Charles Chamberlain is senior vice president and head of corporate banking at United Community Bank. He is a 30-year commercial banking veteran with experience in corporate finance, credit administration, municipal lending, New Markets Tax Credits, tax-free lending and relationship management.
[break]
New Markets Tax Credits is one program the government got right
In this time of government shutdowns, debt ceiling deadlines, sequestration and general gridlock in Washington, D.C., it is easy to become cynical about our government and programs backed by the government. But we must remember the programs created by our government that actually work. One such program is the New Markets Tax Credit program. Established by Congress in 2000 and administered by the Department of the Treasury’s Community Development Financial Institutions Fund (CDFI Fund), the NMTC program was designed to stimulate new and increased investments in commercial, industrial and real estate projects located in low-income communities.
The program has been utilized extensively in the Upstate, including stimulating the continual development of downtown Greenville. For example, NMTCs were a pivotal component of financing the Children’s Museum of the Upstate in 2008 and the Peace Center renovation in 2011. In fact, NMTCs have been used in 10 different projects along Main Street, reshaping the landscape of Greenville as the populous skyline we see today.
Not only has Greenville benefited from the program, but NMTCs have been used to fund numerous projects across the Upstate. In Spartanburg, NMTCs were a vital tool in bringing the new Edward Via Virginia College of Osteopathic Medicine to Spartanburg – now the centerpiece of economic development in the city’s Northside revitalization efforts. NMTCs also made it possible for the University of South Carolina Upstate to build its business and economics college in the downtown area, and they were used by Wofford College to renovate several dormitories and convert them to energy-efficient buildings.
Across the state, the NMTC program was also effective for the city of Seneca, which used NMTCs to renovate an old industrial building near downtown and attract several new industrial companies to the area. Rock Hill used NMTCs to help finance a Velodrome as an economic development tool for its industrial park. NMTCs have also been used in other industrial applications, enabling businesses to expand and create much-needed new jobs.
The NMTC program is primarily delivered through Community Development Entities, which can be formed by banks, divisions of municipalities, not-for-profit entities or private developers. A CDE can apply to the CDFI Fund once a year to secure an “allocation” of NMTCs. Each time a CDE makes a qualifying loan to a qualified low-income borrower under the program, the applicant receives a tax credit equal to 39 percent of the loan amount. The tax credits are earned over a seven-year period, during which time the CDE can transfer the tax credits to investors by selling them at market price, generally 65 to 80 percent of the face value of the tax credits. The CDE then passes the proceeds from the sale to the borrower, either in the form of forgivable debt or reduced interest rates. Therefore, the end cost of the project is significantly reduced – by as much as $2.5 million on a $10 million transaction – by utilizing the NMTC program.
One area where the NMTC program deviates from other government programs is that the transaction uses a “loan” rather than a “grant.” This forces the project to pass certain basic credit underwriting standards on the front end and to sustain its performance for at least the seven-year tax credit period for the benefits to be realized. Qualifying projects have to be meaningful, viable projects that can withstand the test of time and a changing economy.
Another benefit of the program is job creation. Most approved projects create meaningful new jobs in areas of need, including construction jobs and long-term positions to sustain the new facility. The economic benefits of the program allow projects to be completed or expanded that otherwise would not be possible due to economic restraints. The ONE building on Greenville’s Main Street is a prime example. The use of NMTCs enabled the developer to bring Clemson University’s MBA program to downtown Greenville, providing an ongoing, significant and positive impact on both the university and the city. In fact, the income tax revenue the federal government will collect from the new jobs created by the development will be greater than the tax benefit the government surrendered under the program. This turns out to be a “win-win” situation for everyone involved with the project.
The New Markets Tax Credit program continues to be a key component of economic development and urban revitalization. It is well conceived and more than pays for itself by creating meaningful, taxpaying jobs. This is at least one program the government got right.
