Posted: February 26, 2010

By Philip Newswanger

philip.newswanger@insidebiz.com

Money is pouring into low-income communities via tax credits that are sold to investors, according to a recent Government Accountability Office report.

The tax credits are doled out by community development entities to buyers, which get a tax credit of 39 percent over seven years.

The GAO report said the program is working, but it needs simplifying.

More than $26 billion has been awarded since 2003, the first year of the program, with $12 billion injected into projects nationwide. The tax credits have gone to projects in 50 states, Puerto Rico and Washington, D.C.

Most of the investment, about 65 percent, has gone into real estate projects, the report said.

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, the report said.

New Markets Tax Credits 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, the report said.

Investors appear to be paying less for tax credits than in previous years and they made fewer NMTC investments in 2009 than in previous years, the report said.

The GAO said one way to simplify the program is to provide grants instead of tax credits.

Tax credits have been used for a variety of investments, but project impacts are difficult to measure and likely vary depending on the project, the report said.

GAO identified NMTC-supported projects for mixed use facilities, housing developments and community facilities, among other qualified business activities.

GAO also recommended that improvements should be made in collecting data.

For example, the U.S. Treasury Department through the Community Development Financial Institutions Fund does not collect data on incomplete or failed projects, which might be used, for instance, to improve credit allocation selections.

Hampton Roads Ventures LLC, a private subsidiary of Norfolk Redevelopment and Housing Authority, has deployed more than $100 million in tax credits for 12 completed and ongoing projects from Norfolk to Staunton to Roanoke.

The housing authority commissioners are Hampton Roads Ventures' board members.

HRV helped finance the redevelopment of Norfolk's Historic Attucks Theatre & Cultural Center and Roanoke's once-decrepit Dumas Hotel into a neighborhood arts venue.

It also partnered with the NCP Federal Credit Union, a nonprofit community development federal credit union in Norfolk.

HRV invested $700,000 into the credit union, which will use the investment proceeds to make auto, residential and commercial loans to low-income borrowers at lower interest rates.

The Obama administration wants to tweak the program so that the tax credits can offset not only the investors' federal income taxes but also the taxes investors owe under the Alternative Minimum Tax.

The proposal would include allocations that have been made but where money has not yet been invested.

Under the Recovery Act, President Obama expanded the allocation for the New Markets Tax Credits to $5 billion for 2008 and 2009.

The president's proposed budgets for 2010 and 2011 call for an additional $5 billion each year for the tax credits.

Treasury Secretary Tim Geithner highlighted the president's commitment to the program while visiting a tax credit project in Durham, N.C.. Feb. 18.

The government says that every $1 lost in tax revenue due to tax credits generates $12 of private investment in impoverished communities.

The New Markets Tax Credit program fits the Obama administration's policy of spurring a recovery by creating jobs and investing in small businesses.

The Internal Revenue Service and Treasury are reviewing tax aspects of the program for investors. nib