Gateway Transit Village: A Financial Model for NMTC Success
The following was distributed as part of the New Markets Tax Credit Connection - Summer 2014 newsletter.
What started as a discussion between a public university and a non-profit development company became a redevelopment project that has helped create a post-recession renaissance in New Brunswick, NJ.
The Gateway Transit Village, heralded at its groundbreaking by then-Governor Corzine as “the epitome of smart growth,” is a mixed-use retail, office, residential, and mass-transit access hub that fills a 1.2-acre lot between New Brunswick’s train station and the historic East End entrance to Rutgers University. The complex project required complex financing, including New Markets Tax Credits, New Jersey Urban Transit Hub Tax Credits, a Transportation Trust Fund grant, and bond allocations through the American Recovery and Reinvestment Act.
“We knew it was imperative to the viability of the project that we structure the financing in a manner that would make it possible to build Gateway Transit Village in what – at the time – was a long, slow recovery from the Great Recession,” says Jo Ann Clipp, Senior Manager with CohnReznick.
The public-private partnership is the work of the New Brunswick Development Corporation (DEVCO), The New Brunswick Parking Authority (Parking Authority), Penrose Properties, and the New Jersey Economic Development Authority.
“It is a great public private partnership and one of the largest and most complex projects I’ve seen,” says Joel Cohn, a Partner with CohnReznick. “We are thrilled to have been part of this success story.”
The 24-story high rise includes 10 levels of structured parking where commuters using the train station can park their cars in 656 spaces at the base of the high-rise. Pedestrians walking to the train station can shop in the tower’s 57,000 square-feet of retail space, including restaurant space and the new Rutgers University bookstore. There’s also 55,000 square feet of office space. Up above, Gateway Transit Village has brought a new, 192-unit residential community called The Vue to downtown New Brunswick, with 42 condominiums featuring views of the Raritan River and 150 rental apartments. A pedestrian bridge stretches for 200 feet through the site, connecting the train station and the entrance to Rutgers.
How Was the Deal Structured to Be Financially Viable?
CohnReznick is proud to have helped structure the $127.9 million deal to finance this influential project. The deal required unique financial engineering in order to fit the financial structure to the ownership structure. In particular, the project featured initially one, but what would eventually become two Qualified Active Low-Income Community Businesses (QALICBs), with the garage and part of the retail space later being designated to a Parking Authority QALICB, and the remainder of the project being designated to a Rutgers University QALICB.
The challenge was that the building didn’t initially exist; meaning that under local law, there was no property to partition between the two QALICBs. Someone had to build and own the property initially, and then the entire financing structure had to be designed to be split at some point, in this case, after the entire structure was completed.
Cost-efficiently executing the split required significant forward thinking as the entirety of the deal needed to be set-up to support the eventual partitioning of the property. This included requiring the initial QALICB and each of the two future QALICBs to be qualified for NMTC purposes. Further, all loans from the community development entities (CDEs) to the QALICBs needed to be structured as two separate loans – one to each of the ultimate QALICBs. For example, a $100 loan from a CDE would be split into loans for $30 and $70 to the separate QALICBs, with the split being determined based on the how the funds were being used according to the ultimate ownership structure. There were 18 “mirrored” loans – 9 to each QALICB – in the financing arrangement.
Why So Many CDEs?
When it comes to CDE allocations, the industry is at a cross-road of two competing trends. On the one hand, a focus on simplicity, lower cost, and faster execution is creating a drive toward having fewer CDEs financing a transaction. On the other hand, CDEs are less willing to use large amounts of their allocation on a single project as they attempt to fund as many worthy projects as possible – necessitating a need for more CDEs to produce the NMTC financing a project may require. On this project, the latter trend prevailed.
Although not unheard of for a large NMTC development, the Gateway Transit Village project utilized five different CDEs to generate the necessary NMTCs. Gateway’s five CDEs each provided part of $57.8 million in qualified equity investments to generate NMTCs equal to 39% of the investment, or a total of $16.7 million in NMTCs. Once the CDEs generated their NMTCs, they then made a series of construction loans totaling $57.3 million.
The developers of Gateway Transit Village would have been happy to have another two or three CDEs in the deal to finance the tower. If another CDE with an allocation of NMTCs had been available, even more of the capital used to develop Gateway Transit Village could have been funneled through CDEs as qualified equity investments to generate NMTCs. “We could have used another $30 million in NMTC allocation,” says Clipp.
What Does CohnReznick Think?
Financing complex projects like Gateway Transit Village, featuring a public-private partnership, multiple QALICBs, and numerous CDEs, often require innovative financial engineering to find a deal structure that works for all parties. Invest early in this financial engineering in order to reap the dividends of improved deal execution over the long term. In this example, as the property is preparing to be split, very few issues need to be revisited, avoiding unneeded costs caused by practitioners reopening files to re-familiarize themselves with the transaction.
The information contained herein (or in any attachment) is not intended to be used by any taxpayer for the purpose of avoiding any penalties that a taxing authority might impose on the taxpayer or for the promoting, marketing or recommending to another party any tax related matters.
The information in this transmission is privileged and confidential and intended only for the recipient listed above. If you are not the intended recipient, please advise the sender immediately by reply e-mail and delete this message and any attachments without retaining a copy. If you are not the intended recipient, you are hereby notified that any disclosure, copying or distribution of this message, or the taking of any action based upon it, is strictly prohibited.
This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.