Officials for Lancaster-based Community First Fund and Harrisburg-based Commonwealth Cornerstone Group say less money is flowing to Pennsylvania this year under a federal program they have tapped in the past to fund projects across Central Pennsylvania.
In fact, the two midstate organizations were shut out of the program’s most recent funding round. As a result, officials expect urban developers may start fewer mixed-use projects this year in Central Pennsylvania.
The program in question is the New Markets Tax Credit program operated by the U.S. Treasury Department. It helps finance projects in low-income areas.
At least one of the two local groups has received New Markets funding every year since 2012, and the two groups have worked together on multiple projects. Last year, both organizations pumped tax credits into redeveloping the former Bulova building at 101 N. Queen St. in Lancaster. Pittsburgh-based Zamagias Properties is converting the downtown Lancaster property into a mix of retail, office and residential space.
Commonwealth Cornerstone Group poured $10 million in tax credits last year to support the project, estimated to cost between $25 million and $30 million. Community First Fund added another $8 million.
For at least this year though, the tax credits will not be available in Central Pennsylvania unless other so-called community development entities who received an allocation decide to include midstate projects in their pipeline of requests. Entities like Community First Fund apply for the tax credits and then, if the credits are received, the groups work with developers to fund construction projects.
Tax credits, however, will be available elsewhere in the state under the New Markets program, which doled out $3.5 billion in tax credits in mid-February. The recipients include two Philadelphia organizations that will split $130 million in tax credits: The Reinvestment Fund, which received $70 million, and PIDC Community Capital, the recipient of the remaining $60 million.
In comparison, five Pennsylvania groups shared $310 million for the previous round of New Markets funding, in which 2015 and 2016 tax credits were combined in a single round. Commonwealth Cornerstone Group, which is part of the Pennsylvania Housing Finance Agency, received $80 million in tax credits in the combined round while Community First Fund was awarded $45 million.
“You never know if you will get it, but you plan for it,” said Dan Betancourt, president and CEO at Community First Fund.
The Lancaster organization received tax credits three of the four previous times it had applied. Commonwealth Cornerstone, based in Harrisburg, has received tax credits seven times since 2006.
Local officials say the chances of support from other groups are slim because of high project demand and a limited number of tax credits.
Betancourt describes the New Markets program as a “deal enhancer” for developers pursuing large mixed-use projects, often those that exceed $5 million.
Developers often have to spend more to buy and redevelop vacant and blighted properties than they can expect to get back in rental rates once the construction is completed. Incentives such as New Markets help offset chunk of the construction cost so developers can keep rents in line with what a local real estate market can support.
“It’s not a deal maker, but it will help a project that could happen get closer to the finish line,” Betancourt said.
The program takes private equity from investors, usually banks, and turns that money into gap financing for redevelopment projects. The investors receive tax credits in return, which count against their federal income taxes.
Investors can receive credits totaling 39 percent of their investment over seven years, which is broken up into 5 percent for each of the first three years and 6 percent for the next four years.
For example, a $2 million investment could be worth $780,000 in tax credits.
That $2 million in equity could cover 20 percent of a $10 million project, Betancourt said.
Without any credits available locally, a lot of projects might get delayed until a new round of tax credits. Some projects may never happen.
“In Lancaster, the Bulova (redevelopment) doesn’t happen without New Markets,” Betancourt said.
The New Markets program has previously been used to help erect a new Hamilton Health Center facility in Harrisburg’s South Allison Hill neighborhood. Zamagias used the program to help fund a mixed-use renovation of the historic Keppel Building in downtown Lancaster.
Royal Square Development & Construction received tax credits in 2015 and again in 2017 to support mixed-use redevelopment projects along Market Street in downtown York.
Harrisburg developer WCI Partners LP has used the credits in redeveloping a string of vacant and blighted properties in the 900 block of North Third Street in Midtown Harrisburg for dozens of apartments and new commercial spaces.
Both developers will be in a holding pattern on large projects until new credits are allocated. Treasury could announce its next funding round at the end of this year.
“I think any project that was in process and relying on this program will likely be on hold,” said Dave Butcher, president and partner at WCI Partners. In the meantime, WCI plans to focus on smaller residential renovations.
In addition to New Markets, WCI also has relied on state grant programs such as the Redevelopment Assistance Capital Program to help subsidize costs for redevelopment work.
WCI received both tax credits and RACP funds in 2015 and 2016 to support its work on North Third Street.
“Without these programs, it’s extremely difficult to do this type of urban development,” Butcher said.
Some investors may still end up pursuing state loan programs to get deals moving, Betancourt said. Community First Fund also is pushing a federal loan program it recently accessed, called the CDFI Bond Guarantee Program, which could support smaller real estate projects.
But many developers will likely play the waiting game for New Markets.
Community First Fund, which serves 15 counties in southeastern Pennsylvania, had more than $100 million in project requests from developers in its pipeline at the time of the Feb. 13 announcement by Treasury. Commonwealth Cornerstone Group, which covers the whole state, had more than $500 million in requests.
Charlotte Folmer, executive director at Commonwealth Cornerstone Group, said she hopes new allocations will return at the end of this year to Central Pennsylvania.
“There isn’t an alternative that can take the place of New Markets,” she said.