Financing and Capital Markets

Fueling Community Development Through New Markets Tax Credit

Fueling Community Development Through New Markets Tax Credit
 

Graniteville, South Carolina, hit a rough patch in 2005 when a devastating train crash led to the closure of a local textile mill that employed 2,000 people. The small community of roughly 2,600 people needed new job opportunities, but few private developers were willing to invest.

Enter, a federal incentive called the New Markets Tax Credit (NMTC). The program, operated by the U.S. Treasury Department, encourages lenders to invest in economically distressed communities. In Graniteville, the tax credit spurred the development of Recleim, an appliance recycling facility that opened in the retrofitted former mill in 2015. Once it’s fully staffed in 2016, the “next-generation recycling” center will employ 200 people, according to Pete Davis, president of project developer Peachtree Investment Solutions.

Davis says the NMTC wasn’t just beneficial in the creation of Recleim. Without the credit, he says, “it would have been impossible” to get the project off the ground in Graniteville.

Strengthening communities

The tax credit facilitates financing for a variety of projects, from housing developments to community centers to manufacturing plants. For the various parties involved, it’s a “win, win, win,” according to Eric Rosen, senior vice president and NMTC program director for SunTrust Community Capital.

Since Congress authorized the incentive in 2000, the Treasury Department’s Community Development Financial Institutions Fund has allocated $43.5 billion to projects across the country, creating 600,000 jobs.

How it works

Each year, the Treasury identifies the amount of credits to be awarded; the amount allocated in 2014 totaled $3.5 billion. Through a competitive process, the funding is allocated to various Community Development Entities (CDEs). CDEs—which act as investment intermediaries—are often affiliates of mission-driven organizations, private financial institutions, for-profits or government entities, according to the New Markets Tax Credit Coalition.

Once it receives tax credit allocation, the CDE raises private-sector funds to invest in projects in areas suffering from high unemployment and poverty.

‘The most dire need’

The coalition reports that between 2003 and 2013, over 70 percent of NMTC financing went to communities with poverty rates above 30 percent, median incomes below 60 percent of the area median income or unemployment rates 1.5 times the national average.

CDEs such as SunTrust Community Capital seek out projects that wouldn’t be funded if not for the program.

“We try to identify those communities that are in the most dire need, and then speak with the community stakeholders and residents to determine [how] to address those issues,” Rosen says.

The program benefits both communities and private-sector investors. Those investors (typically banks or other financial services corporations) can claim the tax credits, which total 39 percent of the cost of the investment (distributed over seven years).

Because it’s a versatile program, financing is customized for each transaction, Rosen says—there’s no one “cookie cutter approach.” Davis notes that many projects feature multiple CDEs. Recleim, for example, was developed through a partnership between Peachtree and two CDEs: SunTrust Community Capital and AMCREF Community Capital, with each contributing $10 million to the $40.6 million project, Davis says. Typically, the NMTC funds about a quarter of the total cost, with borrowed funds, owner equity or grants making up the rest of the financing.

Long-term impact

The Recleim facility was a “shot in the arm” for Graniteville’s economy, Rosen says.

Even months after the facility opened, Davis says residents still approach him to say how thankful they are to have the business in town.

“It’s a unique project in that you don’t often get a chance to go into a community that has the acute need that Graniteville has,” Davis says, “and provide not only jobs, but provide hope.”

To learn more about how your local government or municipality can better serve the community by utilizing tax credits and other financial resources, contact the SunTrust expert in your area.

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