The Basics of Community Economic Development May 25, 2017 Presented by: Lillian Plata, Esq., MS&B Jong Sook Nee, Esq., MS&B Amelia Rideau, Esq., PNC Bank, N.A.
The Basics of Community Economic Development Access to Credit & Capital Professional Ethics & Responsibility Community & Client Participation
Access to Credit & Capital Financial Tools at a Glance Long or short term tax exemptions and abatements Market access through conduit bond issues and/or use of municipal credit Environmental Remediation Grants/Loans Direct municipal/authority loans or grants State tax credits and incentives CDBG/HOME Funds Disaster Relief Recovery Funds Federal tax credits EB-5 Immigrant Investor Program 3
Why Do We Need Incentives? Banks not extending credit Overuse of syndication complicates lending Higher DSCR requirements Higher LTV requirements Shorter terms High interest rates Guaranty requirements Project gaps significant 4
Pros/Cons Pros: creates market access for needed funds- fills gap may be less restrictive financing terms than conventional lending May be cheaper than conventional lending May provide equity or otherwise allow project to meet senior lending requirements (i.e. LTV) Cons: Requires cooperation of multiple entities with different risk profiles/lending requirements State and local incentive programs require public government action Necessitates inter-creditor issues Takes time Raises pre-development costs May require bridge funding 5
Land Tax Exemptions/Abatements New Jersey Examples: Long term (up to 30 year) PILOT for redevelopment projects based on annual gross revenue or total project cost and subject to statutory minimums and staged increases 5 year exemption for new construction or improvements to commercial, industrial, multiple dwellings- depends on municipal ordinance Under RAB law, redevelopment entity or EDA can issue bonds secured by PILOT payments- no statutory minimum or staged increase- constitutes paramount municipal lien Housing Authority Projects, Cooperation Agreement 6
Federal Tax Incentives Tax Credits: New Market Tax Credits Low Income Housing Tax Credits Historic Tax Credits 7
Federal Tax Incentives New Markets Tax Credits Created by Congress in 2000 to encourage investment in underserved areas Project must be in qualified census tract and serve low income community Credit is 39% tax credit over 7 years-financing-use of leverage structure most advantageous Tax credit investor through an investment fund makes a qualified equity investment (QEI) into a community development entity (CDE) (designated as such by CDFI Fund) who makes a loan to or investment in a qualified active low income community business (QALICB) Loan is long term, 7 years interest only, below market interest rate, flexible terms in DSCR and LTV- estimate 15-20% economic advantage over conventional 8
Federal Tax Incentives Historic Tax Credits: Certified historic structures eligible for 20% credit Application process to National Park Service Available for commercial, industrial, agricultural or residential rental Basic requirements: Must be listed on the national register of historic places, post-rehab must be income producing for 5 years substantial rehabilitation test- cost of rehab must exceed prerehabilitation cost of building- cost must exceed greater $5,000 or the building s adjusted basis rehabilitation must meet Secretary of Interior standards Credit taken against certified qualified rehabilitation expenditures as of date placed in service 10% credit for non-historic buildings placed in service before 1936 9
Federal Tax Incentives Low Income Housing Tax Credits (LIHTC) 9% competitive credit for new const and substantial rehab 4% credit for acquisition cost or if 50% project costs financed with tax-exempt bonds Must be qualified low income housing project meeting 20% units occupied by persons whose income is 50 percent or less of the area median gross income or 40/60 test IRS regulations/program restrictions for life of bonds-must be residential rental property HMFA as the issuing entity and credit allocating agency Need to use eligible basis to determine qualified basis (based on low income units)- 4% or 9% is the tax credit rate multiplied against qualified basis to determine initial allocation Eligible costs must be depreciable 10
NJ Redevelopment Financing Redevelopment Area Bonds: Local & State Authorities may issue bonds project s land tax revenue to aid community development projects General Obligation Bonds: Local & State Authorities may issue general obligation bonds to aid community development projects Revenue Bonds: Local & State Authorities can authorize revenue bonds by resolution secured by project revenues/mortgage (and can be used for site access, remediation, pre-development or infrastructure costs) Grant/Loans: Local & State Authorities may make loans to finance projects or redevelopment work, or may make capital grants if it finds that the project would not be undertaken, or undertaken in its intended scope, but for the provision of financial assistance 11
NJ State Tax Credits and Incentives Grow NJ Economic Redevelopment and Growth Grants Local grants State grants Qualified residential tax credits Mixed use parking projects Brownfields Site Remediation Program 12
Professional Ethics & Responsibility Community Development Considerations Knowing Your Client/Client Due Diligence Scope of Engagement Competitive Applications Partnerships & Corporations (GP vs. Partnership) Conflicts Pay-To-Play Restrictions* 13
Community & Client Participation Community Development Considerations Joint Venture Arrangements Public-Private Partnerships (P3s) Communications with the Community Charette Transparency to the Public Lawyer Engagement Direct Community Benefit Project Components 14
Where It s Working: Plainfield Developer acquired site with historical contamination that has remain vacant forover 16 years. The project will be undertaken in two phases which shall consist of the development of a 44,000 sq. ft. warehouse to preserve jobs and the creation of 96 new affordable housing units. Use of NMTC financing for the commercial phase, 2 Financial Agreements with City of Painfield, and potentially 9% LIHTC for the residential phase. Complications incl. tax structuring different each transaction, limitations under a 16 year old grant for environmental remediation, intercreditor issues and the competitive nature of the LIHTC. 15
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Where It s Working: Millville JV Project between Millville Urban Redevelopment Arts & Innovation Center Corporation, Cumberland County and the Cumberland County Improvement Authority New Markets Tax Credits transaction that financed construction, development, ownership and leasing of a 19,665 square foot, two-story building with approximately 49 accessory parking spaces for Cumberland County College Leveraged Sources County Bonds, County College Bonds & NJDCA Grant Facility was used for College s ceramic, visual and graphic arts program & community space 17
Where It s Working: Newark Developer compiled multiple parcels to build 6 new buildings The Teachers Village project consists of the development and construction in Newark, New Jersey, of six buildings over five neighborhood blocks including four schools occupying approximately 88,00 square feet of school space, 65,000 square feet of commercial retail space and 204 apartment units marketed to teachers on a priority basis. Project financed in three phases Use of three separate NMTC transactions with 8 different CDEs and 2 tax credit investors, a Financial Agreement with City of Newark, a RAB issued by the NJEDA used as leverage, Urban Transit Hub Tax Credits securitized by a loan used as leverage, Qualified School Construction Bonds used as leverage, loans from CRDA and BCDC, direct loans from financial institutions Complications incl. tax structuring different each transaction, multiple 18 affiliated entities, intercreditor issues
Mixed Use Project NMTC Financing 19
Summary of Considerations Tax limitations and benefits Corporate structure Size of the project Community benefits Support for the project Community Political Financial Fix your problems first Get the best team together 20
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