Posted: October 7, 2011

Applications for a federal program that issues tax credits to invest in poor rural and urban communities have increased 26 percent this year from last year.

The Treasury Department's Community Development Financial Institutions fund received 314 applications for New Markets Tax Credits.

The requests seek $26.7 billion in tax credits when only $3.5 billion is available this year nationwide.

Hampton Roads Ventures, an affiliate of the Norfolk Redevelopment and Housing Authority, applied for $100 million in tax credits.

HRV applies for the tax credits every other year. It began seeking them in 2002.

"We have applied previously in rounds I, III, V and VII and have received an allocation each time," said President and CEO John Kownack. "Allocations received by HRV through Round VII total $160 million."

The housing authority appointed Kownack, a project manager with NRHA, to lead HRV after Bob Jenkins, its previous executive, retired from his post June 1 and moved to Washington, D.C., to start another job.

Jenkins had led HRV since its inception and expanded it into other states.

Some of Jenkins' projects include renovation of the Attucks Theater on Church Street and a hotel on Hampton Boulevard, as well as projects in Roanoke, Staunton, Jackson, Miss., and East St. Louis, Ill.

Towne New Markets CDE Inc., a subsidiary of TowneBank, applied for $100 million in the 2010 round, but its request was denied.

Southside Development Enterprises, a subsidiary of Portsmouth Redevelopment and Housing Authority, is also eligible for tax credits.

Southside last applied in 2009, since it still had $10 million left to invest from a $20 million allocation.

Southside invested $10 million in the MAST center in Portsmouth, a complex of office buildings catering to government contractors.

The remaining $10 million is supposed to finance a business park in the Victory Crossing section of the city and a downtown commercial project.

Investors get a tax break of 39 percent over seven years if they invest in impoverished communities using the tax credits.

New Markets Tax Credits are often used as "gap financing" - a short-term loan that is used until a person or company secures permanent financing or removes an existing obligation - and account for a portion of total project costs.

NMTC investments in low-income community businesses generally use leveraged structures, where equity is left in the businesses, or subsidized interest rate structures, where below-market interest rate loans are offered.

A 2009 Government Accountability report found that 65 percent of the tax credits have been invested in real estate.

The government should provide grants instead of tax credits to simplify the program, the GAO suggested in the report.

In June, Treasury and the Internal Revenue Service proposed changes to the program, saying the changes will foster greater investment in operating businesses.

The government wants more investment in non-real estate businesses in low income

rural and urban communities rather than in real estate.

Potential changes to the tax credit include revising reinvestment requirements for entities investing in operating businesses, streamlining compliance requirements and modifying ownership rules to reduce noncompliance risk over the course of an investment, among others.

Public comments on the suggested changes will be available between now and the end of the year at www.cdfifund.gov. 

By Philip Newswanger

philip.newswanger@insidebiz.com