Great Buildings. Great Places:
The Economic Benefits of an NMTC-Funded Development Effort
Low income communities across the country struggle every year to gain economic footholds. Likewise, economic development groups struggle to devise strategies by which they can provide aid to these areas. In many of these communities the poverty rates, unemployment rates, and median family incomes are disproportionately high or low (respectively) compared to national averages.
One of the largest obstacles hindering economic progress in these communities is the scarcity of available capital; there simply isn’t enough money in these areas to fund projects or increased production efforts which might stimulate economic development. For this reason, projects of this nature depend largely upon private investment dollars in order to be realized. Simultaneously, the incentives for private investors to finance efforts in these areas are, unfortunately (but understandably) scant. For this reason, disadvantaged areas often find themselves in seemingly inescapable cycles of economic deprivation; the community’s economy remains subject to decline because nobody will invest in improving it, and nobody will invest in improvement the community because its economy is lagging.
However, in 2000, Congress passed an initiative called the New Markets Tax Credits (NMTC) program with the goal of combating this very issue and stimulating private investment in businesses located in nationally recognized areas of need.
A real-world example of the collective efforts of this process bringing about change in an economically underserved community is the “12W” project. Named after the location of the resulting structure (SW 12th & Washington Avenues), the 12W project saw the development of a brand new mixed-use commercial office, retail, and residential facility in a recognized census tract west of Portland, Oregon’s central downtown district. Overseen by the United Fund Advisors (UFA), a CDE that invests in numerous development projects each year, the effort aimed to create 274 units of new affordably priced rental housing, provide 85,000 square feet of new office space, and to connect Portland’s Pearl District with the Central Business District.
12W is topped by wind turbines on 40-foot masts, ecoroofs, rainwater storage tanks, relies on high-efficiency systems, and its construction used recycled and reclaimed materials.
The NMTC program is a federally-based tax initiative, much like the many active housing tax credit programs across the country, meant to serve the public by spurring private equity investment, providing jobs, and stimulating local spending. Unlike housing tax credits however, New Markets Tax Credits are far more flexible in that their allocated funds can be used for a wider assortment of development projects, including healthcare centers, hotels, educational facilities, youth and recreation centers, public infrastructure, and more.
That said, the application process and criteria by which New Markets Tax Credit allocations are determined is quite rigorous. For starters, NMTC allocations are only approved for use in qualified census tracts. Census tracts are defined as geographic areas with changing, but stable, populations ranging from roughly 2,500 to 8,000 people: the approximate size of a neighborhood or locality.
The application process entails intensive reviews and assessments of privately managed Community Development Entities’ (CDE) proposed projects/uses to determine whether or not they qualify for the program’s funds.
Upon acceptance, funds are subsequently allocated to CDEs by the Community Development Financial Institution Fund of the U.S. Treasury. These recipients are able to issue tax credits to private investors in exchange for usable capital interest in furthering the effort outlined in the qualified project.