Economic development tools: combining and syndicating tax credits

For the past five months, we have published a series of articles on how to use federal and state economic development incentives to encourage the redevelopment of historic buildings, unoccupied textile mills and abandoned buildings including vacant big box retail facilities. Each incentive is a valuable resource on its own; however, combining multiple incentives, especially when the value of the credits can be captured during the financing phase of the project, yields the biggest benefit.
As an example, consider a building listed (or eligible to be listed) on the National Register of Historic Places being redeveloped for an income-producing purpose. Federal and state historic preservation tax credits can offer a significant incentive for the developer. If the building is qualified to receive the preservation credits and it meets the vacancy and prior use requirements of the Textile Revitalization Act, Abandon Buildings Act or Retail Facilities Revitalization Act, the developer can combine the incentives of the act for which the building qualifies with the historic preservation credits.

If the project qualifies for either the Textile Revitalization Act or Abandoned Buildings Act (25 percent credit) as well as federal (20 percent) and state (10 percent) historic preservation credits and the developer elects to receive the incentives through an income tax credit option, the developer can receive a combined maximum tax credit of 55 percent of eligible rehabilitation expenses. The maximum credit is 40 percent for combining Retail Facilities Revitalization Act credits (10 percent) with historic preservation credits (30 percent).

In addition, the developer/owner can maximize the benefits of the income tax credits by transferring the credit's value to a corporation in exchange for its investing equity capital (cash). The money can be used to assist with long-term financing of the redevelopment project. Typically these investors are third parties, such as Fortune 500 companies, that can benefit from the tax credits.

This process is called syndication and gives the owner/developer immediate access to the value of the credits rather than over a period of years. In exchange for the immediate access to the capital, the dollar value of the corporate investment reflects a discounted value, such as $.90 on the dollar, compared to the face value of the tax credits. 

While the process of syndicating tax credits is complicated and requires experienced legal and marketing assistance, it can be very beneficial for medium to large projects. The value derived from syndicated tax credits, in most cases, more than offsets the discounted value of the third-party investment of equity in the project and additional cost incurred for employing consultants and attorneys. The infusion of capital from tax credits can often turn a project with negative cash flow, without the benefits of incentives, into a successful project.

So how do municipalities prepare to offer developers access to these credits?

The most important step is ensuring that elected officials and staff are aware of these tax incentives and their value and are able to communicate the value of the incentives to potential developers and other partners in the redevelopment process. This topic was recently discussed during the Advanced Municipal Economic Development course of the Advanced Municipal Elected Officials Institute of Government held in February.

The second step is identifying properties in the community that would potentially qualify for incentives, then working with the property owners and the real estate community to highlight the potential benefits of the incentives when marketing the properties.

The final step is to identify and establish a relationship with economic development consultants, such as attorneys, architects, investment bankers and syndicators, who can assist developers in attracting investors and in maximizing the benefit of these incentives.

Knowing the value of the incentives, communicating the value to developers and having consultants ready to assist are important elements to success.