In the wake of Hurricane Sandy many businesses have been negatively impacted financially throughout regions from Connecticut, New York, New Jersey, Pennsylvania and Delaware. Hardest hit are businesses located not only along the New Jersey, Staten Island and Long Island NY coasts but in areas that have never experienced such a devastating disaster. Areas such as Hoboken NJ, lower Manhattan and the NYC East Side. Even businesses located in inland communities.
As New York, New Jersey and the City of New York begin to administer HUD CDBG monies for Super Storm Sandy recovery efforts, recipients of CDBG grants must comply with the HUD CDBG procurement requirements. When a grantee elects to hire a contractor, whether to administer a program, complete a task or do construction, those contractors must be procured competitively. Both grantees and sub recipients must follow federal procurement rules when purchasing services, supplies, materials, or equipment. Small purchase procedures allow recipients to acquire goods and services totaling no more than $100,000 without publishing a formal request for proposals or invitation for bids. The small purchases method can also be used to acquire eligible types of services, such as professional consulting, environmental review, or planning. However, if the services contract will exceed $100,000 in value, the grantee must issue a RFP under the competitive proposals requirements. The use of CDBG grants will also trigger compliance with the Davis-Bacon Act. In addition to federal regulations, most states and many local governments have laws and regulations regarding procurement.
New Jersey has received $1.82 billion allocation of Federal Sandy aid from the U.S. Department for Housing and Urban Development. This initial allocation of Federal Sandy assistance will be distributed as Community Development Block Grants. The grants will be administered by the New Jersey Economic Development Authority in conjunction with the Department of Community Affairs. Governor Christie is required to provide a proposal to HUD for the use of the aid which will explain how New Jersey agencies will meet HUD’s guidelines for allocating federal funds. The $1.82 billion represents New Jersey’s first share of a total $16 billion in anticipated block grants that will be shared among storm-hit areas of New Jersey, New York City and New York State and Connecticut.
The CDFI Fund recently published Interim Rules in the implementation of the CDFI Bond Guarantee Program authorized under the Small Business Jobs Act of 2010. Under the CDFI Fund Bond Guaranty Program, the CDFI Fund may issue federally guaranteed bonds to eligible Community Development Financial Institutions (CDFIs). These CDFIs will use the bond proceeds to make loans for community development in economically underserved areas. The CDFI Fund plans to issue its first bond guarantee this year. Under the Bond Guaranty Program, the CDFI Fund is authorized to issue up to 10 bonds per year, each at a minimum of $100 million, with a total of up to $1 billion in bonds guaranteed per year. The goal of the CDFI Bond Guarantee Program is to provide low cost capitals to CDFIs which will be used to provide financing to economically underserved areas.
Mayor Bloomberg of New York City has announced that the City plans to spend its initial allocation from HUD of $1.77 billion from the Hurricane Sandy Recovery Act in Community Development Block Grants for housing recovery, business recovery, and infrastructure resiliency. The housing recovery initiatives include rehabilitation grants for housing and grants for resiliency efforts for public housing. The City of New York will provide grants to businesses for resiliency measures including grants for innovations in resiliency technology. The infrastructure grants will be for resiliency innovations for neighborhoods and utilities. The City of New York is working with HUD for an additional $600 million for Hurricane Sandy recovery efforts.
Yesterday the Senate voted 62-36 to approve the House version of the Hurricane Sandy Bill. The $51 billion aid package for Hurricane Sandy victims is expected to be signed into law by President Barack Obama. The Act will provide $16 billion for Housing and Urban Development Department community development block grants. Of the $16 billion, approximately $12 billion will be shared among Hurricane Sandy victims as well as those from other federally declared disasters in 2011-2013. The remaining $4 billion is solely for Hurricane Sandy-related projects. The Act will also provide $11 billion to the Federal Emergency Management Agency’s disaster relief aid fund for providing shelter, restoring power and other storm-interrupted utility services and meeting other immediate needs arising from Super Storm Sandy and other disasters. The Act will also provide $10 billion to repair the New York and New Jersey transit systems as well as make the systems more resistant to future storms.
The Senate introduced a summary of the proposed Hurricane Sandy and National Relief Act of 2012. The major provisions of the Act include special allocations of Federal New Markets Tax Credit authority, Federal Low-Income Housing tax credit allocation; and Recovery Zone Bond authority. The proposed Act provides for an allocation of Federal New Markets Tax Credit authority of $500 million a year for three years to be used in federally declared major disaster areas. For the years 2013, 2014, and 2015, the Act permits States affected by Hurricane Sandy to allocate additional amounts of Federal Low-Income Housing tax credits for use in the disaster area of up to $8.00 multiplied by the State’s disaster area population. The Act will also permit affected States to issue tax-exempt Sandy bonds to finance qualified activities including residential rental projects, nonresidential real property and public utility property located in the disaster area.
While interest rates for commercial real estate financing remain low, lender underwriting criteria remains very stringent. Lenders require substantial equity, guarantees, as well as strong tenants and general contractors when financing commercial real estate transactions. As a result, creative techniques are required when developing the capital stack of a commercial real estate transaction. One technique to attract equity to a project is to maximize the value of the federal tax benefits of the transaction. A partnership “flip” structure may be used to initially provide an equity investor 99.99% of the profits and losses from the development of the transaction. At a time when the equity investor receives a target yield the interests “flip” and the interests of the sponsor and investor are adjusted to reflect the intended “back end” equity ownership of the equity investor in the project. For the right investor this partnership “flip” structure can enhance the internal rate of return to the investor by combining cash flow with the cash value to the investor of the losses generated by the development of the project.
The change in focus of the Federal New Markets Tax Credit Program to non-real estate businesses together with the high demand on the Program has deprived the real estate industry of a very valuable financing subsidy. Developers could use the New Markets Tax Credit Program to generate a subsidy of almost 20% of total project costs. The unavailabilty of the Program going forward will necessitate a new look at some old subsidies. For example, residential rental properties financed with volume cap tax-exempt bonds are eligible for the 4% Federal low-income housing tax credit without competition. The trade off for this subsidy is the restriction of the rental units to tax credit tenants for 30 years. However, this credit subsidy may be a very attractive where market and tax credit units are very similar or the project is focused on senior tenants. Similar traditional subsidies worth looking at in a new light include tax increment financing, financing through the EB-5 Program, and the variety of funding and subsidies available for green properties and properties using renewable energy. There may be some very creative uses for established subsidy programs in the development of new real estate projects.
Combining the capabilities of several strong practice areas of the firm, Duane Morris LLP has formed a Puerto Rico Renewable Energy Interdisciplinary Practice Group. This interdisciplinary practice group works with developers, lenders, investors, and private equtiy funds in the development of renewable energy projects in Puerto Rico. Dependent upon the importation of fossil fuels, Puerto Rico’s energy costs are very high making renewable energy a very cost effective alternative. In addition, the Puerto Rico Electric Power Authority has encouraged the development of renewable energy projects in the Island though the issuances of power purchase agreements with renewable energy developers. Members of the group consist of Larry Diamond and Marco Gonzalez of the firm’s Puerto Rico Practice Group, Jim McTarnaghan, and Phyllis Kessler of the firm’s Renewable Energy Practice Group, Nat Abramowitz ,who practices in the finance and bond field, and Art Momjian, who specializes in Federal tax credit programs including the federal renewable energy investment tax credit.