Originally published and featured in the Novogradac Journal of Tax Credits COVID-19 Issue
Using tax credits to support Main Street-oriented real estate presents a unique set of challenges and opportunities. Yet, the financial and community benefits generated by these developments provide vital goods and services and support small businesses within our country’s most historically underinvested communities.
To better support these efforts, many community development entities (CDEs), such as the National Trust Community Investment Corporation (NTCIC), elect to set aside a portion of their new markets tax credit (NMTC) allocation for “innovative” qualified low-income community investments (innovative QLICIs)–specifically, projects that can use $2 million or less in NMTC allocation within their capital stack.
In collaboration with our affiliate the Main Street America, NTCIC has deployed an innovative strategy for meeting the needs of Main Street-scale projects since our inception 20 years ago. We have determined what tools are available, how financing opportunities can work together, and when to assemble a knowledgeable support system to get to the finish line.
To aid Main Street revitalization using innovative QLICIs, NTCIC created the Irvin Henderson Main Street Revitalization Fund. This opportunity combines benefits from the historic tax credit (HTC) and the NMTC to preserve and revitalize Main Street community assets in disadvantaged areas while providing the maximum community impacts. Especially in these days of unprecedented change–as Main Street communities face the enormous disruption of COVID-19–we revisit our toolkit for success and how we anticipate future modifications to address the pandemic.
Know What You’re Working With
While all tax credit-financed real estate developments come with a typical assortment of challenges, Main Street-scale projects, which typically have a total development cost of less than $10 million, require additional considerations. This size can exacerbate complexities around transaction costs, leverage sources, and overall investor appetite.
Yet, these types of deals can be just as complicated and require equally experienced legal and accounting experts as larger-scale developments to see the deal through to financial closing. The same number of transaction and legal documents are often required regardless of size. Additionally, fixed transaction costs, such as ongoing tax/audits, construction monitoring, and reasonableness reports, may disproportionately reduce the net benefit of tax credits for smaller transactions.
The development’s size will also affect investor appetite and interest. A project may find it challenging to secure a “typical” investor that can use the credits. Investors with significant tax appetite typically prefer larger developments, as the time involved in originating, closing and asset-managing transactions is often the same regardless of size. Investors with less robust appetite often seek more straightforward transactions or may have less experience in combining multiple credits.
Because of this, Main Street-oriented projects will often need to partner with regional banks, community-based lenders or the developers themselves. However, though these investors will have the ability to monetize the credits generated by the project, they may not be as well versed in the intricacies of complex financial transactions as a more established investor. An experienced CDE or tax credit syndicator will be critical for success. Moreover, if a project can “twin” credits within the same structure, their combined benefits can help to offset the size and transaction challenges, fill the financing gap and allow for more robust and meaningful outcomes to be generated for the community.
The Irvin Henderson Main Street Revitalization Fund provides up to $2 million in NMTCs financing by using the HTCs as the leverage source. This process maximizes the benefits of both credits within the transaction and helps offset the transaction costs. The fund maximizes benefits by connecting developments to an experienced team of real estate professionals that understand the needs of small deal financing.
Partnerships are Key
One of the most substantial assets Main Street-oriented real estate development properties can have is a knowledgeable, flexible, and supportive network of partners. Internal and external partners help elevate a development’s mission and message, manage and offset costs, and ensure lasting benefits that target communities in need.
Our network, with affiliates such as the National Trust for Historic Preservation and Main Street America, helps us identify projects to support through our specialized fund. Once a project has been successfully identified, our established relationships with highly experienced tax credit attorneys and accountants who have supported our prior transactions with over $6 billion] in total development costs help to control transaction costs.
For example, NTCIC recently supported the revitalization of the Shenandoah Hotel, a historic hotel and the most prominent structure located in downtown Martinsburg, W. Va. The building was in complete disrepair after several attempts at its renovation. Still, the city and local stakeholders viewed the building as a marquee project for its ongoing community revitalization efforts and the space’s potential to increase available housing options downtown.
Coordinating with the city and Mainstreet Martinsburg, the experienced HTC/NMTC project sponsors programmed project uses that would support city initiatives and the strategy of Main Street Martinsburg.
The adaptive reuse is now underway. Once complete, the new space will be home to 38 mixed-income residential units, as well as several locally owned businesses. What’s more, the project sponsors and Main Street Martinsburg signed a community benefits agreement that requires all potential commercial tenants to be approved by Main Street Martinsburg, ensuring and businesses supported by the project are consistent with the Main Street transformation strategy.
Different Communities, Different Needs
Every Main Street-oriented real estate project is different and requires its own process. These unique needs require a flexible financing option and an equally flexible team. Whether it’s helping to create a commercial corridor out of an old industrial area or transforming an abandoned neighborhood school into a nonprofit hub and community space with affordable rental housing, we recognized that Main Street community assets might, in fact, be located outside of traditional Main Streets.
For example, one of our most recent investments was in the Chandler Food Incubator, a historic warehouse building located on a street in Buffalo, N.Y., that was once home to many dilapidated industrial buildings and vacant lots. The project now houses 10 commercial kitchen spaces at flexible lease rates to small, minority- and women-owned businesses. It is a coordinated effort by many community stakeholders to create a commercial corridor out of the underused industrial section of town. Once complete, the corridor will include office, restaurant, and retail space for local businesses.
Businesses, both large and small, have been affected by the COVID-19 economic crisis and shelter-in-place measures. While some businesses have been able to pivot to prevent total shutdown, it is not always easy for local main street businesses to make such drastic changes. Additional financial assistance options are and will be vital to the survival of our nation’s small business community.
From March 25 to April 6, our partner, Main Street America, conducted an online survey to assess the COVID-19 impact on small businesses located within its network of more 1,600 commercial districts across the United States. Survey results indicate that, while 48.9 percent of businesses have been in operation for more than a decade, if the business disruption continues at the current rate, nearly two-thirds of total respondents would be at risk of closing permanently within the next five months.
The survey data highlights critical gaps in support for businesses in need, such as insufficient technical support funding to Small Business Development Centers (SBDCs), as well as partner organizations of SBDCs, such as local Main Street Programs and Chambers of Commerce.
According to the results from the Main Street America survey, “The CARES Act allocates $265 million to assist [SBDCs] in providing programming and educational training to small businesses and entrepreneurs. With potentially 7.5 million small businesses severely impacted by COVID-19, this represents one center for every 6,200 severely impacted small businesses. This also doesn’t take into account that many areas of the country are underserved by SBDCs. Given the potential for closures and the need to encourage entrepreneurship during the recovery, this seems woefully underfunded. To truly address the needs of small businesses, SBA needs to expand resources to SBDC support partners like Main Street Programs, Chambers of Commerce, and local economic development organizations as integral players to both sustaining small businesses and ultimately the needed recovery.”
Partner organizations of SBDCs, such as Main Street Programs, Chambers of Commerce, and local economic development organizations, are integral players in small businesses, and financial assistance through the NMTC incentive could provide an opportunity for support. Innovative QLICIs can be used to assist these organizations by providing expanded space for programming or affordable retail spaces in downtowns. Whether they are direct sponsors for a project or working closely with developers like the Shenandoah, or in a formal partnership with a developer like the Chandler Food Incubator, real estate development can still play an essential role in supporting main street businesses.
Sustaining small businesses and encouraging entrepreneurship during the recovery of the current economic disruption will take partnerships, a shared mission, and innovative financing.