The vacant Hope Street School in Woonsocket’s Constitution Hill neighborhood used to be a major eyesore in an area that has been drawing new residents as a result of the creation of more than 200 new units of affordable housing.
Now, after a $6 million overhaul, the school will be home to a child care facility that can service 110 children and house the offices of Connecting Children and Families Inc., which provides educational, social and health services to children and families.
The project was the first in the country to use the U.S. Treasury’s New Markets Tax Credit Program for the purpose of creating a child care facility, said Barbara Fields, senior program director for Local Initiatives Support Corporation Rhode Island, a community development entity that provided financing for the project, but it was not the only one in the area to use the tax credits.
The Plant, Rising Sun Mills, the American Locomotive Works (ALCO) project, the Dreyfus Hotel, Conley’s Wharf and the Hampton Inn to be built in the St. Francis Chapel in Providence also have used the New Markets tax credits as part of their financing.
The intent of the program, which has taken about four years to be implemented in Rhode Island, despite being established in 2000, is to attract private-sector capital to finance community development projects in urban and rural low-income areas. Typically, banks make an investment in community development entities (CDEs) in order to receive a credit against their federal income taxes.
The credit totals 39 percent of the cost of the investment and is claimed over a seven-year period. In return, the CDEs use the bank’s investment to loan funds at lower-than-market interest rates for projects that are going to spur economic growth in low-income areas.
The investor in the new Hope Street Family Center project, for example, was Bank of America. The CDE was the Rhode Island chapter of LISC.
Dorene Conlon, senior vice president of community development banking at Bank of America, said the New Markets tax credits, combined with state and federal historic tax credits, cut the cost of the $6 million project in half.
And that is what allowed Joe Garlick, executive director of NeighborWorks Blackstone River Valley, the nonprofit that bought the property two years ago, to rent the space to a child care business at a reduced rate, she said.
“From a customer’s standpoint it can make all the difference in the world,” said Ed Seksay, manager of the New Markets program for Rockland Trust, based in Rockland, Mass. “A lower interest rate makes the economics of the project more viable. It makes it easier for us, in some instances, to underwrite the project.”
It makes the project less risky for a bank, because it increases the debt-coverage ratio, said Pam Woodell, senior vice president for tax credit investment for Sovereign Bank.
And banks don’t mind that the financing is at a lower interest rate, because they are getting a partial subsidy in tax credits, said Herb Stevens, a Nixon Peabody attorney with an expertise in tax credits related to real estate development. It’s enough to fill the gap.
Without the New Markets incentives, he said, “these projects would be hard to do.”
Rockland Trust, Sovereign Bank and Bank of America themselves have formed CDEs for the specific purpose of competing for and managing allocations from the Treasury’s Community Development Financial Institutions Fund, which administers the NMTC program.
CDFI allocated $3.5 billion in New Markets tax credits to CDEs this year. Of that, Rockland Trust’s CDE – called the Rockland Trust Community Development Corp. – received $45 million. The CDE received $30 million last year, which was the first year it was active.
Under the first allocation, Rockland Trust’s CDE used the tax credits to finance the redevelopment of an industrial building in Olneyville, said Jonathan Neuner, manager for Rockland Trust’s commercial lending center in Attleboro. The CDE also financed a mixed-use commercial condominium project in Pawtucket.
Neuner said he could not disclose the name of the projects or the developers.
Under this year’s allocation, the CDE financed a $9 million loan to redevelop the St. Francis Chapel at 58 Weybosset St. in downtown Providence into a Hampton Inn & Suites hotel.
The CDE also has plans to finance a residential condominium project in Pawtucket, a restaurant in Woonsocket and a commercial office building in Woonsocket, Neuner said, but those deals have not been finalized.
The benefit of the tax credit program is threefold, Seksay said.
It’s good for customers, because it reduces their debt, he said. It’s good for the bank because by enabling it to finance more projects, it raises the bank’s profitability. And it’s good for shareholders, if the bank is publicly traded, because it makes the bank more profitable.
“I think it’s a program that’s tailor-made for banks,” he said, because banks have an advantage in applying and qualifying for the allocations.
Banks have an advantage, he said, because the applications are judged based on how good the applicant’s track record is in doing business in the communities where the tax credits will be used, how proficient the applicant is in making loans, and how proficient the applicant is in raising funds.
“Anyone already doing business in low-income communities that has the ability to show they know what they’re doing should ace the application,” Seksay said.
