The Y2K bug; AOL and Time Warner’s merger; Hillary Clinton becoming a senator. Looking back a decade and a half, the year 2000 seems ages ago. It was that year in which federal legislation established the New Markets Tax Credit Program too, and yet more than 15 years later, Nevada’s business owners and entrepreneurs have just now begun using these financing incentives.
In many other states, New Markets financing has played a routine and often substantial role in project financing deals for many years.
The concept behind the New Markets Tax Credit Program is to revitalize disadvantaged communities by job and wealth creation. Although it is sad that Nevada has communities that easily qualify as disadvantaged under the federal standards, this presents an opportunity for those entrepreneurs and business owners with a vision to create positive change in the community.
So why have Nevadans been so slow to pursue New Markets financing incentives? To answer this, we need to examine some of the lingering challenges facing the Silver State.
For starters, the Nevada New Markets Job Act was enacted only during the 2013 legislative session, 13 years after the corresponding federal act. While Nevada is sometimes criticized for having a part-time Legislature that convenes every second year, this constitutional framework fails to yield a complete answer. After all, the Legislature convened six times after passage of the federal act without voting to enact a Nevada counterpart. So why were Nevada’s elected officials not cognizant of developments elsewhere in the nation?
A deeper analysis might focus on the Nevada State Bar’s long-standing rule prohibiting multi-jurisdictional law firms. For most of its history, the Nevada State Bar prevented national firms from entering the Nevada marketplace. Nevada’s lawyers organized themselves into small local firms, only a few of which ever grew to more than 50 lawyers. In this environment, transactional lawyers with experience in a narrow field like New Markets Tax Credit financing simply could not exist. Any transaction in Nevada requiring a highly specific practice probably would involve counsel from another state. This practice continued in Nevada until well into the 2000s. Accordingly, many attorneys practicing in Nevada were unaware of developments on the East Coast (including New Markets financings) and were, therefore, unable to counsel their clients to pursue such incentives.
At the same time, Nevada’s previous housing and construction boom seemed to captivate all and reward many. Financing for projects flowed from investment banks and other traditional lending sources with ease. There appeared to be no need for creative tax-based incentives to fund projects throughout Nevada. In low-income communities, where New Markets financing could have been used to revitalize local businesses, large parcels of land were consumed by developers with an eye toward the next luxury high-rise condo project.
This general lack of awareness about the program, both within the Nevada business community and among the legislative ranks in Carson City, finally ended after the Nevada boom turned to bust and as more sophisticated practitioners entered the Nevada marketplace and introduced the business community to the benefits of New Markets financing.
When the Eclipse Theaters transaction closed earlier this year, it was among the very first New Markets Tax Credit deals to do so in Nevada. In fact, the Nevada Department of Business and Industry still needed to adopt its final rules promulgated under the Nevada New Markets Job Act of 2013 for the closing to be finalized.
So, can a handful of deals be the onramp for an expressway that has been built for Nevada’s entrepreneurs and business owners to pursue federal and state tax credits as part of their capital raise? Several Community Development Entities have now emerged in Nevada, and several institutional lenders are prepared to fund NMTC transactions. It looks like the economic and the legislative environments have finally converged at a point where more parties will invest with New Markets Tax Credits on their minds, but let’s not wait another 15 years to take advantage of the next financial development breakthrough.
Paul Wassgren is a partner with Fox Rothschild LLP. He practices in the areas of securities, project and real estate finance, mergers and acquisitions and general corporate law. In Las Vegas and Los Angeles, Paul handles matters for clients ranging in size from entrepreneurs to multinational corporations. He can be contacted at pwassgren@foxrothschild.com