Cherrytree Group LLC Blog

...by Warren Kirshenbaum

The top state energy official in Massachusetts marked Earth Day this week by announcing a new solar power initiative. The pilot program is aimed at bringing the power of the sun to the masses.

A grassroots marketing effort will attempt to sell solar power house by house and business by business and through volume discount pricing attempting to overcome a chief drawback, the high cost of installing solar power systems. Richard Sullivan, Secretary of the Massachusetts Executive Office of Energy and Environmental Affairs says the program called “Solarize Massachusetts” introduces a new business model for small scale solar projects for homes and businesses.

It is a way to aggregate and drive down the cost of installation.

Proponents of the program hope it will take solar energy in Massachusetts beyond the early adopters and reduce the need for substantial government rebates for solar. Sullivan says Massachusetts has one of the most ambitious clean energy programs in the country, but 80 percent of the roughly 22 billion dollars spent on energy annually in Massachusetts goes out of the state, most of it out of the country.

Since 2006, incentive programs have helped increase solar power by 20 fold in Massachusetts. The state has 45 megawatts of solar power installed and another 40 megawatts under contract for installation. By statute, 250 megawatts of solar power is to be installed by 2017.

The effort to increase adoption of solar power will begin this year in four pilot communities Hatfield, Harvard, Scituate and Winchester. These were selected at random from geographic regions and each meets certain criteria under the state's Green Communities Program.

The Massachusetts Clean Energy Center, partnering with the state to run the pilot program, is seeking bids from companies willing to provide homeowners and businesses with a turnkey solar power system on a tiered price schedule that lowers the costs for multiple installations. Existing state and federal renewable energy credits would also be available for purchasing the solar power systems.

The director for the Massachusetts Clean Energy Center says funding is available for up to 400 projects.

Funding for the solarization pilot project comes from a clean energy surcharge on Massachusetts utility bills and from the sale of renewable energy credits.

Original news story can be seen and heard WAMC Northeast Public Radio - Paul Tuthill

... By Warren Kirshenbaum

Baltimore Area Institutions to Receive Over $155 Million in New Markets Tax Credit Awards

BALTIMORE, MD - In an effort to highlight the Obama Administration’s key investments in broad-based economic growth and commitment to the revitalization of communities stricken by the economic crisis, Community Development Financial Institutions Fund Director Donna Gambrell today visited a job training and human services organization in Baltimore benefiting from private sector investments made possible through the New Markets Tax Credit (NMTC). Speaking alongside Representative Elijah Cummings, Director Gambrell announced the selection of 99 organizations nationwide to receive NMTC allocation awards under the 2010 program round. These 99 awards will leverage billions of dollars of investment into businesses and real estate projects to create jobs and promote growth in communities with high rates of poverty and unemployment.

“The New Markets Tax Credit continues to be a tool for job-creation and economic revitalization in areas that struggle to attract investment because of poverty, unemployment and a lack of opportunity” said Director Gambrell. “I am honored to announce the 2010 New Markets Tax Credit Award allocations with Representative Cummings here in Baltimore, where our partners have demonstrated why this tool has been so effective in making literally thousands of projects possible across the country and give Americans a chance to make a living, to start a business and to build a better future in areas that need it most.”

The NMTC, established by Congress in December 2000, permits individual and corporate taxpayers to receive a credit against federal income taxes for making equity investments in investment vehicles known as Community Development Entities (CDEs). The credit provided to the investor totals 39 percent of the cost of the investment and is claimed over a seven-year period. CDEs must apply to the Treasury Department’s Community Development Financial Institutions Fund (CDFI Fund) to compete for this allocation authority. The 99 organizations receiving awards were selected from a pool of 250 applicants that requested over $23.5 billion. They are headquartered in 27 different states and the District of Columbia; but have identified principal service areas that will cover nearly every state in the country, as well the District of Columbia.

“By helping our partners in community development secure critical funding for job-creating projects, the New Markets Tax Credit is helping to bring opportunity and drive investment in our local businesses and communities,” said Representative Cummings. “In these tough economic times Baltimore welcomes the support of the CDFI Fund, and we will continue working to ensure that we're reaching the hardest hit.”

Director Gambrell’s and Representative Cummings’ announcement was made today at Humanim Inc., a nonprofit organization that provides workforce development and rehabilitation services to individuals with disabilities and other barriers to employment. An award winning human services organization, Humanim provides a ground-breaking model for delivering expanded employment services that gives those individuals in greatest need the opportunity to build a career and attain financial independence. Over $14 million in NMTC financing provided by City First Bank of DC and the National Trust Community Investment Corporation allowed Humanim to convert a large brewery that sat abandoned for 35 years in one of the poorest neighborhoods in Baltimore into its headquarters. Humanim reaches individuals of all ages with comprehensive vocational services.

Having benefitted from funding under the NMTC, Humanim highlights the effectiveness of the NMTC in leveraging private investment to complete economic and community development projects that help revitalize communities with high rates of poverty and unemployment. In total, five institutions in Maryland will receive funds in this NMTC award round to invest in development projects.

To date, over $20 billion of private-sector capital has been invested through the NMTC into urban and rural communities throughout the country, helping to create or retain hundreds of thousands of jobs and to provide low-income community residents with access to quality education, health care, job training, housing and critical retail services in their communities.

2010 NMTC Program Awards

2010 NMTC Program Award List
2010 NMTC Program Highlights
2010 NMTC Program Allocatee Profiles
2010 NMTC Program Award Booklet

A complete list of the 99 organizations selected and additional information on the NMTC Program can be found on the CDFI Fund’s web site at: http://www.cdfifund.gov.

REITs - Real Estate Investing Minus the Headaches

By Warren Kirshenbaum

Real Estate Investment Trusts (REITS) have traditionally offered many advantages to investors looking to the real estate market for diversification and tax advantages.

They generally have higher yields and lower portfolio turnover than stocks or stock funds, plus they have the potential for capital gains.

As real estate bottomed, the rumor was that REITs had come and gone. But more likely, the weak housing market may have opened the door for smaller investors to participate in the short- and long-term gains offered by REITs -- which is especially appealing to the many investors who can't afford to buy a home or who aren't interested in owning physical property.

How REITs Work

REITs are created to hold a pool of managed real estate properties or mortgages. The REIT itself is not actively managed, relying instead on a set portfolio of preselected properties that is maintained for the duration of the trust. When the trust matures, the portfolio is reset according to the REIT's investment objectives. Each trust is considered to be a distinct security, with each unit in the REIT constituting a proportional share of ownership in each asset held within the trust.

REITs tend to focus more on value than growth. Historically, REITs have provided higher yields than other types of fixed-income securities, making them attractive holdings for moderate income investors. They tend to be more immune to market volatility than stocks or stock funds because of their correlation with the real estate sector.

Categories of REITs

There are three basic categories of REITs: equity, mortgage and hybrid.

Equity REITs receive rental income from the properties held within the trust as well as the capital gains from property sales. These three different streams of income make equity REITs the most desirable of the three.

Mortgage REITs are considered to be riskier than equity REITs because of their vulnerability to changes in interest rates. As with all other fixed-income securities, the value of mortgage REITs can drop substantially if interest rates rise.

Hybrid REITs are a combination of equity and mortgage REITs. There are several different varieties of hybrid REITs: some are open-ended securities, while others are closed-ended; some have a limited life span, while others are perpetual. They can also be invested in as little as one property, although they are usually invested in a group of properties.

Taxation of REITs at the Trust Level

The IRS requires REITs to follow specific rules of taxation. First, they are taxed as a trust, and unitholders pay tax on the income they receive. In most cases, little or no income is held at the trust level, and usually 100% of the income is passed on to investors.

The IRS requires that REITs distribute at least 90% of the income generated by the trust’s portfolio to unit holders. However, they must follow the same method of self-assessment that corporations are required to use. This means that REITs have to obey the same valuation and accounting rules as corporations, but pass cash flow (instead of profits) directly through the trust to unitholders.

In most cases, REITs are generally exempt from taxation at the trust level provided they distribute at least 90% of their income to their unit holders. Even some REITs that adhere to this rule will still face corporate taxation on any retained income, depending upon the provisions spelled out in the initial trust indenture.

The taxation of REITs differs from that of other unit investment trusts. Because the government considers them to be the business of managing properties, rental income is treated as business income to REITs. Therefore, all expenses related to rental activities managed by the trust are deductible, just as business expenses can be written off by a corporation.

How Will You be Taxed on Income From a REIT?

Because they are rarely taxed at the trust level, REITs usually pay larger dividends than stocks, which can only pay dividends after being taxed at the corporate level.

For the most part, REIT dividends are taxed to the unitholder as ordinary income just like stock mutual fund dividends. This means that you will pay tax on these dividends at your marginal tax rate.

However, some REIT dividends are classified as “qualified” dividends, which are a special type of dividend taxed at the more favorable capital gain rates. Some of the dividends you receive from your REIT may also be considered a non-taxable return of capital. When this happens, your taxable income from the REIT is reduced accordingly for the year. Return of capital distributions reduce your cost basis and you will not pay tax on return of capital distributions until the REIT matures or you sell it.

By Warren Kirshenbaum

In the recent election, Question 2 on the Massachusetts ballot asked whether voters should “repeal the law allowing developers of projects that include low- or moderate-income housing to apply for a single comprehensive permit from a city or town’s zoning board” The law in question is M.G.L. Chapter 40B, which is an expedited permitting statute. Chapter 40B creates an expedited permitting procedure for those developers that include an affordable component to their development. Specifically, in order to receive a permit under 40B, 25% of the housing units to be built must be considered affordable housing. The towns in the Commonwealth that are subject to 40B are those towns whose affordable housing stock does not exceed 10% of their total housing inventory. 40B subjects the Zoning Board to a streamlined procedure greatly reducing the time and cost of the permitting procedure, and limiting the ability of the town to deny the permit.

On Tuesday, November 2nd, Massachusetts voters, in a decisive victory of 58% to 42% voted not to repeal 40B.

This trend in the voting patterns comports with conversations that I had with people, in which it seemed that there was a lot of non-information, and even misinformation on this issue, and as this movement to repeal 40B could resurface again, I am hoping to shed some light on the issue in this post.

The main underlying issue that I sensed is the NIMBY one. Not in My Back Yard is understandable, and is a concern about falling property values and the denigration of a neighborhood when some of the housing is affordable. Declining property values is indeed a fallout of affordable housing, as the financing options discussed below are very favorable to developers or affordable buyers and, therefore, their properties. These affordability factors lower the market value of a single family home, or a multifamily property, and, therefore, affect the comps of other sellers in the area. This effect is a micro-economic effect, and a relatively minor one at that, as lower comps would affect a financing appraisal in small part, and the market value of a sale with even less consequence. In any event, 40B historically has mostly been used for multi-family construction, and 95% of the projects permitted under 40B are multi-family apartment complexes or condos.

Practically speaking, if a condo development were built near your home, whether it was affordable or market-rate your property value and property enjoyment would decline, so this is not an affordable housing, or 40B issue, as much as it is a land-use or urban planning issue.

Secondly, people I spoke to understood 40B to be a financing statute, and assumed that it gave developers funding to pursue their affordable housing projects. 40B is an expedited permitting statute that allows an override of municipal zoning authority to promote affordable housing. It is not a financing statute. There are forms of financing that are available to developers of affordable housing, such as the Federal Low Income Housing Tax Credit, HUD insured mortgages, tax-exempt bonds, Community Block Grants, and other state and federal sources of funding, and developers use these sources of funding once they are permitted, whether pursuant to 40B or otherwise. 40B is not a preamble to these sources of financing.

While realizing that concern over retaining a leafy suburban lifestyle, or holding on to a paper appraisal of a home value may be important to some in the micro-economic sense, it is not a positive economic trend in the big picture that justifies the repeal of a statute such as 40B. Consider this: a community is more than just our home values; it is a collection of individuals, families, homes, stores, houses of worship, and so forth. While we are happy when we see a fire truck scooting off to tame a brush fire near our neighbor’s yard, we would be foolish to attempt to exclude the possibility that the first responders on the fire-truck also be given the opportunity to live among us in our community by creating affordable options here, and not force them to be relegated to living in a far-off town for affordability reasons.

It should also be pointed out since its enactment, 40B has been credited with spurring upwards of 80% of the new development in Massachusetts, and there are several new developments, as well as many ongoing ones that would not have been built, or will not now be completed were 40B to be repealed, or if it didn’t exist in the first place. This construction has created jobs, spending, and economic activity that we rely on for our stability, and, particularly in our economic malaise, we can little afford to repeal a statute that has created such substantial growth and employment.

The Citizens Housing and Planning Association (“CHAPA”), a prominent Massachusetts non-profit that plays a decisive role in encouraging the production and preservation of affordable housing claimed that this vote evidenced the largest victory margin of any ballot campaign. CHAPA claimed that, “over 1.2 million voters and 80% of cities and towns affirmed their support for protecting the affordable housing law for seniors and working families in urban, suburban, and rural communities all across the state.” While this is true, an analysis of the voting results shows that the larger urban centers voted strongly in favor of not repealing 40B, constituting the largest slice of the 16% victory margin, while the voting in many towns was closer than this 16% victory margin suggests. Many towns actually voted in favor of repeal. Cities and towns such as Worcester, Somerville, Quincy, Arlington, Boston, Brockton, Lawrence, New Bedford and Cambridge opposed repealing 40B in large numbers, and they were joined by the suburban bastions of Newton, Needham, Lexington, Brookline, and Milton, which all together carried the NO vote on this question. Significantly, however, there were also several towns that voted to repeal 40B, such as Abington, Amesbury, Billerica, Bridgewater, Sudbury, Stoughton, Wilmington, Westford, Chelmsford, Tewksbury, Walpole, and Canton.