Stuck in the weeds: The tax credits problem

    Hampton Inn & Suites

    In 2009 the RDA received $60 million in federal New Markets Tax Credits, which it was to deploy to worthy redevelopment projects in low-income neighborhoods. For the fledgling agency, then less than one year old, the award not only brought credibility and prestige but income: The RDA made about 10% in fees for administering the tax credits program.

    In the years that would follow the RDA invested the tax credits in several local redevelopment projects— $6.1 million in the ExxonMobil YMCA at Howell Place, $11.4 million in the YMCA at Americana in Zachary, $11.7 million in the Hampton Inn and Suites downtown, and $17.5 million in Honeywell, which was expanding its facility in north Baton Rouge.

    But when the RDA applied for more credits from the U.S. Department of the Treasury, which administers the program, it was turned down—not once, but three times in 2011, 2012 and 2013. Critics have blamed the agency for relying too heavily on the tax credits program as a source of income. They have also questioned why the RDA’s requests were denied.

    Since 2000 the Treasury Department has awarded some $40 billion in New Markets Tax Credits to community development organizations around the country. Baton Rouge-based Stonehenge Capital, a finance company that specializes in tax credits, has alone received more than $550 million worth of those credits. Dozens of New Orleans-based organizations have also received tens of millions of dollars worth of credits every year. Given Baton Rouge’s poverty and blight, shouldn’t the RDA have received any additional allocations?

    Not necessarily, say experts familiar with the situation. For one thing, the Treasury Department has changed the way it scores applicants. In 2009, when the RDA first applied for credits, applicants were ranked based on a point system. Those with the highest number of points received tax credits. In recent years, however, the program has become more competitive and the judging more subjective.

    “Treasury has told us the difference in point scores in the top 200 applicants is just two or three,” says Tammy Probst of the Greenville, South Carolina-based Tax Advantage Group, which worked with the RDA in preparing its applications for the credits. “So it truly goes through an internal process of looking at geography and other factors so there is more subjectiveness today than there was five years ago.”

    The geography factor is particularly important. Until 2013, more than 80% of all New Markets Tax Credits in the country flowed to Louisiana, in large part because of post-Katrina redevelopment in New Orleans. Since then, the Treasury Department has made a conscious effort to distribute the credits more evenly around the country and to invest more in rural areas.

    “In this last round of allocation, you saw most of the credits going to firms agreeing to invest 50-100% of their allocation in rural areas,” says Tom Adamek, principal of Stonehenge.

    Geographic diversity is one reason Stonehenge has been so successful receiving credits. Though based in Baton Rouge, the firm invests in projects all over the U.S. It also invests in existing businesses—not just real estate projects, which is another reason Adamek believe it has scored high with the Treasury Department.

    “Those (community development entities) that invest in real estate have become a smaller and smaller percentage of the overall allocation of New Markets Tax Credits,” he says. “That could be another reason the RDA didn’t get them. If they were just focused on real estate that would have been seen as a negative.”

    Finally, there is the RDA’s track record. It was limited because the agency is so new. Moreover, the projects in which it invested its first round of tax credits—particularly the Americana YMCA and Honeywell expansion—were not necessarily in keeping with the spirit of the tax credits program. True, they created jobs and were used to develop community projects, which are required for New Markets Tax Credits investments. But they didn’t exactly lead to redevelopment in the inner city.

    At least one former administrator believes the choice of projects in which the RDA invested its tax credits could have hurt its ability to receive additional awards.

    “The Honeywell project, in particular, was very unique,” says the former administrator. “It created jobs and all but given the nature of Honeywell there wasn’t a lot of public information about it. You could never go out and have a ribbon cutting, which kind of flies in the face of using public money for community development. It’s all perfectly legal but is the intent there?”

    Related stories:

    Five years and millions of dollars later, why doesn’t the EBR Redevelopment Authority have more to show for its efforts?

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    The tax credits problem

    Unrealized plans

    Small but successful: Gap financing and grants