New Tax Credits for Hotel Projects

By Andrew Glincher Office Managing Partner, Nixon Peabody LLP | October 28, 2008

Unfortunately, these are the locations in which hotel projects are the most speculative and sometimes difficult to finance. They may be just outside the central business district, or in a former industrial area that has seen hard times, but is beginning to reinvent itself and turn things around.

A new federal tax credit program is designed to help developers of projects exactly like that. It is available for a wide range of commercial projects, but hotel developers need to become more aware of it. The New Markets Tax Credit (NMTC) program could easily be the difference between a property being developed or staying on the drawing board - it can provide a financial edge that tips projects toward reality and success.

Simply put, the New Markets Tax Credit program was created by Congress in December 2000 to encourage investments in communities which historically have had poor access to capital. It provides a federal tax credit equal to 39% of the investment - obviously a significant value - spread over a seven-year period. Aimed at spurring community and local business development, this tax credit can help lower interest rates and offer developers far greater financial flexibility.

There is an allocation of tax credits each year, made by the U.S. Department of the Treasury. In this year's round, announced just last month, 41 organizations were selected to receive $2 billion in tax credit allocations, ranging from $5 million to $100 million.

Any taxable investor--including individuals, corporations, partnerships and investment funds - is eligible for The New Markets Tax Credit. Transactions can be structured so that the project developer can use the credit or sell it through the well-established, although highly specialized, market for these credits.

The mechanism for obtaining the credits is, however, somewhat complex. Having seen many entities successfully through this process, it has become clear to us that having the advice of counsel who are knowledgeable and experienced in this area is essential.

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