Last fall, in the heart of Memphis, Tenn., workers swarmed over a gothic revival skyscraper that had stood vacant and crumbling for more than 10 years.

“It was like a black hole just sucking the life out of downtown,” said Bill Whitman, president of Telesis CDE Corp., a developer based in Washington, D.C. Telesis planned to open the first new apartments in December 2007 in the redeveloped 22-story Columbian Mutual Tower and the five-story Lowenstein Building next door. The combined project, known as the Court Square Center, will eventually include 59 residential units and 27,675 square feet of retail and office space.

A government program made the deal work. Telesis’ $51 million project received $11.7 million in equity from the sale of New Markets Tax Credits (NMTCs).

NMTCs can help developers break into new markets just as those markets are ready to break out. Several developers have used the complicated federal program to pioneer projects that mix new apartments and commercial space in old downtowns that were ready for revival.

For example, the number of housing units in downtown Lansing, Mich., has increased tenfold since local developer Buildtech, Ltd., opened a NMTC-funded project there just two years ago.

The old Arbaugh Department Store opened the first of 48 apartments and 20,000 square feet of office space in December 2005.

Since then, the number of housing units downtown has grown from less than 50 to about 500, according to Rich Karp, president of the for-profit developer.

Buildtech also benefited from the boom downtown. Both the Arbaugh’s office space and apartments are fully occupied. And that’s not all. The economic growth the project helped to spur has circled back to boost profit margins for Buildtech. “We’ve been raising the rents steadily,” Karp said.

What projects work

NMTCs are designed to help bring commercial development to low-income neighborhoods.

The program creates a tax credit equal to 39 percent of the qualified equity investments made in a development. The tax credit can be sold to investors to help fill gaps in the project’s budget.

“For anything with a commercial component, NMTCs are just a natural tool,” said Telesis’ Whitman.

The challenge is to find a location where unemployment is high enough or incomes are low enough to make the neighborhood what officials call a “qualified census tract,” but where the local market is still strong enough to support new retail or office space.

“We obviously do a lot of work on the market studies,” said Whitman.

Some of the best project sites are historic buildings in run-down downtowns surrounded by wealthier suburbs, said Whitman. These sites can have good traffic from potential shoppers, even if those shoppers currently lock their car doors when they drive past vacant old buildings.

A realistic analysis of the marketability of the property’s commercial space is crucial, because the success of a mixed-use NMTC development depends on that space, said Whitman. Government regulations require at least 20 percent of an NMTC-funded project’s income to come from retail or office rents, as opposed to apartment rents. Plus, lenders like Key Community Development Corp. favor New Markets projects in which market studies predict commercial rents strong enough to provide 40 percent or more of the project’s income, according to Roz Ciulla, senior vice president and manager of Key Community Development Corp.

NMTC projects should also have more than $2 million in development costs, experts say. That’s because a smaller project probably won’t bring in enough equity from the sale of NMTCs to justify the $100,000 or so it can cost to close a deal, according to developers.

Developers planning to use NMTCs should also be comfortable working with government programs. The NMTC program requires seven years of government compliance after the project is finished.

Experienced New Markets developers like Buildtech prefer to use NMTCs at projects already slated to tap other government programs, like HOME funds or Community Development Block Grants, that require years of compliance. Otherwise, the NMTC program rules impose a layer of compliance requirements where there wouldn’t otherwise be one.

How to get the credits

To get NMTCs, developers like Alexander Co. first check with their lenders. Most of the community development entities (CDEs) that distribute NMTCs are finance providers like banks or foundations. These CDEs get their NMTCs from the U.S. Department of the Treasury, which had $3.9 billion in NMTCs to allocate in 2007 through its Community Development Financial Institutions Fund (CDFI Fund).

Developers often swamp CDEs with requests for financing that total 10 times or more the NMTCs that the CDEs have to allocate, according to experts familiar with the program.

Some developers, like Telesis and McCormack Baron Salazar, have improved their odds by setting themselves up as CDEs and applying directly to the CDFI Fund. The supply/ demand ratio for NMTCs is 7-to- 1 for CDEs applying to the CDFI Fund versus 10-to-1 for applicants requesting credits from the CDEs.

If a developer fails to get NMTCs from its lenders, the next step is to review the complete list of CDEs available from the CDFI Fund, and look for CDEs whose program goals focus on urban redevelopment.

“It’s a lot of hunting around,” said Jonathan Beck, development project manager for Madison, Wis.-based Alexander Co. The developer is currently financing its mixed-use Capitol West development in downtown Madison with help from NMTCs.

“We need to have a project that really sings,” he said. Fortunately for Beck, plans to restore landmark historic buildings in struggling downtowns tend to have just the right kind of grandeur.