Maine’s New Markets Capital Investment Program continues to receive critical attention from the legislature and media.
Recently, a legislator proposed yet another reform that would have established benchmarks for a project’s effectiveness in terms of job creation and allowed the recapture of credits taken from sham transactions. The Midtown Project in Portland’s Bayside neighborhood received critical attention because it is seeking tax credits under the program.
I think the program is unnecessarily complicated and its complexity invites mischief. Nevertheless, I support it. The key is to use good judgment and select worthwhile projects.
You may recall how in 2012 we got taken by a bunch of slickers from away in the Great Northern Paper deal to save the mill in East Millinocket. The deal reduced mill owner Cate Street Capitol’s high-interest debt by $7 million, paid brokers and lawyers a million dollars in fees, and generated no new investment in the mill, which wound up closing in 2014. To make matters worse, the deal-makers appear to have inflated the value of the deal with one-day loans, so that it will cost Maine taxpayers $16 million worth of refundable tax credits over seven years.
The deal was done under the program, which our Legislature created in 2011 to encourage investment in economically distressed areas of the state, to create and preserve jobs, and to promote the general welfare of the state by offering incentives to induce investments in economically distressed areas. The program encourages investment with refundable tax credits that are irrevocable in the sense that they will not be impaired by subsequent changes in law and will be honored by successor legislatures.
Maine’s program was modeled on a federal program created by Congress with bipartisan support in 2000. That program was an offshoot of Republican Congressman and HUD Secretary Jack Kemp’s idea of using the tax code to create market incentives for the private sector to invest in poor communities. Maine is one of at least 15 states that have a state analog to the federal program.
The federal program provides credits against federal income taxes for making investments in “community development entities” to create jobs for, and improve the lives of, residents of low-income communities. CDEs are organizations whose primary mission is to invest in low-income communities. The types of investment that qualify for the credits include buying an interest in, making a loan to, or providing services to a low-income community business, and one CDE buying a loan from another.
The federal program has anti-abuse rules that allow the IRS to recapture credits in certain situations. Those situations include a deal in which most of the money does not go into a qualified low-income community investment, or a deal whose principle purpose is inconsistent with the program.
Maine’s program piggybacks on the federal program by requiring that applicants be participants in good standing in the federal program, and requiring that they disclose their track record in the federal program. Applicants must explain how the proceeds of their investment will be used and how much of a tax credit they are seeking. The credit is a percentage of the purchase price of the investment and may be as much as 39 percent. At least 85 percent of the price of the investment must go to the low-income community business. If it does not, then the tax assessor may recapture the credits.
Maine’s program is administered by the Finance Authority of Maine, the quasi-governmental agency that administers Maine’s student loan program, among others. FAME acts through a 15-member board appointed by the governor. The board is composed of the state treasurer, a natural resources commissioner, the commissioner of economic and community development, nine at-large members, and three designated members, one of whom must be a CPA, one an attorney, and one a banker. FAME has a CEO and a staff of professionals to advise its board and do its work.
At its August 2012 meeting, FAME’s board acknowledged that the program’s typical transactions were complicated and it agreed to get a tutorial from staff to better understand them. At the September meeting, staff explained that a typical transaction was a leveraged investment consisting of a conventional loan from a lender and an equity investment from one or more investors.
Both go to the CDE, which uses the money to make two loans to a low-income community business. One loan matches the original conventional loan. The other loan matches the equity investment, but is on more favorable terms. The lender gets repaid with interest. The investor gets tax credits worth 39 percent of the total value of the loan and equity investment. The lender and investor can be related. The business gets the benefit of the lower, blended interest rate, and usually only has to repay the lender because the investor gets their return in the form of the tax credits.
Maine’s program has been used to support numerous projects in the working forest industry, as well as capital improvements to the Farnsworth Museum in Rockland, the Gulf of Maine Institute in Portland, and the Portland Public Market conversion into office space. The developers of the Press Hotel in Portland even applied for the credits.
The board approved the GNP deal at its December 2012 meeting, with 12 of 15 members present. The deal was described as a variation on the typical transaction: A newly created entity was going to use a one-day loan to pay off existing debt and to buy fixed assets from a related entity, so that no funds would be used to buy additional goods, services or facilities. The applicants argued it would qualify under the federal program.
FAME staff was concerned that it did not provide enough of a benefit to the community. Nevertheless, the staff recommended approval based on the applicants’ characterization of the issue as one of timing, and their commitment to spend an additional $9 million on the mill over the following year. Eleven members of FAME’s board voted to approve the project; then-state Treasurer Bruce Poliquin abstained.
That decision that doesn’t seem to have been a great value at the time and looked worse in hindsight: paying $16 million in tax credits over seven years to retire $7 million worth of high-interest debt on a business in a declining industry. FAME should have been up to the task. After all, some of its board and staff were subject-matter experts, accountants, lawyers and bankers. While the deal was complicated, it seems to have been explained to the board. There was a lot of pressure to save the mill, and I suspect that is in large measure why FAME approved the deal.
Admittedly, there is political pressure on both sides of the Midtown Project. However, it is designed to create needed residential units, office space, parking, and jobs in a low-income but up-and-coming area of Portland that has enormous potential.
It fits the program, and is worth investing the credits.
Halsey Frank is a Portland resident, attorney and former chairman of the Republican City Committee.