Real Estate and Construction Law

Real Estate Finance

New Market Tax Credits, Part II

May 12, 2011    •    2 min read


Attorney Neil Bhagat presents a follow-up to his Introduction to New Market Tax Credits:

Recently, Bloomberg Markets Magazine published an article criticizing the use of New Market Tax Credits (NMTCs) to finance commercial real estate developments.  In particular, the article focused on the renovation of the Blackstone Hotel in downtown Chicago, which used $15.6 million in NMTCs.  While the article largely questions specific NMTC appropriations, it also raises the issue of whether more oversight is needed to ensure the program accomplishes its purpose.

Many of the criticisms of the NMTC program focus on the “census tracts” that determine where such credits can be utilized.  The census tracts combine various data that measure facts such as low median family income, unemployment rates, and family poverty rates in order to establish those locations in which NMTCs are available.  Critics of NMTCs assert that this methodology is not exact and that census data from ten years ago is not current enough to reflect gentrifying areas.  While there is certainly an argument that any type of development is critical to spurring the growth of an impoverished area, it is uncertain at this juncture when and if changes will happen in determining eligibility criteria for NMTCs.

Despite the potential need for changes with the criteria determining what areas should be eligible for NMTCs, it is clear that there is opportunity for a wide variety of projects.  While one might not think a luxury hotel qualifies for NMTCs, the fact that it is located in an area meeting the U.S. Department of Treasury’s guidelines is critical.  This should encourage developers to examine whether a location in which they are considering development might qualify for NMTCs.  Throughout Ohio, there are numerous census tracts that qualify for NMTCs, not only in Cleveland, Akron, Canton, and the larger cities, but in rural counties as well.  NMTCs were originally created to spur development in underdeveloped and underutilized areas, not only metropolitan cities.  As a result, it may be wise for a developer to conduct some research or contact an advisor in order to determine if any projects in the pipeline might qualify for NMTCs.

While conscientious of the negative publicity a luxury hotel might get for receiving tax credits, a developer, especially one in a smaller city or rural area, might consider this an opportunity.  Should the backlash against tax credits going to large developers increase, the opportunity for smaller developers who have complied with the application process may increase as well.

In Ohio, besides the NMTC program, there are a wide range of incentives available to businesses.  Some of these include the Enterprise Zone Program and Community Reinvestment Areas.  You might be surprised to learn what options are available.  For a more in-depth discussion of what areas might qualify for NMTCs and other related incentives and credits, contact attorney Neil Bhagat at [email protected] or 888.811.2825.

Check back next month for a further discussion regarding some of these possibilities and how they can save money for developers or your business.

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