A Conversation With...
Reznick Group’s Joel Cohn
A guide to navigating government subsidies
Securing construction financing in today’s economic
environment is almost as hard as finding a needle
in a haystack. But determined developers can take
heart in knowing that there are still accessible avenues of
funding, particularly in the form of government subsidies.
Joel Cohn, a principal in the Baltimore office of the
Reznick Group PC, says he’s surprised by the number of
developers who are unaware of the federal and state subsidies available for commercial real estate.
Cohn, who specializes in tax policy, accounting and
financing vehicles, spoke with REAL ESTATE FORUM about
some of the programs that are out there and what types of
developments are eligible.
What programs are available for commercial developers?
COHN: The New Markets Tax Credit is one program that is
commonly used to help make development more feasible. It’s
a 39% federal income tax credit that reduces the cost of capital
for a project over a seven-year compliance period. The credit
may be used to effectively buy down an interest rate on a loan
or to subsidize the cost of equity capital. It’s generally not available for multifamily rental properties, but is more focused on
office, retail and industrial product types.
There is also the historic tax credit. That is a 20% federal
income tax credit on all the rehabilitation costs for an historic building. So it’s possible that the developer could have
as much as 18% to 20% of the rehabilitation costs subsidized by the federal government. The property doesn’t have
to have the kind of history such as George Washington slept
there or some spectacular physical features. There are quite
a few structures, including a lot of post-war buildings, that
are important because of their role in the economic development of the community. Any building that is over 50 years
old could potentially qualify for an historic tax credit. And it
could be used for any product type.
Has there been a retreat in the funding of these programs
as a result of the downturn?
COHN: No, there are actually some efforts to enhance
them. At the moment, the American Recovery &
Reinvestment Act proposes an increase of the federal
historic credit by 30%, from 20% to 26%. With the New
Markets Tax Credit, the proposal calls for the current
maximum annual amount of $3.5 billion to be increased
by $1.5 billion.
Are there states that offer development funding?
COHN: There are some states that tack on their subsidies to
the federal programs to make projects even more feasible.
For example, Connecticut, Rhode Island and Massachusetts
have their own state historic tax credits that can push the
subsidies to as much as 40% of the rehabilitation costs.
What pitfalls, if any, are there in using subsidies?
COHN: The first part is the learning curve; developers
have to become familiar with how the programs work. In
each of these cases, whether it’s the New Markets or the
historic credit, there are other stakeholders involved that
a developer must work with. For example, for the historic
credit there may be architectural approvals that are needed by a state or federal official. Those are easily obtained,
but it’s another process to work through and another
approval to get.
With the New Markets Tax Credit, the challenge is that
the subsidy is available, but it’s limited. So developers are
competing against one another and there is no guarantee
that it will be obtained. They need to work harder to see
how federal or state subsidies could make their projects
feasible. The days of easy money have passed. We are seeing a lot of developers who are looking at these subsidies
in a fresh way because they can’t get the amount of debt
they need through traditional channels. A lot of times
these subsidies raise equity for a project that otherwise
wouldn’t be available. When the loan-to-value is lower than
it had previously been, you need more equity. That’s where
these subsidies fit in since they make up for the lower debt
levels that exist today.—Danielle Douglas ◆
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