also cited leveraging public works projects, the individual project data from those investments and undertakings isn’t parsed out yet, and since the University Financial Corporation award is so recent, it’s likely that we won’t have any outcome assessment from their projects for years.

The future of the NMTC program is uncertain, but the investments are still at work, there are still funds available for real estate and businesses and there is interest in continuing the program, though potentially with some modifications. With ten years under our belt some informed tweaking is possible as we go forward. One thing to watch for is a more in-depth debate about the success of the program after the recent release of two reports, one from the Government Accountability Office and another from Senator Tom Coburn’s office. Stay tuned, because a lot depends on programs like these.

 

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2 Responses to Why did the New Markets Tax Credit Disappear?

  1. Janne Flisrand
    Janne September 13, 2014 at 8:54 am #

    Thanks for this post. It’s a perspective streets.mn had lacked.

  2. Alex September 13, 2014 at 9:22 am #

    Another example of how political dysfunction at the federal level has an impact locally. Has there been any movement to replicate these credits at the state level? Even if congress cleans up its act and gets them extended, a state program would provide even more incentive to invest in our most impacted communities.

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