Cherrytree Group LLC Blog

... 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.

The U.S. Treasury Department has awarded Pittsburgh's Urban Redevelopment Authority $35 million in tax credits to stimulate investment in low-income communities.

The URA was one of 99 applicants to receive the New Market Tax Credits; more than 250 government entities, nonprofits and other groups applied.

The tax credits will go to investors in "Community Development Entities," groups formed to undertake projects in low-income neighborhoods. The cedits are designed to draw private investment into those communities.

"This is great news for Pittsburgh," Mayor Luke Ravenstahl said in a statement. "This award will leverage millions of dollars of investment into businesses and real estate projects to create jobs and promote growth in our neighborhoods."

U.S. Sen. Bob Casey, D-Pa., and Rep. Mike Doyle, D-Forest Hills, supported the URA's application.

By Joe Smydo, Pittsburgh Post-Gazette

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.

If you are thinking about a strategy to make money in real estate, skip residential properties and focus on commercial real estate. This does not necessarily mean that you need to focus on commercial buildings, start with a small residential multi unit building. Buildings with five units or more are considered commercial.

Where the money happens is here; residential properties are not appraised in the same way by lenders as commercial real estate. This makes all the difference for someone looking to invest in commercial real estate.

Small residential rental properties are appraised by comparing the building to recently sold similar buildings within a mile radius. Therefore, to increase the appraisal value and recoup your down payment you have to either hold the property long enough for the value to be driven up by the market, or you need to improve the property itself. Neither of these options are very cost effective for making money quickly.

A commercial building is appraised by comparing the income and expenses to other comparable commercial properties in the area. So essentially, the lender subtracts the expenses from the rent roll and multiplies that by the capitalization rate for the vicinity of the property. The challenge is to look for properties with artificially low rent rolls. This can be found in a landlord who has owned a property for a long time or in buildings where the owner resides within and is looking to sell.

Therefore, in order to increase the value of the property and recoup your deposit, you can increase the rent roll and or decrease expenses. Not a costly endeavor in relation to the residential option, and if managed correctly, will not take an exorbitant amount of time.

You, as the investor, can recoup your deposit money in less than a year, giving you the funds to purchase a new property and repeat the strategy. With rates as they are now, still low despite the rise of the last couple months, this can make you, the investor, quite a bit of money in a few short years.