Boston University School of Law

In Real Estate Finance and Tax with Professor Nessen, someone asked if government subsidization of redevelopment increases the cost to the developer. We were discussing New Markets Tax Credits (NMTC), where the IRS awards tax credits to a community bank, which in turns sells them to investors to raise capital for redevelopment that has a fighting chance of triggering economic revitalization in capital-starved neighborhoods. Tax credits are lightly disguised government spending—instead of collecting taxes and then granting out the money, political hurdles are avoided by never collecting the taxes in the first place, which nevertheless counts as tax “expenditures.” Investors calculate their tax bill, subtract the tax credits they bought, and in that way pay a reduced amount of tax.

At first, I didn’t understand the question that was being asked. The point of this financial exercise is to decrease cost to the developer, not increase it. The community bank that sells the tax credits doesn’t keep the capital. Instead, the capital resources a developer who is rehabilitating a theater, or a library, or a supermarket—some nonresidential project that creates jobs. For example, if the project costs $10M and $2.5M is raised by selling tax credits, then the developer only needs to find 7.5M, which you’ll notice is less than $10M.

I began to understand the question, though, when a parallel was drawn with tuition and government loans. Once colleges and universities got a good understanding of how much extra money would be available to new students for tuition through government loans, those colleges and universities quickly upped their tuition to absorb the increase in student buying power. Vendors to NMTC-funded projects might think the same way—if a trend sets in where developers’ pockets are becoming deeper because this new source of capital exists, then vendors might adapt to that new world by charging more. The extreme example of vendor enrichment is the happy lawyers on a NMTC deal, who will charge up to 7% of such a deal for their specialized services. 7% of 10M at the closing of the deal is a $700K payday. The wealth building that NMTC contemplates is not lawyer revitalization, given that those lawyers likely are not the neighborhood residents short on sustainable wealth building opportunities.

Of course, tax-unburdened investors and enriched vendors are what drums up business in the first place. NMTC turns economic revitalization into a profitable venture, and capital is flowing like river according to a 10 Year Report by the New Markets Tax Credit Coalition:

Between 2003 and 2009 NMTC leveraged $8 in private investment for every $1 of cost to the government. The New Markets program generated almost $50 billion in financing to businesses in low income communities. Of that amount $15.5 billion came from direct NMTC investments, which cost the government $6 billion in lost revenue (39% of $15.5 billion). The balance, totaling $34 billion, came from other public and private sources of capital.

Finding specialists for a NMTC deal is strangely parallel to finding folks to dig ditches and refill them during the Great Depression—just to have something, anything, to get paid to do. Lawyers are paid to structure complex transactions that move capital into disinvested communities, but the complexity is a ditch to dig and refill. One experienced NMTC negotiator told me that the program is welfare for lawyers. Professor Nessen noted in our class discussion that funding through direct federal grants instead of tax credits would shortcut the legal work, but the transparency of that sort of government spending triggers stiffer political opposition.

I’m not above the fray here, as I hope to be one of the lawyers on tax credit-funded deals once I graduate. Tax credits are the financial tools we have for affordable housing and community development, and I’m glad we’ve got them. But I’m aware that, at the same time, NMTC illustrates how complexity in financial transactions creates whole careers. In this series of posts, I’ll be thinking about our economy being built through complexity, and what that means for access to wealth.