How Will COVID-19 Affect New Markets Tax Credits?

4 min read

The COVID-19 pandemic has brought challenges to the entire economy, particularly to real estate genres that were already in a tenuous situation. New Markets Tax Credits (NMTC) cover a broad array of these asset classes, so one might think the credits, which are issued by the Department of the Treasury and meant to revive distressed areas, will be impacted. Whether or not that happens was the topic at a recent NH&RA panel discussion.

Titled “COVID-19 Member Town Hall – Historic & New Markets Tax Credits Update,” the event grouped NMTC developers, investors and others working in the space. Hosted by NH&RA’s own Thom Amdur, the panel included Kayla Gross, principal of CohnReznick; Merrill Hoopengardner, president of  the National Trust Community Investment Corporation; Steve Kramer, a senior VP business development officer at U.S. Bancorp; and Bobby Maly, CEO of the Model Group.

There was a mix of opinions on what the long-term trends will be for both the pandemic and the credits. On the pessimistic side, some panelists noted that NMTC prices were decreasing, presumably because investors will have smaller 2020 income tax burdens to reduce. There’s also a question of whether NMTC, which expires at year-end, will be extended as the federal government faces a revenue shortfall. Lastly, there’s no guarantee of enough private sector institutional funding in this downturn to fill the gaps.

“The fundraising obviously is slower,” said Gross during the panel. “It used to be that maybe it’d take 90 days to close a deal. Now, 90 days would be awesome.”

On the optimistic side, there was general enthusiasm among panelists that the pandemic recovery will be quick, aided by recent vaccine announcements.

This was particularly the stance of Maly, who I later interviewed on Zoom. He said that in the short-term, the pandemic could affect the health of NMTC for the above-stated reasons.

But long-term, he doesn’t think there will be dramatic changes to real estate trends that have been consistent for decades. He believes that, rather than the much-ballyhooed “death of the city,” the desire to move to activity-rich urban areas will continue, as will normal life once social distancing restrictions are rolled back.

“I fully believe that…absent a vaccine or a treatment…you can throw everything we’re talking about out the window,” he said. “But [with a vaccine or treatment] I believe that the demand for urban working and playing isn’t going to go anywhere.”

Panelist Steve Kramer of U.S. Bancorp concurred, pointing to increased activity after the early loosening of lockdowns this spring.

“People are longing for interaction…evidence for that is that states that eased restrictions had a surge because people charged back out and did the things that they couldn’t do for the last three months.”

Maly was less convinced of a quick recovery for office projects, however. He cited contacts who have noted a possible 25 percent elimination of previously-existing office space, and said work-from-home trends point to a “broader question” weighing on the market. He speculated that co-working projects could become more common once the pandemic ends. This seems like a possible future application for NMTC funding. Then, of course, the credits are also used for social service facilities, like homeless shelters and charter schools, which are useful in these times, particularly. And through the next 12-18 months, Maly expects more of an emphasis on NMTC-funded light manufacturing, low-income business relocation and job growth initiatives.

James Howard did not sit on the NH&RA panel, but is the founder and principal shareholder of Dudley Ventures, a Phoenix-based Community Development Entity (CDE) that syndicates and invests using NMTC on projects nationwide. He more or less shares the panel’s bullish outlook. During a Zoom call, he said that in both rural and urban markets, housing demand has already picked up. His firm has completed two NMTC projects the week of November 9th. He felt a little shakier about manufacturing and industrial developments that rely on NMTC.

“Certain asset classes which [would have been viable] a year ago are no longer moving forward,” he said. Howard believes the picture will become clearer by Q3 2021.

Of course, much of NMTCs’ future depends on politics – that was the case even before the pandemic. Hoopengardner was optimistic that Congress will remain in a pro-stimulus mood due to the economic downturn.

“You could essentially double the credits and ultimately make them permanent,” she said.