Examples of Community Development Financing
New Markets Tax Credits
The New Markets Tax Credit (NMTC) program is a federally-administered subsidy tool for impactful projects located within low-income communities. Strong NMTC candidates have a solid economic impact (job creation, job training, catalytic real estate development or affordable housing), strong social impact (healthcare, education, community facility or minority impact) and/or a positive environmental impact (renewable energy or green manufacturing). Unlike other programs, NMTCs can be used for a variety of project types and industries. For this reason, it can be extremely competitive. Since 2002, NMTCs have been used to support $50+ billion of impactful projects across all 50 states and several U.S. territories.
Scarlet Oak Capital’s principal has helped close more than $180 million in NMTC allocations. Working with organizations that have high-impact projects, Scarlet Oak structures deals and markets projects in pursuit of New Markets Tax Credits, which can subsidize up to 20-25% of a project’s total capital stack.
Historic Tax Credits
The Historic Tax Credit (HTC) program was first established in 1976. Since then, the federal government has expanded and made the program permanent. HTCs help finance significant rehabs of historically significant buildings, which have above-market rehab costs due to expensive factors such as mold, asbestos or lead paint. Because of the purpose and nature of HTCs, completed rehabs must conform to the historic appeal of the building. Since its inception, the tax credit has preserved more than 35,000 buildings across America, and continues to support billions of dollars of historic remediation every year. The program has been so successful that most states have adopted their own version, which can be combined with the federal program. Depending on the project, HTCs also can be combined with incentives like New Markets Tax Credits or Low Income Housing Tax Credits. This can be particularly crucial for projects in non-primary markets which have lower rents but still have significant development costs. Thanks to the Historic Tax Credit program, tens of thousands of historic buildings have been restored rather than raized.
PACE Financing
Property Assessed Clean Energy (PACE) is a financing tool that allow projects to obtain low-cost flexible debt to finance 100% of the cost of energy efficiency, renewable energy and water conservation improvements for real estate projects of all types. The PACE loan is a long-term, fixed-rate, non-recourse (after construction in completed) loan which is repaid through a special assessment levied against the property and collected with the property’s tax bill. PACE can act as a lower-cost loan, replace more expensive debt and equity sources, or help fill a financing gap. It can be stacked with bank loans and other incentive sources as well. As increased emphasis is placed on environmental sustainability and ESG Investing, PACE has seen a significant uptick in utilization in the past several years.
Low Income Housing Tax Credits
The Low-Income Housing Tax Credit (LIHTC) program was created through the Tax Reform Act of 1986 and was made permanent in 1993. LIHTC is a federal financing tool used to fund the construction and rehabilitation of low-income affordable rental housing. The program is intended to encourage the development of affordable housing by providing a subsidy that offsets the lower rental revenue from affordable housing. Without the incentive, affordable rental housing projects often do not generate sufficient profit to warrant the investment. The LIHTC program provides an upfront subsidy to low-income housing projects. Financed projects must meet eligibility requirements for at least 30 years after project completion. In other words, owners must keep the unit's’ rent restricted and available to low-income tenants for the specified time. At the end of the period, the properties remain under the control of the owner. There are multiple levels of LIHTC incentives, which can subsidize 20-40%+ of a project’s overall development cost. LIHTC can be paired with HTC and other incentives, however, there are statutory challenges with pairing it with NMTCs.
Opportunity Zones
Created in 2017, Opportunity Zones (OZ) are a location-based financing tool designed to encourage long-term investments within underserved low-income urban and rural areas. The incentive provides potential investors with tax advantages that will boost their returns by investing in designated OZs (designated by the governor of each state). OZ investors must have a realized capital gains tax liability, which is invested into a qualified OZ project. While this program does not provide a direct cash subsidy injection in the way that NMTCs, HTCs, and TIFs would, Opportunity Zones can make it easier to market and attract projects that otherwise may have a below-market return on their project.
Community Development and CDFI Loans
There are numerous Community Development Financial Institutions (CDFI) as well as socially responsible lenders, community development lenders and impact funds. Each has its own unique set of products that provide debt financing to impactful projects. These loans are mainly designed for small and mid-sized businesses. Most lenders focus on projects within distressed communities or projects led by underserved groups such as women or people of color. With an extensive network of lenders and investors, Scarlet Oak Capital leverages its relationships with hundreds of community development lenders in order to identify financing solutions that align with a project's needs, geography and impact.
Other State and Local Incentives
There are numerous state and local programs across the country. Each upholds the goals of its governing entity. Some have broader goals such as using Tax Increment Financing (TIF) to support affordable housing projects or catalytic development projects. Others can be much more specialized. For example, South Carolina’s many textile mills began shuttering in the 1970s; some remain vacant to this day. The state implemented a unique Textiles Communities Revitalization Credit program, which provides a subsidy for the revitalization of blighted and abandoned mills. This incentive has allowed private developers to take abandoned mills, often with substantial environmental or other issues and convert them into quality modern housing, offices or various other uses. This in turn improves the neighborhood and generates positive community outcomes and new tax benefits for the state and city.