The Neighborhood Homes Investment Act Helps Bridge The Value Gap In Financing For Urban Communities

The Neighborhood Homes Investment Act Helps Bridge The Value Gap In Financing For Urban Communities

Owners, investors, and lenders wishing to rehabilitate low-income properties in many urban housing markets, including Philadelphia, have faced a serious dilemma for several decades. The problem arises because the combined costs of purchasing and rehabilitating a property in certain urban areas may be greater than the resulting appraised value of the property. Fortunately, there are government programs, grants, and subsidies, like the Neighborhood Homes Investment Act (NHIA), that attempt to cover this gap between the appraised value and market value of any urban property. This gap is referred to as the appraisal gap or value gap.

The dilemma related to bridging the value gap has caused disinvestment in low-income communities across the United States. When the combined costs of purchase and development exceed the resulting value of a property, investors are reluctant to pledge capital for development.

This problem of attracting investment has contributed to the significant deterioration and depreciation of property values in Black neighborhoods in urban markets. A new report by Redfin shows that homes in Black neighborhoods are undervalued by an average of $46,000 nationwide. A neighborhood is considered “primarily black” if 50% or more of its residents are black.

In Philadelphia, homes in primarily Black neighborhoods are undervalued by an average of approximately 27% or $26,000 when compared with similar homes in primarily white neighborhoods. In Philadelphia’s primarily Black areas, the average sale price of homes is about $96,600, compared with $162,600 in primarily white areas of Philadelphia.

To stop this urban blight, some cities, nonprofit organizations, banks, and other financial institutions have offered subsidies to spur investment. Of course, there are federal and state government programs such as The Neighborhood Homes Investment Act (NHIA), which was introduced in both houses of Congress as H.R. 2143 and S. 98. The NHIA is part of the American Jobs Plan.

The Neighborhood Homes Investment Act creates a tax credit for encouraging private investment in distressed communities to increase homeownership opportunities. The goal of the NHIA is to provide an influx of capital in the single-family construction, rehabilitation, and repair of one-to-four unit family residential properties.

The value gap contributes to conditions that inhibit sustained urban growth in low-income communities. In places where it costs more to build or rehab a house than the property’s eventual sale price, owners leave and walk away from homes that are inhabitable and incapable of being refinanced or sold. A financing tool is needed to close this value gap. The tax credit offered by the NHIA may be an acceptable tool.

The significant absence of money to reinvest in distressed, low-density neighborhoods creates favorable conditions for absentee owners to convert aging homeownership housing to rental housing. These landlords exploit the residents of these communities with relatively expensive, poorly maintained rental housing, thus further diminishing the quality of life in these neighborhoods.

The lack of reinvestment capital in low- and moderate-income neighborhoods has aggravated existing racial inequalities, particularly between African-American family wealth and the wealth of every other ethnic and racial group in the country. 

The Neighborhood Homes Investment may be the first step to help alleviate these conditions and spur local development while creating jobs and better housing. It is estimated that the following benefits will occur resulting from the passage of the NHIA:

  • 25,000 homes built or rehabilitated

  • $4.25 billion of total development activity

  • 33,393 jobs in construction and construction-related industries

  • $1.82 billion in wages and salaries

  • $1.25 billion in federal, state, and local tax revenues and fees

The tax credit provided by the NHIA will:

  • improve property values,

  • increase family wealth,

  • decrease blight and abandonment in distressed neighborhoods, and

  • create more and better options for shelter.

Let’s Work Together to Develop our Communities

If you want to learn more about the Neighborhood Homes Investment Act, contact Savage & Associates. Dionne Savage can help you gain access to the benefits provided by the NHIA, New Markets Tax Credits, Low-Income Housing Tax Credits, C-PACE, Historic Tax Credits, and other vital economic development tools. To reach us by phone, call 215.880.9441 in Philadelphia, or 202.817.3941 in Washington D.C. to arrange a consultation. You can also visit our website at Savage & Associates 24 hours a day, seven days a week for more information.

How The Neighborhood Homes Investment Act (NHIA) Works

How The Neighborhood Homes Investment Act (NHIA) Works

The Neighborhood Homes Investment Act (NHIA) has been introduced in the House of Representatives as H.R. 2143 and in the Senate as S. 98. The Biden administration has included the NHIA in the American Jobs Plan to help counteract the devastating economic effects of the COVID pandemic. The NHIA creates a tax credit that encourages private investment in distressed urban housing markets. It also is available to homeowners who need to renovate their homes. The purpose of the NHIA is to maintain neighborhoods and increase opportunities for homeownership.

The National Community Stabilization Trust (NCST) has commended the Biden administration for including the NHIA in the American Jobs Plan. The NCST supports families and communities by “restoring distressed single-family homes, strengthening neighborhoods, and increasing sustainable, affordable homeownership and responsible rental.”

Here is a summary of how the NHIA works.

States allocate NHIA tax credits on a competitive basis.

The NHIA intends to inspire the influx of capital in the single-family construction, rehabilitation, and repair of 1-4 unit residential properties. First, states publish allocation plans setting standards for construction cost and quality, as well as developer fees. States allow only the tax credits reasonably needed for financial feasibility. Ten percent (10%) of each state’s allocations are set aside for nonprofit sponsors. Selection criteria for planned projects include:

  • neighborhood need for new or rehabilitated homes,

  • neighborhood revitalization strategy and impact,

  • sponsor capability,

  • likely long-term homeownership sustainability, and

  • any other state criteria.

Project sponsors raise investment capital to finance home construction and substantial rehabilitation.

Sponsors for NHIA projects would include developers, lenders, and local governments. These sponsors develop the homes or work in tandem with builders and owners.

NHIA tax credits fill the gap between the development cost and final sales price – up to 35% of the cost of construction, rehabilitation, property acquisition, demolition, and environmental remediation. If homeowners contribute to the rehabilitation of their homes, NHIA tax credits fill the gap between the rehabilitation cost and the homeowner’s contribution up to 35% of the cost of rehabilitation.

Investors claim and receive tax credits after homes are completed, inspected, and owner-occupied.

A homeowner pays the sale price with a down payment and mortgage loan. The NHIA tax credit fills the gap between the development cost and the sale price. Sponsors may use any allocated but unneeded tax credits for developing additional homes.

Here is an example of home financing under the NHIA. If the acquisition and development costs equal $200,000 and the sales price is $160,000, the NHIA tax credit would cover the value gap of $40,000. The estimated impact of investment projects like this over ten (10) years would include:

• 500,000 homes built or substantially rehabilitated

• $100 billion of total development activity

• 785,714 jobs in construction and construction-related industries

• $42.9 billion in wages and salaries

• $29.3 billion in federal, state, and local tax revenues and fees

Let’s Work Together to Develop our Communities

If you want to learn more about the Neighborhood Home Investment Act, contact Savage & Associates. We can help you gain access to the benefits provided by this new, beneficial, legislation. We can also help you utilize the benefits of New Markets Tax Credits, Low-Income Housing Tax Credits, C-PACE, Historic Tax Credits, and other vital economic development tools. To reach us by phone, call 215.880.9441 in Philadelphia, or 202.817.3941 in Washington D.C. to arrange a consultation. You can also visit our website at Savage & Associates 24 hours a day, seven days a week for more information.

Making It Easier For Communities To Use NMTCs

Making It Easier For Communities To Use NMTCs

The New Market Tax Credit Program (NMTC is an effective mechanism for overcoming the historical lack of investment in low-income communities (LICs). The NMTC Program attracts private investment that helps reinvigorate struggling local economies. How can we make it easier for low-income communities to utilize NMTCs so they may maximize those benefits they receive?

Based on limited economic resources, LICs have been harder hit by the coronavirus pandemic than other more financially stable communities. The good news is that more support is on the way to support our neediest communities with the Consolidated Appropriations Act of 2021 (the “Act”). Thus, a new round of New Market Tax Credit allocations will be available in the Fall of 2021.

The New Markets Tax Credit (NMTC) Program attracts private capital into low-income communities by providing investors with a federal tax credit. Investors who make equity investments in specialized financial intermediaries called Community Development Entities (CDEs) receive a credit over seven years that equals 39 percent of their original investment amount. A loan or investment by a CDE in a QALICB is known as a “Qualified low-income community investment” (QLICI).

More QALICBs = More Investment Opportunities

The availability of more NMTC allocations means more opportunities for growth and economic development in communities that need it most. “Qualified active low-income community businesses” (QALICBs) receive NMTC investments which they use to develop needed facilities in distressed communities. QALICBs in pursuit of NMTC-related financing should contact local and national CDEs directly for their projects to be considered and added to a CDEs pipeline. Businesses that receive NMTC-enhanced loans or equity investments must meet statutory requirements to qualify as a QALICB. The purpose of imposing these requirements is to ensure that community impact-driven businesses receive NMTC allocation while precluding certain businesses that the IRS have deemed unqualified to receive NMTC investment, such as golf courses, country clubs, massage parlors, hot tub facilities, tanning salons, casinos, and carry-out liquor stores.

Examples of QALICBs that have received NMTC allocation include several of the following: soup kitchens, hotels, shopping malls, restaurants, nonprofit theatres, student housing, mixed-use facilities, community facilities, research facilities, and charter schools. Many of these transactions have allowed QALICBs to create new full-time and part-time jobs in the communities with the most need.  

Let’s Work Together to Develop our Communities

At Savage & Associates, we take great pride in our ability to help our QALICB clients structure creative and cutting-edge transactions. We can also help your business meet the requirements for becoming a QALICB. Dionne Savage can help you gain access to New Markets Tax Credits, Low-Income Housing Tax Credits, C-PACE, Historic Tax Credits, and other vital economic development tools. At Savage & Associates, we help clients meet the requirements to qualify as a QALICB so they may successfully access NMTC allocations. Savage and Associates help clients utilize the NMTC program to create critical economic change in our communities.

If you have any questions about New Market Tax Credits or any other development financing program, call 215.880.9441 in Philadelphia, or 202.817.3941 in Washington D.C. to arrange a consultation. You can also visit our website at Savage & Associates 24 hours a day, seven days a week for more information.

Where Do NMTC Projects Go?

Where Do NMTC Projects Go?

As we consider the overwhelming success of the New Markets Tax Credit (NMTC) Program, we are compelled to ask certain questions: Where are NMTC projects located across the country? Are projects being targeted toward communities with the greatest, particularly during these unprecedented times of a pandemic and an economic downturn for many communities?

Through the most recent year that data exists (2017), there were 5,746 NMTC projects in 3,654 census tracts. NMTC projects across the US, in terms of dollars per capita for low-income communities, are located primarily in the Northeast, Northwest, and some places in the South and northern Midwest.

America’s fifty largest cities have fared well under the NMTC Program. While these cities have 20 percent of the eligible population, they have received 41 percent of total investment and 33 percent of projects. Baltimore has received the most NMTC investment in terms of total project cost per eligible population.

From the inception of the program through 2017, Pennsylvania received 174 NMTC projects and QLICIs of over two billion dollars or $386 per member of the eligible population. Over this same period, Philadelphia received approximately $974 million of QLICI investment for 65 projects.

To ensure that the NMTC Program sparks investment and economic development in communities that are struggling economically – census tracts with high poverty rates or low median incomes – NMTC Program has certain criteria to make certain that the communities with the greatest needs have access to get the investments necessary to deliver revitalization.

[The current data suggest that NMTC projects located in neighborhoods that, relative to eligible census tracts that did not receive NMTCs, tend to have lower median incomes, higher poverty rates, and larger numbers of people who are nonwhite. Those communities in the U.S. that are socioeconomically disadvantaged in the country receive the most NMTCs. Metropolitan areas receive more NMTC project dollars per capita than rural or nonmetropolitan areas because they have the greater need.

To be eligible for NMTCs, census tracts must be located in “low-income communities” (LICs) that meet one of the following criteria. The CDFI Fund also designates a subset of tracts and investment purposes as having greater investment needs and therefore eligible for NMTCs.

  • The tract has a poverty rate of at least 20 percent.
  • If the tract is located within a metropolitan area, the median family income for the tract does not exceed 80 percent of statewide median family income.
  • If the tract is located within a metropolitan area, the median family income for the tract does not exceed 80 percent of the greater of the statewide median family income or the metropolitan area median family income.
  • The tract has a population under 2,000, is contiguous to one or more low-income communities, and is within an empowerment zone.
  • A tract is in a “high-migration county” (defined as a county with net out-migration of at least 10 percent when comparing the latest census to two decades before), and it does not exceed 85 percent of statewide median family income.

The NMTC program provides a great amount of flexibility related to the purpose and type of project for which an NMTC allocation is applicable. QALICBs may use NMTC loans and equity to finance equipment, for business operations, or non-residential real estate projects. Although no type dominates the NMTC landscape, the most common types of projects are those in the following areas:

  • retail
  • manufacturing/industrial
  • mixed-use
  • health care
  • office
  • school

Let’s Work Together to Develop the Northeast and Philadelphia!

The financing of qualified businesses with NMTCs is complex. At Savage & Associates, we take great pride in our ability to help our clients structure creative, cutting-edge transactions that overcome market challenges, especially those presented by unforeseen events like the pandemic. These innovative transactions ensure that as much allocation as possible is generated from NMTCs to provide optimal effects to qualified active low-income community businesses. Savage & Associates  prepare our clients so that you they are in the best position to engage in community development and transformation through the NMTC program.

If you have any questions about New Market Tax Credits or any other development financing program, call 215.880.9441 in Philadelphia, or 202.817.3941 in Washington D.C. to arrange a consultation. You can also visit our website at Savage & Associates 24 hours a day, seven days a week for more information.

NMTC Allocation is Expected Soon – Are you Shovel Ready? If Not, Savage & Associates Can Help You

NMTC Allocation is Expected Soon – Are you Shovel Ready? If Not, Savage & Associates Can Help You

I always advise my clients that being “shovel-ready” is essential to attract qualified community development entities (CDEs) to deploy their NMTC allocation into their projects.  Simply put, CDEs have a timetable to manage and deploy their NMTC allocation.  It is expected that the CDFI Fund will announce the next round of allocation recipients very soon. 

After the CDE receives its NMTC Allocation and closes out its NMTC Allocation Agreement with the CDFI Fund, it will be prepared to make equity investments or loans to QALICBs. No matter how impactful your project is, other projects are just as impactful and may be closer to closing than your project.  Therefore, you need to be as prepared as possible. As we inch closer to the announcement, my role as a New Market Tax Credits attorney is to prepare my clients for the process ahead while working with them every step of the way until we achieve a successful NMTC closing. To receive an equity investment or a loan from a CDE, you must be a QALICB.  

The NMTC Program assists businesses in low-income communities by providing them access to financing with loan terms that are flexible and affordable. Typically, 94 to 96% of NMTC investments involve more favorable terms and conditions than those usually offered on the market. These flexible terms may include longer maturities with lower interest rates, origination fees, and debt coverage ratios.

Once you confirm that you are indeed a QALICB next you need to place yourself in the best position possible so a CDE will consider you as the potential recipient of its precious NMTC allocation. Being “shovel ready” will have significant weight when a CDE makes its final decision on how to deploy its NMTC allocation.  You may think that you are prepared but it is my job to ensure that you are fully prepared.

Show CDEs that you are “Shovel-Ready” with the following actions recommended for optimum success:

Finalize All Term Sheets

All project financing should be reflected by a signed term sheet. Any term sheet should contain a detailed summary of the fees and expenses of the proposed financing. Because different lenders will require different types of collateral, the term sheet should describe the type of collateral sought by the lender. The most crucial term sheet is the NMTC Allocation term sheet that shows your project may receive NMTC allocation. 

Hire an NMTC Accountant and Prepare Draft Projections

The CDE, lenders, and investors will request a draft of your NMTC accountant-prepared projections before closing calls begin. These projections provide an overall summary of your transaction from a financial perspective. Along with other relevant financial information, the projections provide the CDE and lenders with reasonable assumptions about the project. The projections also outline the projected net operating income and the debt of the QALICB (including the NMTC loan and any other debt of the QALICB) and whether the NMTC loan is capable of being repaid or refinanced upon maturity.

File and Seek Approval of Your Architectural Plans & Obtain Your Permits

The local authorization to proceed with construction is essential. A CDE will typically not close an NMTC transaction without a building permit. Remember, obtaining the necessary building permits is not a one-step process. Typically, there are multiple steps and other permits that must be acquired before the building permit application may be submitted and obtained. Working with architects and engineers that are knowledgeable about the process for obtaining permits in your area will help expedite the overall process. The procedures for any sign-offs or approvals that require the longest lead time should be initiated as soon as possible.

Organize Pre-Incurred Expenses

The efficient and comprehensive organization of all pre-incurred expenses cannot be overemphasized. A spreadsheet of all the expenses incurred to date should be kept with expenses categorized by the entity incurring the expense, the date the expense was incurred, and the purpose of the expense. 

Only expenses that have been incurred 24-months before the NMTC closing are acceptable for reimbursement from NMTC loan proceeds. Thus, any significant closing delays may cause expenses to lose their status as compensable and they will no longer be available for reimbursement. Time is therefore of the essence since you want to preserve the maximum amount of reimbursable expenses.

It is an excellent idea to create a dropbox file to organize and maintain expenses and other organizational documents. This provides a well-organized collection of information that will be easy to share with lenders. Canceled checks may be kept here.

Because the actual borrowing entity may not yet have been formed while you are seeking NMTC allocation, it is acceptable that expenses may be incurred by the sponsoring entity. This will require a Reimbursement Agreement to allow the expenses to be attributable to the QALICB and reimbursed at the NMTC closing.      

Focus on Your Community Impact and Benefits

NMTCs are all about the impact the credits have on the community. Demonstrating the number of new full-time, part-time, and construction jobs that will be created by the project is critical.  You should also highlight unique programs that will be provided to the community. For example, a youth cooking program or a nutritional eating class once per month.  At closing, you will be required to execute a Community Benefits or Community Impacts Agreement that will hold you accountable for the community impacts, i.e., benefits, that you intend to provide over the term of the NMTC loan.  

Whether you are “shovel-ready” or still have a few more items to finalize, we can help.  Please contact us with any questions regarding your NMTC transaction, Savage & Associates is here to help you.

Let’s Work Together to Develop our Communities

Savage & Associates is an Economic Development Law Firm.  We provide sophisticated legal and business advice to those who seek to be agents of change and develop disfranchised communities. Whether you are a developer, investor, nonprofit, or entrepreneur, in tandem with our legal expertise, we can transform low-income communities. While passion is a requirement of success, so is capital. Our firm negotiates creative, cutting-edge transactions to help you obtain the resources necessary to build businesses, leverage investments, create jobs, and spark economic activity.

If you have any questions about New Market Tax Credits or any other development financing program, call 215.880.9441 in Philadelphia, or 202.817.3941 in Washington D.C. to arrange a consultation. You can also visit our website at Savage & Associates 24 hours a day, seven days a week for more information. At Savage & Associates, we focus on innovative financing tools like New Market Tax Credits, Low-Income Housing Tax Credits, C-PACE, Historic Tax Credits, and other vital economic development tools.

Recommended Regulatory Changes That Will Strengthen NMTCs – Loan Mods

Those who support the NMTC program strongly believe that further guidance on certain regulatory issues, including modification of qualified low-income community investment (“QLICI”) loans, is necessary to both increase and sustain the effects of NMTCs on low-income communities. The COVID-19 pandemic has caused unprecedented change which has resulted in the necessity to modify QLICI agreements to correspond to and meet the challenges of such unexpected change.

The result of such additional guidance would make the NMTC program even more effective in providing much-needed economic growth in communities throughout America. In today’s blog, I elaborate more on these recommendations.

One recommended change is to Treas. Reg. §1.1001-3, with proponents suggesting the temporary suspension of this regulation as it applies to modifications of QLICIs during the calendar years 2020 and 2021 primarily because of the effects of the coronavirus pandemic. Also, those who work with the NMTC program believe that the IRS should issue further guidance on certain matters relevant to loan modifications.

Many industry participants and NMTC proponents believe that there is a key distinction between a significant modification under Treas. Reg. §1.1001-3 and an amount received under Treas. Reg. §1.45D-1(d)(2). The distinction is Treas. Reg. §1.45D-1(d)(2) is intended to refer to actual cash or property repayments of QLICI loans, while Treas. Reg. §1.1001-3 is intended to address deemed tax consequences when material terms of a loan are modified.

Therefore, it is further recommended that the IRS publish a notice that confirms that a significant modification to a QLICI loan does not constitute any “amounts received” related to repayment of a QLICI loan for purposes of Treas. Reg. §1.45D-1(d)(2) and, therefore, does not result in reinvestment. This suggestion applies to loans made to lessen a QALICB’s economic distress, which results in the deemed exchange of the original QLICI loan for a new debt instrument under Treas. Reg. §1.1001-3.

The result of such requested guidance would be that CDEs would have the ability to more quickly react and support borrowers when adverse economic conditions occur, such as a pandemic. This would allow CDEs to provide modifications to loan terms that effectively accommodate affected borrowers who have undergone severe changes in their economic conditions. In the absence of such guidance, CDEs must deal with two specific issues caused by the debt modification rules.

QALICBs rely on CDEs to provide loans and investments with fair below-market terms to facilitate maximum community growth and success. The modification of these loans may be required occasionally for a variety of reasons, including a “force majeure” such as a pandemic.

The first issue involves determining whether a realization event has occurred that requires the recognition of gain or loss by CDEs as lenders and QALICBs as borrowers due to a deemed exchange of the QLICI loans. The second issue involves determining whether a deemed exchange constitutes a reissuance of a QLICI loan that would require the CDE to retest the qualifications of the borrower’s business or reset the reasonable expectations of safe harbor. 

CDEs may experience more concerns assisting QALICBs, as well as expend substantial time and money determining the extent of any relief that it may provide if a realization event is deemed to have occurred, or if a deemed reissuance of a QLICI loan requires retesting of a QALICB.

Treas. Reg. § 1.1001-1(a) states that a realization event occurs when property is exchanged for other property that differs materially in kind or extent. Any change in the timing of payments is a significant modification if it results in the material deferral of scheduled payments. If a realization event is deemed to have occurred, the entity must recognize exchange gain or loss.

A simple loan modification that alters a repayment schedule would constitute a significant modification and therefore be considered a taxable event under current law. Savage & Associates has the experience and expertise to help you efficiently close your NMTC transaction. We also have the know-how to help you during those difficult situations further down the road in the process, such as when you need a loan modification.

Let’s Work Together to Develop our Communities

Whether you are a developer, investor, nonprofit, or entrepreneur, the more you know and understand about the NMTC program, the better prepared you will be to close your NMTC transaction. Savage & Associates can provide the answers to your NMTC questions so that you understand all the relevant issues that NMTC transactions present so that you may move forward and provide the important development that your community awaits.

If you have any questions about New Market Tax Credits or any other development financing program, call 215.880.9441 in Philadelphia, or 202.817.3941 in Washington D.C. to arrange a consultation. You can also visit our website at Savage & Associates 24 hours a day, seven days a week for more information. Savage & Associates, we focus on innovative financing tools like New Market Tax Credits, Low-Income Housing Tax Credits, C-PACE, Historic Tax Credits, and other vital economic development tools.