Big Tax Credits for Community Development

//December 16, 2005

Big Tax Credits for Community Development

//December 16, 2005

A recent federal program that promotes investments in low-income areas gains momentum in the stateWhen the Greater Brunswick Charter School in New Brunswick needed a new building last year, it tapped a little-known federal program that provides tax breaks for investments in low-income communities. The result: a $2.6 million low-interest loan that helped the school purchase a 40,000-sq.-ft. facility. The charter school now occupies half the building and rents out the rest.

Making the deal possible was the two-year-old federal New Markets Tax Credit (NMTC) program. It grants credits equal to 39% of private investments made through so-called Community Development Entities (CDE) like New Jersey Community Capital of Trenton, which financed the New Brunswick deal.

The fund is one of three designated CDEs operating in New Jersey. Also dispensing loans under the federal program are the state Economic Development Authority and CityScape Capital Group of Princeton. Loan recipients have ranged from a small Newark alternative-medicine practice that received a $140,000 loan to a Newark sandwich shop that received $220,000 to refinance its mortgage and make capital improvements.

The NMTC program aims to provide $15 billion of tax credits nationwide. It has so far dispensed $8 billion of credits, with another $3.5 billion on the way as a new round of applications is reviewed.

New Jersey Community Capital of Trenton has about $75 million of total loans under management and $15 million of tax credits to dispense. The federal program allows it to replenish its funds by selling loans to the Community Reinvestment Fund, a nonprofit in Minneapolis, Minnesota.

“I need them because it’s very hard for me to raise the amount of investment capital I need locally,” says David Scheck, executive director of the New Jersey fund. The Minneapolis outfit purchases the loans and resells them to investors that get the interest on their investments and federal tax credits as well. Such transactions enabled the fund to kick in $1.4 million of the $2.6 million New Brunswick charter school loan.

Without the support of the Trenton and Minneapolis funds, “a number of charter schools would have gone out of business,” says Richard Pressler, executive director of the Greater Brunswick Charter School, a K-through-8 facility with 210 students.

Pressler will need another $2 million to $3 million for future building renovations, and he hopes to tap the federal program again.

Frank Altman, CEO of the Minneapolis fund, says his investors include Citigroup, JP Morgan Chase and Merrill Lynch. Altman says the loans “are riskier than would be suitable for bank investment,” so the fund secures the loans with extra collateral to satisfy the investors.

While tax credits are available from many other federal sources, Altman says the NMTC program is the most flexible yet. Its loans can be used for everything from equity investments in businesses in low-income communities to financial assistance for residents. Two weeks ago Altman closed a $144,000 loan to Integrated Healthcare, a chiropractic clinic in Montclair.

Also selling loans to the Minneapolis fund has been the Greater Newark Business Development Consortium, which financed the Newark alternative-medicine practice and the sandwich shop. The consortium has access to $10 million in NMTC loan funds, of which it has utilized $500,000 so far. Mark Quinn, the group’s executive director, says the tax credit program enables him to extend loans of up to 25 years and provide loan-to-value ratios of up to 90%, compared with the 75% ratio typically offered by banks.

Altman says the Minneapolis fund has experienced a default rate of less than 1% in the NMTC-program loans it has made or aggregated and sold. Scheck of New Jersey Community Capital says defaults have been zero in the year since the Trenton fund started making loans. “We do some very high-risk loans,” he says, “but risk is a matter of perception, and we work with clients that are [strong] credit organizations.”

However, Scheck worries about the continued life of the NMTC program when it comes up for renewal next year. And Quinn urges supporters of the program to contact their representatives in Congress to lobby for keeping it.

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