Large commercial real estate developments in New Orleans don’t happen without government help which ranges from New Market Tax Credits, Community Block Grants, Tax Exempt Financing, to Digital Media Tax Credit, Bonus Depreciation, and Tax Abatements.
For example, one of the largest developments in New Orleans was a $70 million, 550 unit apartment and retail complex near the Superdome. Here is how the project was financed: New Market Tax Credits provide $4.9 million and Enterprise Zone Rebates provide $806,000, leaving loans from Goldman Sachs providing $55 million and equity of $8.4 million from the developers.
New Market Tax Credits
The most common financing vehicle was from New Market Tax Credits which was established by Congress in 2000 to spur new or increased investments into operating businesses and real estate projects located in low-income communities. The New Market Tax Credits Program attracts investment capital to low-income communities by permitting individual and corporate investors to receive a tax credit against their Federal income tax return in exchange for making equity investments in specialized financial institutions called Community Development Entities (CDEs). The credit totals 39 percent of the original investment amount and is claimed over a period of seven years (five percent for each of the first three years, and six percent for each of the remaining four years). The investment in the CDE cannot be redeemed before the end of the seven-year period.
Internal Revenue Service Advice
The Internal Revenue Service (IRS) published a Notice providing guidance with respect to how certain Targeted Populations of individuals may be treated as Low-Income Communities eligible for investments by Community Development Entities (CDEs) under the New Markets Tax Credit (NMTC) Program. As indicated in the Notice, certain individuals in the Hurricane Katrina Gulf Opportunity Zone, as such term is defined in the Gulf Opportunity (GO) Zone Act of 2005 (Pub. L. 109- 135), are deemed to be a Targeted Population provided that the individuals were displaced from their principal residences as a result of Hurricane Katrina and/or lost their principal sources of employment as a result of Hurricane Katrina. A business that serves these individuals may be a qualified active low-income community business to the extent that:
- The business is financed by a special set-aside of NMTC allocations that was made available to CDEs with a significant mission of recovery and redevelopment of the GO Zone, pursuant to the GO Zone Act of 2005.
- The business is located in a population census tract in the GO Zone that contains one or more areas designated by the Federal Emergency Management Agency as flooded, having sustained extensive damage, or having sustained catastrophic damage as a result of Hurricane Katrina.
- The business is located in a census tract with a median family income that does not exceed 200% of the applicable median family income.