Smith Moore Leatherwood attorney offers insight at ICSC law conference
GREENVILLE, SC — Commercial real estate developers and credit lenders have been hit hard by the down economy in 2009. However, thanks to a program funded by the U.S. Department of the Treasury since 2000, real estate transactions are being impacted in a positive way.
Smith Moore Leatherwood LLP attorney Michele Lyerly was recently tapped to moderate a discussion concerning the New Markets Tax Credit program at the International Council of Shopping Centers 2009 U.S. Shopping Center Law Conference. Lyerly, the firm's commercial real estate practice area leader and a partner in its Greenville, SC, office, provided insight into how the tax credit loans are structured and how they are impacting commercial real estate transactions.
According to Lyerly, developers and lenders are using the New Markets Tax Credit program to create loans during today's challenging economy. A New Markets Tax Credit is a credit against federal income taxes that can be taken by individuals or businesses that make a qualified investment through a "community development entity" (CDE) and invest in a qualified commercial enterprise that is located in a low-income community.
Lyerly says that the benefit is that the developers can potentially save hundreds of thousands of dollars over the period of time in which the credit is applicable. "The amount of the credit is equal to 39 percent of the investment and can be taken over a period of seven years," says Lyerly. "Therefore, an investment of $1 million could save an individual or business $390,000 in taxes over seven years."
In addition, Lyerly says that the loan transactions can be packaged. One loan, which consists of approximately 80 percent of the total loan package, is a traditional mortgage or securitized loan with market rate terms and conditions. According to Lyerly, the second loan, consisting of approximately 20 percent of the loan package, is structured as an interest only loan with a below market rate – usually two percent per annum or less – with a 40 year maturity date.
Lyerly says that the two-loan package is one way that businesses are taking advantage of the New Market Tax Credits program, even though they do not receive the credits directly. "After seven years, the bank or CDE can require the borrowing entity to buy the second loan for a specified price, usually one percent of the face amount of the loan," says Lyerly. "With this structure, a borrower can essentially borrow 100 percent of project costs, but only have to pay back 80 percent of the loans.
A member of the International Council of Shopping Centers and the South Carolina Bar Association Real Estate Section, Lyerly holds undergraduate and law degrees from the University of South Carolina. She focuses her practice on the representation of developers, investors and users of commercial real estate and primarily works in the area of land acquisition for large-scale retail, mixed-use and "lifestyle" developments and in the development and implementation of retail tenant leases.
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