Tax Increment Financing:

     What is TIF?:  Tax Increment Financing, or TIF, is a public financing method that is used for subsidizing redevelopment, infrastructure, and other community-improvement projects in many countries, including the United States.  TIF is a method to use future gains in taxes to subsidize current improvements, which are projected to create the conditions for said gains. The completion of a public project often results in an increase in the value of surrounding real estate, which generates additional tax revenue. Sales-tax revenue may also increase, and jobs may be added, although these factors and their multipliers usually do not influence the structure of TIF.  When an increase in site value and private investment generates an increase in tax revenues, it is the "tax increment." Tax Increment Financing dedicates tax increments within a certain defined district to finance the debt that is issued to pay for the project. TIF is often designed to channel funding toward improvements in distressed, underdeveloped, or underutilized parts of a jurisdiction where development might otherwise not occur. TIF creates funding for public or private projects by borrowing against the future increase in these property-tax revenues.

     Crticisms of TIF:  Although politicians portray TIFs as a great way to boost the local economy, there are hidden costs they don't want taxpayers to know about. Cities generally assume they are not really giving anything up because the forgone tax revenue would not have been available in the absence of the development generated by the TIF. That assumption is often wrong.

     “There is always this expectation with TIFs that the economic growth is a way to create jobs and grow the economy, but then push the costs across the public spectrum,” says Greg LeRoy, author of The Great American Jobs Scam: Corporate Tax Dodging and the Myth of Job Creation. “But what is missing here is that the cost of developing private business has some public costs. Road and sewers and schools are public costs that come from growth.” Unless spending is cut—and if a TIF really does generate economic growth, spending is likely to rise, as the local population grows—the burden of paying for these services will be shifted to other taxpayers. Adding insult to injury, those taxpayers may include small businesses facing competition from well-connected chains that enjoy TIF-related tax breaks. In effect, a TIF subsidizes big businesses at the expense of less politically influential competitors and ordinary citizens.

     TIFs in Garland, Texas:  In Garland, Texas, a TIF District board of directors (TIF Authority) chooses how to spend the money captured in the TIF fund. TIF funds can only pay for a specific menu of eligible projects. When the TIF expires, all assessed value revenues are paid to the respective taxing districts like before the TIF was designated. The illustration below depicts how a TIF district works.

     TIF-eligible Projects in Garland:

• Project costs related to the cost of buildings, schools or other educational facilities owned by or on behalf of a school district, community college district or other state political subdivision.
• Railroad or transit facilities.
• Affordable housing.
• Remediation of conditions that contaminate public or private land and buildings.
• Preservation of the façade of a private or public building.
• Demolition of public or private buildings.
• TIF administration fees.
• Financing costs, including interest and payments to TIF bond holders.
• Land acquisition, capital costs and interest before and during construction related to the acquisition and construction of public works of public improvements (streets, streetscape enhancements, utility infrastructure, alleys, sidewalks, parking garages).
• Land assembly costs for projects listed above.

Sources:

http://en.wikipedia.org/wiki/Tax_increment_financing

http://reclaimdemocracy.org/articles/2006/tax_increment_financing.php

http://www.ci.garland.tx.us/gov/lq/pcd/ed/partners/financing.asp

HUD Mortgage Guarantee Programs:

     The HUD 184 loan guarantee program:  Much of the land in Indian country — some 55 million acres — is held in trust by the federal government.  In enacting the Housing and Community Development Act of 1992 established a Native American Housing Loan Guarantee Program — Section 184 of the act— administered by the Department of Housing and Urban Development (HUD) through its Office of Native American Programs (ONAP), Offi ce of Loan Guarantee, based in Denver. As of September 30, 2001, the Office of Loan Guarantee had underwritten 864 loans valued at $84.7 million.

     Through this program, HUD guarantees the mortgage loans made by approved lenders to eligible borrowers. The loan guarantee assures the lender that its investment will be repaid in case of foreclosure. Loans are originated and serviced by supervised lenders approved by ONAP.

     Rural Housing Program Through HUD:  The Section 502 Guaranteed Rural Housing Loan Program is designed to serve rural residents who have a steady, low or modest income, and yet are unable to obtain adequate housing through conventional financing. These loans enable low and moderate-income rural residents to acquire modestly priced housing for their own use as a residence through the purchase of a new or existing dwelling or the purchase of a new manufactured home. In this variation of the Section 502 program, RHS does not make a loan directly to an eligible borrower, but guarantees a loan made by a commercial lender. lender. This guarantee substantially reduces the risk for lenders, thus encouraging them to make loans to rural residents who have only modest incomes and little collateral.

Sources:

http://www.occ.gov/static/community-affairs/community-developments-newsletter/Fall-5.pdf

http://www.hud.gov/offices/cpd/economicdevelopment/programs/rhed/gateway/pdf/502_GuaranteedLoans.pdf

https://www.cfda.gov/?s=program&mode=form&tab=step1&id=84b4059a4f6213e9237563b343f9fbab

Community Development Block Grants:

     What is CDBG?:  The Community Development Block Grant (CDBG) program is a flexible program that provides communities with resources to address a wide range of unique community development needs. Beginning in 1974, the CDBG program is one of the longest continuously run programs at HUD. The CDBG program provides annual grants on a formula basis to 1209 general units of local government and States.

      Primary CDBG Objective:  The primary objective of the CDBG program is to develop viable communities by providing decent housing and a suitable living environment and by expanding economic opportunities. These grants primarily serve persons of low- and moderate-income, as the State must ensure that at least 70 percent of its CDBG grant funds are used for activities that benefit these persons.

    

     CDBG In Action in Springfield:  The above picture shows the results of the CDBG program in Springfield.  The city’s Community Development Block Grant Small Business Assistance Program resulted in 50 jobs created or retained and nine revamped facades on commercial buildings.  The city made $340,000 in grants and low-interest business loans between 2010 and 2012 to 32 businesses, including nine new businesses and 23 existing businesses, according to a news release.

There were grants of up to $10,000 per storefront for exterior improvements like signs, doors, windows and paint and loans of up to $25,000 for equipment and interior renovations. The property must be in a low-income neighborhood the federal government has deemed eligible for Community Development Block Grants and businesses must create or retain at least one job for each $10,000 and they must remain in Springfield for a minimum of three years after the grant is made.

Sources:

http://portal.hud.gov/hudportal/HUD?src=/program_offices/comm_planning/communitydevelopment/programs

http://www.nccommerce.com/cd/investment-assistance

http://www.masslive.com/business-news/index.ssf/2012/04/springfield_cdbg_money_spruces_up_storef.html

Low Income Housing Tax Credits:

     What's a LIHTC?:  The Low Income Housing Tax Credit (LIHTC - often pronounced "lie-tech", Housing Credit) is a dollar-for-dollar tax credit in the United States for affordable housing investments. It was created under the Tax Reform Act of 1986 (TRA86) that gives incentives for the utilization of private equity in the development of affordable housing aimed at low-income Americans. LIHTC accounts for the majority - approximately 90 percent - of all affordable rental housing created in the United States today.

The credits are also commonly called Section 42 credits in reference to the applicable section of the Internal Revenue Code. The tax credits are more attractive than tax deductions as they provide a dollar-for-dollar reduction in a taxpayer's federal income tax, whereas a tax deduction only provides a reduction in taxable income. The "passive loss rules" and similar tax changes made by TRA86 greatly reduced the value of tax credits and deductions to individual taxpayers. As a result, almost all investors in LIHTC projects are corporations.

     How Tax Credits Are Allocated:  Each year, the IRS allocates housing tax credits to designated state agencies-typically state housing finance agencies - which in turn award the credits to developers of qualified projects. Each state is limited to a total annual housing tax credit allocation of $1.75 per resident, with only the first year of the 10 years of tax credits counting against the allocation. 

     States allocate housing tax credits through a competitive process. The state allocating agency must develop a plan for allocating the credits consistent with the state's Consolidated Plan. Federal law requires that the allocation plan give priority to projects that (a) serve the lowest income families; and (b) are structured to remain affordable for the longest period of time. Federal law also requires that 10 percent of each state's annual housing tax credit allocation be set aside for projects owned by nonprofit organizations.  The credit amount for a project is calculated based on the costs of development and the number of qualified low-income units, and cannot exceed the amount needed to make the project feasible. 

     A State has two years to award housing tax credits to projects. Tax credits not awarded in a year may be carried forward to the next year. If a state is unable to use its tax credits over a two-year period, they are returned to a national pool for re-allocation. If a state awards tax credits to a project that is not completed and the tax credits are returned, the state has an additional two years to award the tax credits to another project within that state.

Sources:

http://en.wikipedia.org/wiki/Low-Income_Housing_Tax_Credit

http://www.hud.gov/offices/cpd/affordablehousing/training/web/lihtc/basics/allocating.cfm

http://www.youtube.com/watch?v=XxwpoLztx70

Rehabilitation Tax Credits

     Often times rehabilitation of a property can provide a renewed feel to the surrounding block and community at large.  In an attempt to encourage such renewal, Rehabilitation Tax Credits are offered by government entities.

     How Credit Applies:  The rehabilitation credit applies to costs you incur for rehabilitation and reconstruction of certain buildings. Rehabilitation includes renovation, restoration, and reconstruction. It does not include enlargement or new construction.

Generally, the percentage of costs you can take as a credit is 10% for buildings placed in service before 1936, and 20% for certified historic structures.

     Rehab Credits in Virginia:  To encourage the adaptive reuse of existing buildings, Virginia offers substantial relief from real estate taxes in Virginia is available to property owners who rescue, repair and rehabilitate qualified older buildings. Subject to the following qualifications, real estate tax is deferred on the value of the improvements to residentil and commercial property.

           Residential Property

Residential includes single-family dwellings, duplexes, multi-family dwelling units, & townhouses; and 1) Structure be no less than fourty (40) years of age; 2) If structure is assessed at less than $10,000, said structure can be demolished if not a registered Virginia Landmark or is determined by the Department of Historic Resources not to have contributory significance if in a registered historic district. If demolished, the replacement structure must be a single-family residence with an assessed value of at least 120% of the median value of other dwelling units in the neighborhood; 3) Assessed value must be increased by at least forty (40) percent, be designed for residential use after completion of improvement, and be improved without increasing the number of living units; and 4) Increasing the total square footage of structure will have no restrictions on size, as long the increases comply with City zoning ordiances.

Commercial real property

     Commercial property qualifies for the tax credits if:  1) It is not less than twenty-five (25) years of age; 2) Can be improved so as to increase the assessed value of the structure by no less than sixty (60) percent; 3) Can be improved without increasing the total square footage of such structure by more than one hundred percent (100%); and, 4) Can be designed for and suitable for commercial or industrial use after completion of such improvement.

Sources:

http://www.irs.gov/businesses/small/industries/article/0,,id=97599,00.html

http://www.roanokeva.gov/85256a8d0062af37/vwContentByKey/N255RS9L166CFIREN

http://www.youtube.com/watch?v=7wdxaYaIE8I

Community Development Entities

     What Is a CDE?:  The investment vehicle for the NMTC is a Community Development Entity (CDE). An organization must be certified by the CDFI Fund as a CDE to be eligible for NMTCs. Two important considerations for certification are that the organization must have a track record and demonstrate accountability to the community. After receiving certification, a CDE may then apply for credits through an annual competition conducted by the CDFI Fund. CDEs successful in receiving an allocation must have a strong business plan, good management, proven track record of working with investors and proposed projects that will have a substantial impact in low-income communities. In March 2003, the CDFI Fund made its first allocation of $2.5 billion in NMTCs to a total of 66 CDEs. Over 300 Community Development Entities (CDEs) applied in the first round, requesting $26 billion in credits.

     How CDEs Work:  Typically, tax credits and incentives come after a company has had significant up-front cash outlays. While tax credits and incentives are valuable offsets against total project costs, what if you could reduce total project costs overall? By reducing the cost of debt interest, thereby limiting cash outflows for the project itself, a project is more likely to survive the first few years.

     Capital market rates are computed on a project-by-project basis utilizing multiple factors, including but not limited to credit score, type of financing, and location of the project. The NMTC is designed to provide eligible lenders an incentive to offset the cost of doing business in low-income communities (LICs).

     Since its inception in December 2000, the U.S. Congress has promoted the NMTC as an economic development catalyst for LICs across the country. It is designed to provide a federal tax credit to investors of CDEs, which in turn utilize investor funds to make below-market financing available in LICs.

     To offset the reduced return rate and risk factors associated with these projects, eligible CDE investors receive a 39 percent tax credit over a seven-year allowance period. Thus, the credit subsidizes the investor’s risk and provides a significant return for pursuing LIC projects.

     Requirements For CDE Certification:  To become certified as a CDE, an organization must submit a CDE Certification Application to the Fund for review. The application must demonstrate that the applicant meets each of the following requirements to become certified:

     1) Be a legal entity at the time of application;

  
     2) Have a primary mission of serving LICs; and

     3) Maintain accountability to the residents of is targeted LIC.

Sources:

http://www.frbsf.org/publications/community/investments/0308/article1a.html

http://www.areadevelopment.com/taxesIncentives/dec09/new-markets-tax-credit-incentive1103.shtml

http://www.cdfifund.gov/what_we_do/programs_id.asp?programID=10

New Market Tax Credits
Incentivise Adaptive Reuse   

     The NMTC Program, established by Congress in December of 2000, permits individual and corporate taxpayers to receive a credit against federal income taxes for making qualified equity investments in investment vehicles known as Community Development Entities (CDEs). The credit provided to the investor totals 39 percent of the cost of the investment and is claimed over a seven-year period. Substantially all of the taxpayer's investment must in turn be used by the CDE to make qualified investments in low-income communities. Successful applicants are selected only after a competitive application and rigorous review process that is administered by the CDFI Fund.

     Through calendar year 2010, the CDFI Fund made 594 awards totaling $29.5 billion in tax credit allocation authority. The CDFI Fund anticipates announcing the availability of another $3.5 billion of allocation authority to CDEs later this spring. The NMTC Program is currently set to expire in 2011, but the Administration has asked Congress to extend the Program with a $5 billion authorization for 2012.

     NMTCs So Popular They Have Lobbyists: The New Markets Tax Credit (NMTC) Coalition is a national membership organization founded in 1998 to advocate on behalf of the NMTC program. The Coalition, which now includes more than 150 members, is managed by Rapoza Associates, a public interest lobbying, policy analysis and government relations firm located in Washington, DC that specializes in providing comprehensive legislative and support services to community development organizations, associations and public agencies.

The Coalition serves its members in the following capacities:

• Worked with the Clinton Administration to design the Credit and lobbied Congress for its enactment;
• Collaborated with the Bush Administration to launch the program including the original rules, regulations and application;
• Build bipartisan Congressional support for the Credit as an efficient market-based incentive for community revitalization;
• Lobbied successfully for four extensions of NMTC totaling $17 billion in additional credit authority;
• Conducted annual surveys of Community Development Entities and published 7 annual NMTC Progress Reports, state profiles of NMTC projects (50 Projects – 50 States), and reports on the overall effective ness of the credit (10th Anniversary Report);
• Convened two annual Washington conferences where Coalition members have a chance to brief policymakers on the NMTC.
• Responded to Treasury and IRS’s requests for comments and technical feedback on the Credit; and
• Served as the eyes and ears of the NMTC industry in Washington, alerting members to the latest developments with regular emails via NMTC Bulletins.

     The Coalition also manages the Investor Advisory Committee (IAC), co-chaired by Gary Perlow and Mike Novogradac, as a venue for investors to discuss NMTC issues and encourage ongoing policy discussions between CDEs and investors.

      NMTCs Create Jobs in Philadelphia:  Building America CDE Inc. allocated $5 million in new markets tax credits (NMTCs) for Paseo Verde, a $48 million mixed-use development in a distressed area of Philadelphia, Pa. Jonathan Rose Companies and Asociación Puertorriqueños en Marcha are developing the transit-oriented community. The development, situated on 1.9 acres near Temple University's Regional Rail train station, will feature 120 units of affordable workforce housing and 30,000 square feet of commercial and retail space. Paseo Verde will also include a primary health-care facility and a social services office. The project, which is expected to achieve LEED Gold certification, is expected to generate 150 union construction jobs, create 42 new permanent jobs, and preserve another 39 jobs.

Sources:

http://cdfifund.gov/news_events/CDFI-2011-05-New-Markets-Tax-Credit-Named-Among-Top-25-Programs-In-The-Innovations-In-American-Government-Award-Competition.asp

http://nmtccoalition.org/2012/02/about-the-coalition/

http://www.novoco.com/journal/2012/04/briefs_nmtc_201204.php