In East St. Louis, Illinois, an unprecedented deal was struck to use public housing development funds in the New Markets Tax Credit (NMTC) program for a mixed-use housing facility, Jazz @ Walter Circle. The development will be an environmentally sustainable, mixed-use facility that will include 74 units of public and housing-choice-voucher rental units for low-income seniors. Jazz @ Walter Circle will be financed by NMTCs, HUD public housing development funds, city tax-increment financing, and state energy funds.
A New Kind of NMTC Transaction
An architectural rendering of Jazz @ Walter Circle in East St. Louis, Illinois. Image courtesy of East St. Louis Housing Authority.
The public-private partnership that financed Jazz @ Walter Circle breaks new ground in closing funding gaps for affordable housing. For the first time, the deal integrates HUD mixed-finance development regulations with NMTC multiuse regulations. Public actors such as the East St. Louis Housing Authority (ESLHA), the city of East St. Louis, the state of Illinois, and HUD collaborated with project developer and owner Eco Jazz, Inc.; the national real estate firm Dudley Ventures; the NMTC firm Hampton Roads Ventures; and a not-for-profit affiliate of the ESLHA to reach a deal. In addition to residential space, Jazz @ Walter Circle will house a community center, office and retail space, a grocery store, and community gardens. The project will be the first LEED Gold certified building in East St. Louis, where 35 percent of the population lives below the federal poverty level.
Created in 2000 and extended in 2010, the NMTC program spurs investment in low-income communities by providing tax incentives to investors. NMTCs are federal tax credits awarded to investors in exchange for investment in certified Community Development Entities (CDEs) — organizations with a primary mission of serving low-income communities — which then make debt (loans) or equity investments in qualified businesses. The investor earns a total credit of 39 percent of the original investment, claimed over 7 years. When NMTCs are earned on loan, NMTCs are expected to have an added benefit of lower interest rates, which can increase cash flow and generate other community benefits, such as job creation. To qualify, a business must have a certain percentage of its physical assets, income, and services tied to low-income areas. Low-income areas are census tract areas where the poverty rate is at least 20 percent or where the median family income in the area is no more than 80 percent of state or metropolitan median family income, whichever is greater.
This deal is not the first time that NMTCs have been used in affordable housing projects. Housing authorities have acted as lenders, community development entities, and developers in the NMTC program in the past. Also, other types of HUD programs, such as Community Development Block Grant and HOPE VI program funds, and certain FHA multi-family programs, have been used in NMTC transactions in the past. Jazz @ Walter Circle, however, uses public housing funds in the NMTC leveraging finance structure for the first time. NMTC mixed-use regulations, such as the so-called 80/20 rule (a requirement that classifies residential rental property as generating 80 percent or more of total gross income from residential rents), deems businesses like Jazz @ Walter Circle eligible for participation so long as the project is mixed use and the commercial portion generates at least 20 percent of total building revenue.
Public Private Partnerships: A New Way To Close Funding Gaps?
Stephanie L. Franklin-Suber, a partner in the law firm Ballard Spahr, which represented ESLHA in the transaction, said that a growing number of NMTC projects use different sources of public funds. Jazz @ Walter Circle, however, is the first NMTC project to use public housing development funds. Because this deal was unprecedented, several obstacles needed to be overcome. For example, the deal required first-time HUD authorization for the use of public housing funds. The project also had to meet the NMTC 80/20 rule — a challenge, particularly when public housing operations generally require that rent must supply the development’s entire cash flow.
The success of the Jazz @ Walter Circle deal may signal the potential for other private-public partnerships to close funding gaps for affordable housing. NMTCs can serve as a new source of affordable housing funding in a number of ways. In the future, public housing authorities may form affiliates to act as CDEs and receive their own allotment of NMTCs for future transactions. In this instance, ESLHA formed an affiliate to act as lender and developer, not as the CDE. On a broader level, the deal to finance Jazz @ Walter Circle signals that other federal, state, or local government grants and loans can offer new funding sources for affordable housing. Programs like the NMTC program expand the pool of more frequently used funding sources for affordable housing, such as the Low Income Housing Tax Credit and Community Development Block Grant programs.
Jazz @ Walter Circle can serve as a model for future private-public partnerships in closing funding gaps for affordable housing. At minimum, the multimillion dollar deal to finance the mixed-use facility offers a new funding strategy for integrating public housing funds with NMTC leveraging finance structure. But most importantly, the unprecedented deal will result in much needed housing for low-income seniors. The project is scheduled for completion in 2012.
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