Case Study

Newark Arts Commons

6 min read

Opportunity Funds Paired With Historic, New Markets Tax Credits  

Ever since the Opportunity Zone program was announced two years ago, developers, investors and community development organizations have been trying to determine which other tax benefit programs, if any, fit comfortably within the same requirements and parameters. One example of pairing credits and OZones is the conversion of former St. Michaels Hospital to the Newark Arts Commons, which utilized both Historic and New Markets credits from National Trust Community Investment Corporation’s (NTCIC) Irvin Henderson Main Street Revitalization Fund along with a large OZone investment. The project at 306 Dr. Martin Luther King Boulevard will be an arts-focused destination near downtown Newark in an OZone that has been defined as a highly distressed census tract based on poverty, area median income (AMI) and employment.

The project will offer permanent affordable office space to nonprofit arts organizations, together with unique housing options in New Jersey’s largest city. The space, which is dedicated to nonprofits arts organizations, is more than 60 percent below market rate, enabling those organizations, to obtain affordable, long-term space to promote an ongoing vibrant arts scene in the central city.

The original St. Michael’s Hospital has been a part of Newark’s history for nearly 150 years. Established by the Franciscan Sisters of the Poor in 1869 to serve Newark’s poor and immigrant populations, the highly regarded hospital was the first in the state to perform open-heart surgery and the first to develop a cardiac catheterization program.

The Newark Arts Commons is located in the Historic James Street neighborhood and preserves and restores a historic eight-story structure that has been vacant and deteriorating for nearly a decade. It is intended to act as a connecting anchor between the downtown, University Hill and James Street neighborhoods. Once the restoration is complete, the first two floors (approximately 36,300 square feet) of the revitalized space will become the homes of two local nonprofit organizations, GlassRoots and b[x] Studios. These groups will provide affordable creative workspaces to artists, as well as classes and spaces for artists to learn and practice glassblowing, with a primary mission to engage young adults in the creation of glass art and the development of entrepreneurial and life skills.

The Commons will also include 25 apartment units – 20 “co-living units” and five traditional units. Co-living is a form of rental housing where you rent by the bedroom instead of by the unit. The concept is taking place in major cities and developed because increased rents are forcing young professionals to seek roommates in order to afford housing in more expensive areas.

The OZone equity investment is $11 million and Historic Tax Credits generated amount to approximately $17 million. The remainder of the capital stack is owner equity (based on building value appreciation), a residential condo loan, a contribution from GlassRoots and project sponsor equity investments from the Community Asset Preservation Corporation (CAPC), a nonprofit organization that acquires vacant and abandoned properties to stabilize and revitalize communities. CAPC partners with local community builders and contractors to rehabilitate and return properties to productive use as quality, affordable housing. In keeping with the OZone mission, the project should create 80 construction jobs, and 30 full-time and ten part-time jobs once completed.

Not a Natural Fit
According to  Merrill Hoopengardner, president of NTCIC in Washington, DC, pairing Opportunity Funds and Historic Tax Credits may not be a natural hand-in-glove fit, and it may not be easy, but under the right circumstances, multiple benefits can be made to work together.

NTCIC is a wholly owned for-profit subsidiary of the National Trust for Historic Preservation, with a mission of enabling tax credit equity investments that support sustainable communities nationwide. It places qualified tax credits for Federal and State Historic (HTC), New Markets (NMTC), Solar (ITC) and Low Income Housing (LIHTC) projects. Hoopengardner is an attorney with a community development focus. Before joining NTCIC, she was a principal at Advantage Capital Partners, a finance company specializing in using public-private partnerships to raise venture capital and small business capital for investments and loans in underserved areas.

“We’ve done more than a half billion dollars of HTC in low-income census tracts, so we’re very interested in OZones,” she says. “We were pioneers in pairing HTC with NMTCs, so the OZone program is certainly something we’ve been closely following from a policy and investment perspective. We think there could be at least a 50 percent overlap with NMTCs, and we’ve set up an internal working group.”

One of the challenges is what Hoopengardner refers to as a “lack of guardrails” in the OZone program, no design requirements and no specific monitoring at this point. “But if you pair it with another program that does have guidelines and monitoring, you can have the best of all worlds in terms of maximizing benefits,” she says.

“It may not be perfectly intertwined, but we submitted comments to everyone at the IRS suggesting they take a flexible view of compatibility with HTCs. Though it’s conceptionally possible for some investors, it’s likely that the investor on the tax credit side may be different.” She cites differing investment periods—five years versus ten years—differing costs of capital and differing expectations of gain at exit.

“The composition of the return is different,” Hoopengardner notes. “Fundamentally, we look at OZone investments for their tax incentives, but this is real equity. The investors are expecting all of their money back with a cash-on-cash return. In a tax credit investment, much of the return is the credit itself. With an OZone investment, you are playing with your own money and you can’t walk away from your investment the way you can with tax credits, so [the investment] is incentivized in a different way.”

There may be a place for banks and financial institutions in the paired investing strategy. While they don’t generally show substantial capital gains on their books, Hoopengardner says, “For banks in particular, they are limited in the kinds of investments that can generate gains. But many banks are investing [in OZone areas] through the Community Reinvestment Act (CRA).”

NTCIC has seen the pairing work on occasion.

As far as tax credit investments supporting OZone-located businesses, Hoopengardner says, “I have not seen this for businesses yet, but the topic comes up frequently. We’re certainly looking into it. The ability to get gross capital for our tenants would be tremendously helpful and we’re intrigued by it.”

While much of the tax credit and OZone pairing is still in the theoretical stage, Hoopengardner says, “As we think about the value in pairing, we hope from a preservation perspective that people will figure it out. Nothing in OZone regulations speaks to tearing down [a standing building]. We’d like to see developers start with an existing asset and build on it, rather than replacing it.”

Story Contact:
Merrill Hoopengardner
[email protected]