June 1, 2002 - From the June, 2002 issue

Enterprise Foundation Seeks Partners & Commercial Success Using New Federal Market Tax Credits

The Enterprise Social Investment Corporation (ESIC) is a full-service real estate company and an industry leader in community revitalization initiatives in underserved and emerging markets. ESIC, a subsidiary of The Enterprise Foundation, works with nonprofit and for-profit partners to finance, develop, acquire and manage a portfolio of community development projects across the country. TPR sat down with Michael Curran, President and CEO of ESIC, to discuss the New Markets Tax Credit and the current opportunity in urban redevelopment.

Michael, the New Markets Tax Credit Program created by the Community Renewal Tax Relief Act of 2000 has as its objective to stimulate up to $15 billion of private sector investment in business operating in low-income communities. Can you help us understand how it will work? What businesses are eligible?

That is what it's about-looking at what kind of incentives can be put in place that would attract private capital to businesses in emerging or transitional markets.

Businesses, as defined by the legislation, can be an operating business that does a certain percentage of its business either in the qualified census track or employs people who reside in that census track.

The other kinds of business that would qualify would be essentially rental real estate that's non-residential in nature.

The credit is a powerful tool to help stimulate non-housing related real estate development in these targeted areas.

How is this new federal effort better than or different from other similar efforts, i.e. empowerment zones, our LA Community Development Bank, etc.?

The net effect of it is not so much that it will create a transaction or create the opportunity for a transaction, but rather lower the cost of funds for projects so that you're able to attract more capital to a project. Or you may make a project that might be slightly on the fence much more feasible.

Unlike the low-income housing tax credit, which is a very deep and powerful credit, this one is shallower in nature-39% credit taken over 7 years.

The Enterprise Foundation has been involved with the low-income housing tax credit for some time. What's attractive about this new program?

We've created a new business that's called Enterprise Realty Partners. Within that entity is a new fund that we're calling the Enterprise Community Fund. The whole notion behind this new entity and the fund is to really diversify ESIC, taking it from a housing centered organization to one that's more community based. That begins to open up a wider range of activities, both for those communities and for your key investors who are looking for additional, more innovative ways of providing capital to these areas.

That sounds very similar in approach to the mission and concepts behind Neighborhood Reinvestment Corporation and Neighborhood Housing Corporatons. Has the Enterprise Foundation now come to the same conclusion as the NRC, that neighborhoods and communities must be holistically improved to make a meaningful difference in people's housing.

That's pretty much right. There are business reasons to do it beyond just the social mission component-we take very seriously the notion that we need to be profitable.

We want to be profitable because it allows us to be sustainable. It allows us to be more valued as we upstream more money to the foundation to help support its programs and initiatives. But, it also provides us with a more sustainable business model that provides a longer-term lifecycle of work, as opposed to being a housing expert.

The way we describe ESIC is that we're a portfolio player, not a transaction player, which means we're not in this kind of business for the sake of making a quick buck and then going off to the next place. We're really in this for the long-term.

You were in Los Angeles co-hosting with Riordan and McKenzie a briefing on the opportunities available because of the New Markets Tax Credit. Give us some examples of how the credit might be utilized and who might be able to access the program.

If you talk from the investor's side, the initial interested investors in this credit will be CRA motivated investors. The credit is not sufficient enough, nor will the returns be sufficient enough, to attract a wider range of investors, at least at the front end. On the investment side, you're going to be talking to banks and, to a certain extent, insurance companies. Maybe the occasional public employee pension fund, or a union fund, that would have some vested interest in working in those kinds of markets.

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On the developer side, you're going to be looking at a mix of for-profit and non-profit developers who either have the experience of broader real estate development management leasing capability, or can partner with someone who does.

An example might be if you have a school or hospital that is no longer being used. So somebody comes in and they create a wonderful little office building out of those buildings. Or you could have a mixed-use where you've got office and retail. Or maybe it's a brownfields site or some vacant site that's being cleaned up and you want to do a light manufacturing or distribution facility. That would be a qualified investment.

As mentioned earlier, L.A. has a Community Development Bank which has not yet been very successful. Some believe they had a deal flow problem, and some have concluded that capital is not the problem. There is a lot of capital in this basin. The question for many is how does one uncover the enterprises that are not readily able to get that capital and process them to the point that there are real deals to make and a return on investment? In your opinion, is capital the problem in urban markets like L.A.?

It's not so much that there's no money. It's do we have the right kind of money? What do we need to do to get it? If you're working in these kinds of neighborhoods, who is actually providing the services? Who has the capacity to build, manage, lease, and maintain a project? Historically, it has been very difficult to attract for-profit entities that have been willing to come into those markets.

At the same time, many of the suburban markets have become saturated. Increasingly, as more and more information gets out, there is clearly untapped potential in these urban markets. But, it is such an intertwined set of key things that are needed here to make these markets work better. So you need responsive and interested political leadership, so that people who want to come in and do things, can have the support and get quick approval of permits, zoning requests, and all the rest. The political support can obviously be helpful at the neighborhood level.

In the case of the community development bank, it may very well be a capacity issue there, that there wasn't enough leadership for people to believe that they could actually go and do something and walk away with a reasonable return.

In most urban communities you're going to go into, there are typically economic development corporations that are quasi-public or public-private. There are community development banks and enterprise zones, there are public and private entities that have been trying to do this for years. How do you anticipate and envision this program and ESIC partnering with these efforts? Give us some examples in some of these metropolitan areas where that might happen.

If you go back to the credit and you ask what it is really aiming to do, the credit is really an enhancement. It gives you that little boost to attract the capital and do things that are more outside of what these investors have been comfortable with over time, which is housing, and to a certain extent, small business lending. You now have a tool to be able to move into different kinds of real estate investments with some kind of enhancement. That's one piece of it.

The second piece is that there really are good opportunities out there and, increasingly, people are being attracted to them, not just local CDCs or local economic development entities, but really for-profit developers, either on their own or in partnership with the CDCs or development authorities.

There were several projects in which we invested in Baltimore that were basically utilizing historic tax credits and real estate equity to convert formerly manufacturing and warehouse buildings into office and retail projects.

One is called Tide Point, a former Proctor and Gamble detergent manufacturing site. Five buildings, 400,000 square feet of space, that a local Baltimore developer redeveloped into office space using various kinds of financing, including historic tax credits, real estate equity, and a little bit of money from the state of Maryland.

In St. Louis, there was an old office building that's on the historic register, called the Continental Building, that had been vacant for about 25 years. A local developer put together about 5 different layers of financing, including real estate equity and historic tax credit equity and converted the building into 107 market rate luxury apartments.

In each of these cases, you're looking in neighborhoods where an opportunity exists to provide a catalytic impact.

We have not had trouble sourcing transactions so far and we are still in the process of raising capital for the new fund. There likely won't be an allocation of new markets credits until the latter part of the year. We haven't had too much trouble finding opportunities. Once those are analyzed, like anything else, a lot of those are going to fall out. There are deals, and then there are deals that can work.

What we've seen so far is that there are a sufficient number of projects like I've just described that are going on around the country, that there is clearly a market to be served. And with marrying of the credit, you can certainly provide lower costs to help the project and at the same time, give the investors some reasonable return.

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