Congress Breathes New Life Into New Markets Tax Credits
Developers willing to launch projects in distressed areas got a nice surprise in December. Congress passed the $2.3 trillion Consolidated Appropriations Act of 2021, and one of its many provisions extended the New Markets Tax Credit program and provided a significant funding boost.
The Department of the Treasury has allocated about $61B in tax credits since 2003 for investors that supported development in severely distressed areas. The more than 6,300 projects created include factories, community centers, new retail, schools, hospitals and other health care facilities, which boosted employment and brought needed services to low-income urban and rural districts.
But the program was set to expire at the end of 2020. Instead, Congress extended its life by another five years, the longest extension ever, and increased the annual tax credits allocated to $5B, up from the recent average of $3.5B.
“I don’t believe anyone was counting on a five-year extension,” Strategic Development Solutions Managing Director Steve MacDonald said. “Increasing the sheer amount of tax credits available is very important, but the five-year extension allows us to plan better, rather than worrying whether the program is going to be around next year.”
MacDonald’s Los Angeles-based firm runs National New Markets Fund, one of the many community development entities certified to receive tax credit allocations from the Treasury Department. Individual and corporate investors willing to make equity investments with CDEs receive credits against their federal income tax, and the CDEs then make loans and investments to businesses operating in low-income communities, typically with better rates and terms than what is available on the open market. Tax credits are worth 39% of investors’ original CDE equity stake, which they claim over a seven-year period.
Putting such entities on firmer financial ground may seem like a small gesture by Congress, but after nearly 20 years of investing, CDEs know how to assemble pipelines of shovel-ready projects in hard-hit areas. And as the pandemic and subsequent employment crunch have hit low-income communities much harder than affluent areas, experts say CDEs will likely play an outsized role in the coming recovery.
“Job creation is one of the keys to coming out of the COVID crisis, and we have established networks of CDEs that are committed to investing in highly distressed areas, whether urban or rural, so there is a framework ready to go that can deploy tax credits quickly,” said Chicago Neighborhood Initiatives Chief Operating Officer Jennifer Bransfield, whose CDE works primarily in low-income Chicago neighborhoods such as Pullman and North Lawndale.
NNMF focuses on fostering manufacturing operations in the South and the Great Lakes regions, MacDonald said. He expects the pandemic will lead CDEs to put more focus on manufacturing in the next few years, as the created jobs tend to be high-paying, and the firms receiving investments foster even more economic activity through equipment purchases.
“By creating these jobs, you have a huge multiplier effect,” he said.
Of the 288 NMTC projects funded in 2019, 83 were in the manufacturing, wholesale, energy or industrial sectors, according to the 2020 NMTC Progress Report by the New Markets Tax Credit Coalition, a nonprofit that advocates for the program.
MacDonald’s NNMF started the year off by joining with two other CDEs to kick-start a project that will eventually bring about 150 manufacturing jobs to rural Tennessee, he said. NNMF provided $14M of a total of $48.25M in financing for ERMCO’s revival of a 200K SF manufacturing plant in Dyersburg, about 75 miles northeast of Memphis.
ERMCO, a manufacturer of electric transformers and other components, already employs more than 1,300 people in the Dyersburg area. It will use the NMTC financing to reconstruct a former Caterpillar facility, as well as buy new manufacturing equipment.
“ERMCO is the single largest employer in this county, and it pays high wages relative to others in the area and provides good benefits, so it’s a very solid economic engine for the Delta region, and that’s what appeals to us,” MacDonald said. “Areas like this are the ones that need the most help.”
Since 2005, NNMF has provided a total of $577M in financing for 42 projects, he added.
Since forming in 2010, Chicago Neighborhood Initiatives has coordinated $86M in New Market Tax Credits and $500M in investment, according to Bransfield. Although the group helped fund schools and health care facilities for low-income neighborhoods, it has focused much of its efforts on bringing jobs back to a site once occupied by Ryerson Steel Mill in Chicago’s Far South Side Pullman neighborhood.
The company left, leading to both massive job loss and a wave of home foreclosures, which got even worse after the 2008 financial crisis, she said.
But with its tax credits and major investors such as U.S. Bank, Chase, Local Initiatives Support Corp. and Wells Fargo, CNI brought in the 140K SF Amazon Whole Foods Midwest Distribution Center, the Method Products soap factory and a Gotham Greens greenhouse. In addition, along with developer Ryan Cos., CNI created a 400K SF industrial spec building, which secured Racine, Wisconsin-based SC Johnson as a tenant. SC Johnson also operates the Method factory and in 2020 moved its distribution operation for that facility to the new warehouse.
CNI also brought in retail. In 2015, it opened Pullman Park, a retail center on the Ryerson site that includes a 150K SF Walmart store. CNI also debuted in 2017 the 111th Street Gateway Retail Center at 756 East 111th St., which now includes One Eleven Food Hall, the first food hall on the city’s Far South Side. All this activity brought needed services and work to the jobs-hungry neighborhood.
“Before the food hall, Pullman was very much a food desert,” according to Dominique Leach, owner and chef at Lexington Betty Smokehouse, one of the food hall tenants. “I can’t think of any restaurants that were in Pullman except for the McDonald’s on 115th Street.”
Leach started a catering company in 2017 but eventually decided to open permanent restaurants dedicated to barbecue and soul food. Being in the food hall meant getting services such as marketing help, allowing her to focus on growing the business. She now has three sites in Chicago and employs 12. The business survived the pandemic by doing carryout and box lunches for Roseland Hospital and other neighborhood institutions.
“My wife and I were doing a lot of box lunches and killing ourselves with long hours, but everything really helped,” Leach said.
Businesses have kept flowing into the neighborhood. In 2020, CNI and Ryan Cos. developed a 145K SF distribution facility for mega-retailer Amazon at 10500 South Woodlawn Ave. This project was done without tax credits, but Bransfield said it was CNI’s decadelong effort that proved Pullman was once again a viable location.
“Using the tax credits initially attracted strong businesses, and that has helped attract additional investment. It really was a catalyst.”
In total, the neighborhood saw the development of about 1.7M SF of industrial, retail, health care and community center facilities, which support about 1,500 jobs, according to Bransfield.
CNI has high hopes that tax credits will help fund a new round of development in Pullman and other Chicago neighborhoods, Bransfield said. The group has asked for $50M in allocations this year. It plans to use those allocations to support seven proposed projects: two manufacturing facilities, three community centers and two job training programs.
MacDonald said NNMF typically puts in applications for three or four projects each year and wins between $25M and $75M in credits. This year, it filled out applications for five projects. Although CDEs won’t know how many tax credits they will have, if any, until the U.S. Treasury selects the next winners in June, MacDonald hopes the annual funding boost and a continued appetite among investors means a larger number of projects can break ground in 2021 and beyond.
“Things have obviously improved significantly since the early days of the COVID crisis, with all of its unknowns, and we believe 2021 will be a solid year when it comes to investor interest in these tax credits,” he said.
But the recent extension of the tax credit program, while welcome, is not enough for advocates such as Bransfield and MacDonald. They don’t want to continue worrying that Congress will someday allow the program to lapse, and they plan to keep pushing for change.
“Ultimately, we want the program to be a permanent part of the tax code,” MacDonald said. “So, we’re not there yet.”
CORRECTION, JAN. 28, 6 P.M. CT: A previous version of this story misstated the total amount of tax credits allocated and the number of projects developed. The story has been updated.