What are typical sources of financing that can be secured for real estate projects?
Traditional public infrastructure support includes typical municipal bonds and infrastructure or general obligation bonds that go toward public improvements that support the site, like roadway access and public parking garages. Also, there are truly subordinate sources that generate equity for commercial redevelopment projects. There are two particularly prominent funding sources of this type. First, historic tax credits, offered by the U.S. government and available through the IRS, provide tax credit for the eligible amount of investment directed toward upgrading eligible properties. Second, the New Market Tax Credit, another federally designated program, was established to support job creation.
These tax credits are typically earned by the developers and syndicated to an investor, usually institutions such as banks and corporations. Developers could use the credits themselves, but usually the developer is not generating enough income to take advantage of them. So they are sold to corporations, which contribute much-needed equity to projects.
In addition to federally designated tax credits, the state of Ohio now offers historic and New Market tax credits as well. Another source of funding is local foundations, such as the Cleveland Foundation, the Greater Cleveland Partnership and the Columbus Foundation, that support historic or urban redevelopments and job creation.
Typically the final piece in these communities is the urban governments themselves — the cities of Akron, Cleveland and Columbus all offer either redevelopment or economic development grants and low-interest financing sources.
Why are these partnerships becoming more prevalent?
Their increased prevalence is a reflection of the economic times. The last time that significant public/private partnerships were required was the late ’80s and early ’90s, when a lot of our urban cores were redeveloped. Projects like the Short North area in Columbus and Tower City in Cleveland received significant tax credits for historic renovation.
Help was required because economic times were such that market rents wouldn’t support private capital doing it alone, and there was a scarcity of capital. We’re going through that again, as many large-scale projects were stopped when the financial markets crashed in 2008. Slowly, developers have dusted themselves off and government and foundation sources have stepped up in creative ways to support development. In turn, the banking industry has been nudged back to the table.
When times are tough and capital is scarce, everyone needs to come to the table to get these deals done, or else nothing happens in the marketplace.
Michael K. Dostal is a Senior Vice President and Commercial Real Estate Manager with FirstMerit Bank. Reach him at (216) 694-5654 or [email protected].
