Winter 2012It is not news that the continuing difficulty faced by real estate developers in obtaining traditional bank loans to finance projects has slowed the pace of development. With bank loans proving scarce for all but the most robust development outfits, securing the needed capital to make a project go has become difficult. Developers that once eschewed public programs and incentives as an alternative to private debt financing are finding an occasion in the current market to rethink the merits of some alternative funding sources.
This article identifies and briefly examines some of the various programs and incentives that are available to the developer who needs alternative funding sources and has the right project.
This program, operated by U.S. Customs and Immigration, provides a means for a foreign national to obtain a green card in exchange for investment in U.S. companies and projects that will create jobs.
The program has been around for some 21 years but has recently been seen in a more favorable light as an alternate means to finance projects that cannot now be fully leveraged through bank debt. Most EB-5 investments are conducted through regional centers — intermediary companies that often aggregate foreign investments and provide connections to eligible projects. Nationwide, there are currently around 150 regional centers with more than 80 applications pending for new centers, as compared to the 11 such centers that existed in 2007.
A project for the EB-5 program must create jobs and it must be located in a targeted employment area. Projects not located in the targeted employment area necessitate an increased investment for eligibility ($1 million) as compared to projects in the targeted employment area ($500,000).
New Market Tax Credits
This program, established in 2000, is operated by the Community Development Financial Institutions Fund, which is a part of the U.S. Department of the Treasury. This program certifies nonprofit Community Development Entities ("CDE") with a mission of increasing investment in low income areas. Equity investors in a CDE receive a tax credit equal to 39 percent of their investment, applicable over seven years.
The program is sufficiently flexible to allow a developer to partner with a CDE, while retaining a controlling interest in the project. The outcome of such an arrangement is that the developer's equity investment to the CDE will be applied to the project. Resulting tax credits are available to offset any project income or may be sold to a third party.
Historical Tax Credits
The federal government provides various tax incentives to encourage the rehabilitation and preservation of old buildings. The National Park Service administers the federal historic preservation tax incentives program with the Internal Revenue Service in partnership with state historic preservation offices.
This program provides a tax credit to a developer who rehabilitates a certified historic structure or a building that is more than 75 years old. A building is a certified historic structure if it is listed in the National Register of Historic Places or is located in a registered historic district and contributes to the historic significance of that district. Through this program a developer is eligible for a tax credit equal to 20 percent of the amount spent in rehabilitation of a certified historic structure or 10 percent of the amount spent to rehabilitate a nonhistoric building that was built before 1936.
Even with the current political movements to rein in urban renewal, it is still a major and most publicized source of public funds for project development. Such funds are available in locations that have been designated as urban renewal areas by the urban renewal agency in a local jurisdiction.
Urban renewal areas can generate funds for projects through tax increment financing, which allows the urban renewal agency to establish the current property tax baseline and allocate any future revenues from increased property tax to financing real estate development. This allows urban renewal agencies to borrow against these future property tax increases to finance specific projects and pay the debt service with the actual tax revenues.
Most urban renewal agencies have no hard and fast criteria for whether a project is eligible to receive funds, other than that the project must be within the geographic limits of the urban renewal area. While this can lend itself to a politicized process, typical project prioritization considers the ratio of private to public financing in a project; the public benefits, such as jobs associated with a project; the use of local and Minority, Women and Emerging Small Business ("MWESB") contractors for a project; and the impact of a project on the real estate values in the urban renewal area.
The programs outlined here are just a few of the resources that may be available to assist in kick-starting a fledgling or stalled project. They do, however, require the developer to dedicate substantial time and money to meeting applicable program criteria to obtain the necessary governmental approvals and certifications. The effective use of these resources is maximized when the developer selects a project with a site and publicly beneficial characteristics that are suited to satisfying the criteria for the desired resources.
Administrative costs and limitations on the nature and character of the project have been, prior to the current recession, a sufficient deterrent to the use of these programs by many developers. But with the advent of the banking industry's more exacting and conservative lending practices, developers that have the wherewithal and sophistication to use public funding programs are now at a significant advantage in the race to proceed with their projects.