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New Markets Tax Credits and Historic Rehabilitation

Published by John M. Tess on Monday, May 6, 2019

Journal cover May 2019   Download PDF

The New Markets Tax Credit (NMTC) program was created as part of the Community Renewal Tax Relief Act of 2000 passed during the Clinton administration with the intent to improve business development in economically distressed areas of the country.

The bill had three primary provisions: First, it authorized the creation of 40 “renewal communities,” which would receive special tax incentives for businesses to locate and hire residents that “had not experienced recent economic expansion.” Second, the bill expanded the “empowerment zone” program, which was created in 1993 to provide specific tax benefits to businesses located within. The third piece of the legislation was the creation of the NMTC.

The goal of the NMTC program was to spur revitalization efforts in low-income and impoverished communities by providing tax credit incentives to investors for equity investments in certified community development entities (CDE), which invested in low-income communities. The credit equaled 39 percent of the investment paid out (5 percent in each of the first three years, then 6 percent in the final four years, for 39 percent) over seven years. CDE service areas vary from nationwide to multistate to statewide and even local. 

The concept behind the NMTC emerged in the late 1990s, when numerous foundations and think tanks worked to popularize the idea of “community capitalism.” The concept focused on creating a tax structure that logically encouraged for-profit businesses to locate and create jobs in distressed communities.

Image: Courtesy of Triggs Photography LLC
The former Liggett & Myers cigarette factory in downtown Durham, N.C., was redeveloped into laboratory space and biotech incubators with financing from the new markets tax credit, federal historic tax credit and state mill credits.

The actual NMTC structure is complicated. It requires certified CDEs to competitively apply for annual tax credit allocations based on qualified equity investments (QEI) from investors. For the investors to claim the credits, the CDE needed to use substantially all of the QEI from investors to make “qualified low income community investments” in qualified active low-income community businesses in low-income communities. The challenge of navigating the process was mitigated by the potential for a cumulative 39 percent tax credit spread over a seven-year period. 

Competition was typically keen. In 2016, which was a two-year cycle, 238 CDEs applied for allocations totaling $17.6 billion. NMTC were awarded to 120 CDEs, totaling $7 billion over a two-year period. Typically, the annual allocation is $3.5 billion.

Credits are spread to major urban areas (60 percent), with a typical mix of 20 percent in minor urban areas and 20 percent in rural areas. Of the allocations, about 70 percent fund operating business while 30 percent fund real estate projects.

The impact of the program is impressive. Over 14 rounds, the federal government has allocated $54 billion in tax credits. In turn, for every $1 of tax credit, NMTC has generated $8 of private investment. NMTCs have financed more than 5,400 businesses in low-income communities, creating nearly 750,000 jobs and have created 84.6 million square feet of manufacturing space, 62.7 million square feet of office space and 42.7 million square feet of retail space.

NMTCs can be used in the rehabilitation of historic buildings, combined with both the federal historic tax credit (HTC) and where applicable, state HTCs or other incentives. Combining the credits does however add significant complications to the organizational structure; it is essential to have a solid and experienced team of historic consultants, accountants and attorneys. This complication translates directly to noticeably higher project soft costs for administration and professional services. In practical terms, a smaller project becomes more challenging.

Unlike federal and most state HTCs, which are available by right and have no volume cap, the NMTC program is competitive and requires securing an allocation from a CDE that has received an award and has available credits. Finally, it is important to note that while the recapture period for the HTC is five years, the recapture period for NMTC is seven years; recapture for both is triggered by transferring the property to new ownership.

Image: Courtesy of Triggs Photography LLC
The former Liggett & Myers cigarette factory in downtown Durham, N.C., was redeveloped into laboratory space and biotech incubators with financing from the new markets tax credit, federal historic tax credit and state mill credits.

Chesterfield (Durham, North Carolina)

NMTCs are used to fund job creation, business expansion and new construction. It also can be used to preserve and rehabilitate iconic historic buildings. One such property is the Chesterfield, a former Liggett & Myers cigarette factory in downtown Durham, N.C.

Formerly known as the “New Cigarette Factory,” the massive and visually prominent seven-story, 286,000 square foot building was built by Liggett & Myers Tobacco Company in 1948. At the time, the Chesterfield was considered the most modern cigarette factory building in the world, featuring a steel frame structure with an open floor plate on a 22-foot square grid.

The building is located in Durham’s historic Bright Leaf District, on the west side of Durham, not far from Duke University, and was listed on the National Register in 1999. The district is comprised of 340 acres with 22 contributing buildings, all related to cigarette manufacturing. The Chesterfield Building itself was part of a larger Liggett & Myer’s complex that featured 13 buildings. 

Initially, the Liggett Group (as it was then called) planned to retrofit the buildings for a mix of uses, though primarily residential–beginning with the five northernmost buildings. They eventually transferred the properties to Blue Devil Ventures, which developed West Village I (the northern five buildings) and then West Village II (the southern six buildings) as industrial-style apartments. Initially, Blue Devil planned to also adapt the Chesterfield Building for residential uses, but the development stalled during the real estate doldrums of the 2000s.

In 2013, the building–having sat vacant for 14 years–was acquired by Wexford Science & Technology. Wexford is a real estate company exclusively focused on partnering with universities, academic medical centers and major research institutions to create vibrant, mixed-use communities built on a foundation of discovery, innovation and entrepreneurial activity. Their inspirational, collaborative innovation environments enable universities, entrepreneurs and companies to engage in a way that brings new thinking and new ideas to light. Wexford has developed or has under development major projects in more than a dozen cities across the country and recently completed six buildings in the Wake Forest Innovation Quarter in Winston-Salem, N.C.

Wexford jettisoned the residential concepts for the Chesterfield, focusing instead on creating state-of-the-art laboratory spaces, both as permanent laboratory space and as biotech incubators. The new project was $129.5 million with a dramatic central six-story atrium and gathering space core, complemented by common amenities such as meeting and conference center. Anchored by Duke University, tenants are typically full or multiple floors with limited ground floor street facing retail and limited basement parking. Particular to Duke, the Chesterfield Building provided the university with the opportunity to co-locate with private-sector entrepreneurs and provide space for its School of Medicine and School of Engineering researchers.

One of the particular challenges was inserting new window openings in the street-facing elevation. The original factory building, as a factory, had limited windows, insufficient for any modern use. Under the earlier residential concept, the National Park Service (NPS) had approved adding several bays of windows; though the project morphed into laboratory space, both the state historic preservation office (SHPO) and NPS allowed the new openings to remain in the design. 

A second key challenge was maintaining the interior industrial character while also creating sterile laboratory spaces for scientific research. The project team worked closely with the SHPO and the NPS to find the right balance.

The NMTCs played a defining role in making this project pencil. Of the $129.5 million, federal HTCs were $18.3 million, while the state mill credit was another $17.9 million. NMTCs were $11.8 million through Baltimore-based Urban Action Community Development, targeting both job creation and building revitalization. Another $6 million came in the form of city of Durham incentives.

“The revitalization of this massive building was a complicated financial undertaking,” said Jonathan Ades, senior director of finance for Wexford. “Our financial package included the federal historic tax credit, the North Carolina mill rehabilitation tax credit and an incentive agreement with both the city and county of Durham as well as new market tax credits and owner equity. There was a reason this building stood vacant for two decades and to make this work, we needed to use every tool in the urban revitalization financial toolbox. Without the NMTC, this project would not have happened.”

Image: Courtesy of Triggs Photography LLC
Formerly known as the “New Cigarette Factory,” the massive and visually prominent seven-story, 286,000 square foot building was built by Liggett & Myers Tobacco Company in 1948.


The NMTC program was created to stimulate job creation and construction activity in economically distressed areas. Over its decade-and-a-half, the credits have a very successful history, leveraging $54 billion in tax credits into an investment of more than $400 billion into jobs and buildings. Though complicated to use, NMTCs are a vital piece of the historic rehabilitation toolbox, one that can be combined with federal and state historic incentives to have stunning results.

Nowhere is this more evident than in Liggett & Meyers’ Chesterfield Building. Vacant since the late 1990s, this massive structure was transformed by developer Wexford Science & Technology under the institutional sponsorship of Duke University into a state-of-the-art research facility. NMTCs were an integral component of the financial package and essential to its viability. 

John M. Tess is president and founder of Heritage Consulting Group, a national firm that assists property owners seeking local, state and federal historic tax incentives for the rehabilitation of historic properties. Since 1982 Heritage Consulting Group has represented historic projects totaling more than $3 billion in rehabilitation construction. He can be reached at 503-228-0272 or [email protected].  

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