Client Alerts
July 28, 2021

Updating Project Financing Options — Post-Pandemic

Stites & Harbison Client Alert, July 28, 2021

As the pandemic begins to ease and everyday life is moving toward normalcy, whatever that may be, the pace of the economy’s resurgence, in the words of Federal Reserve Chairman Jerome Powell, “… is about to accelerate much more quickly than anticipated with output approaching its pre-pandemic level.” Capital investment, especially in distressed economic communities, will be needed more now than ever, to enable for-profits and non-profits to start and grow businesses, accelerate job growth, and lessen economic hardships triggered by COVID-19. To help fuel the post-pandemic comeback, the following represent several “out of the ordinary” financing options which can bolster and, at the same time, leverage a project’s capital stack, which, in turn, can produce opportunities, minimize risks, and attract conventional capital not otherwise available to underserved communities.


After a decade-long ban, the 117th United States Congress reinstated earmarks. Referred to as “community project funding” in the House and “congressionally directed spending” in the Senate, earmarks allow legislators to target funding from specific federal agencies to pet projects in their home states. While the moratorium has been lifted, a new set of rules accompany this form of targeted spending. For the first time in its history, earmarks are attached to a much needed oversight process, a process which will now make sure Congressional action is accountable, transparent, assessed against a project’s community outputs.

Initiated by the House Democrats, the new program will comprise no more than 1% of total federal discretionary spending with both the House and the Senate agreeing to limit total spending to $15 billion, split evenly between both chambers. The House Appropriations Committee and its counterpart in the Senate each published guidelines regarding project eligibility as well as the criteria necessary for consideration in those areas. Eligible projects will range from infrastructure, community programs, university research, hospitals, and other local projects sponsored by local governments and non-profit organizations. The new rules are clear that there are no earmarks for for-profit businesses. Members of the House will only be allowed to submit 10 earmarks while Senators have no limits. If history is any indication, it is likely that only a limited number will be approved and included in the respective appropriation bills. The new guidelines are in addition to existing rules which require that all requests must be made in writing and be disclosed fully before consideration by the respective houses. Individual legislators may have their own application forms requiring a range of details about proposed projects, who it will serve, how it will do so, and other specific questions and requirements, unique to their district. The deadline for the submission of Congressional requests was April 30, but has been be extended until President Biden’s 2022 budget. Most deadlines for requests in the Senate are not until June. However, the deadlines for the applications may differ from member to member, as do members’ criteria for deciding which earmarks they will submit.

With respect to non-profit initiatives, tax-exempt organizations have historically favored direct government spending due, in large part, to their inability to successfully compete in the governmental and/or public competitive bidding process. Since an earmark is awarded to a specific recipient, and as a result, is not subject to competitive bidding processes, non-profit organizations are now positioned to profit from this type of governmental spending. Consequently, it is imperative for them to present projects in the best possible light and spin the best possible story in order to catch the attention of respective legislators. This being the case, non-profit organizations should consider the following actions: (i) know the project, be able to articulate how the project solves a local problem, and be sure to articulate the project’s community impacts; (ii) sometimes it’s better who one knows than what one knows — early on, identify the person in the congressional delegation whose interests bests aligns with the project, and then find the best person or persons, inside or outside the organization, that can help get the project in front of the targeted legislator; (iii) do the appropriate research — make sure there is a full understanding of the House and/or Senate guidelines, then identify the particular governmental department or agency which will fund the project and gauge the effect a project will have on the funding source; and (iv) consider engaging the services of a professional whose expertise and experience can add value to the earmark application itself.


The sale-leaseback is a form of ground lease financing often overlooked as an option in a developer’s project’s capital stack. A number of big box corporations and chain retailers have mastered the use of the sale-leaseback, resulting in higher rates of return by moving capital from real estate ownership into their central business operations. In recent times, developers and owner/operators have found this type of ground lease financing to be an efficient tool that can convert the equity in real estate to cash and redirect it to the development, resulting in the reduction of debt and the retention of control.

In a typical sale-leaseback, a developer sells the real estate it acquired for development to an investor or commercial capital provider and then, in turn, leases all or part of it back. The net effect is that the developer has cash proceeds from the sale for construction or renovation while the capital provider as the buyer is promised a stream of rental payments plus the residual interest of the property — that is, the right to the use of the property upon expiration of the lease term. Economically, this form of ground lease is considered an alternative to bank, mezzanine, and mortgage financing which provide benefits not available with tradition commercial lending. For example, typical mezzanine financing has an all-in cost of between 18% and 22% annual return and will often require some type of equity component as part of the total return structure. The financing rate, referred to as the “cap rate” or the “lease factor”, which is embedded in the rental payment, is generally lower than the cost of mezzanine capital and does not require the giving up of equity. When compared to mortgage rates, sale-leaseback cap rates are frequently slightly higher, but a sale-leaseback provides cash proceeds for up to 100% of the appraised value of the property versus the 65% to 75% of appraised value under a typical mortgage. Finally, leases associated with a sale-leaseback have initial terms of 15 to 25 years with one or more multi-year extensions and the right to repurchase, while available debt-financing terms are often 10 years or less. Consequently, fixed lease payments allow the developer/lessee to lock in operating costs for the term of the lease, and depending on the tenant’s creditworthiness, can be structured where they are equal to interest-only or amortized principal and interest associated the debt service paid by the capital provider/lessor. The objective in utilizing this type of financing is to achieve a lower cost of capital than the cost of commercial debt and this becomes possible since the investor/capital provider, as the fee simple owner/lessor, retains the right to depreciate the property, resulting in a higher rate of return on the investment.


The Kentucky Department of Revenue (the “KDOR”) has set the due date of July 15, 2021, for the filing of the application for the next round of Kentucky New Markets Development Program Tax Credits (the “KNMDPTC”) for fiscal year ending June 30, 2022. Accordingly, local, state, regional, and national qualified community development entities (the “QCDE”) will be lining up to obtain their share of the $62,500,000 in order to deploy their allocations in qualified active low income community business projects within the Commonwealth. Job creators, such as manufacturing, distribution, and logistics, as well as community needs like schools, healthcare facilities, community centers, workforce training programs, and healthy food initiatives are all viable projects. The capital investment can take the form of a loan or equity contribution which becomes an integral part of the project’s capital stack.

The KNMDPTC is, for the most part, modeled after the federal NMTC program created under Section 45D of the Internal Revenue Code of 1986, as amended (the “NMTC”). The sole objective of KNMDPTC, as is that of the NMTC, is to incentivize community development and economic growth by attracting private investment to distressed communities via a 39% nonrefundable credit against Kentucky taxes. In order to maximize the economic benefit of the incentive, Kentucky projects will look to stack the KNMDPTC with the NMTC, which, in the end, can result in the federal and state subsidies providing up to 20% of the net capital needed to complete a project. In the case of a development of a $10 million project, for example, the sponsor/developer will only be required to source $8 million since the remaining $2 million will come in the form of the non-dilutive subsidy.

Now is the time for qualified Kentucky projects to get themselves in the hunt for this type of project financing. With the awarding of the KNMDPTC occurring in late August or early September and with the announcement by the the U.S. Department of Treasury’s Community Development Financial Institution Fund of $5 billion in NMTCs (an increase of $1.5 billion from the prior year) within the next two to four weeks, Kentucky projects in need of capital to fill a gap in their capital stacks should do everything possible to secure both NMTCs and KNMDPTC to be “shovel ready”.


Through the use of historic rehabilitation tax credits (“HRTC”), the Federal Government promotes the investment of private capital in the preservation of historic properties. This popular program has been instrumental in maintaining historic architecture, and, in doing so, allowing neighborhoods to preserve their own unique local appeal. The federal program provides a 20% reduction of federal income tax liability for qualified rehabilitation expenditures in the restoration of income-producing historic buildings. The Kentucky Historic Preservation Tax Credit (“KHPTC”) program, modeled after the federal program, offers a matching income tax credit of up to 20% of qualified rehabilitation expenses for income-producing properties as wells as a tax credit of up to 30% of qualified rehabilitation expenses for owner-occupied residential properties.

Based on an extensive campaign by local and state historic preservation organizations, the 2021 Kentucky legislature made major improvements to KHPTC. First, it increased the annual tax credit cap from $5 million to $100 million, with 75% of the credits awarded to commercial property and 25% to owner-occupied residential property. Second, it provided a 30% tax credit for qualified expenses for property located within a rural county, which is defined as a county with a population of less than 50,000. Third, it reserved 40% of the tax credit cap for property located in rural counties. While these changes are certainly meaningful, there were two items that failed to make it into the legislation: one on policy grounds and the other a result of legislative oversight. Both have a material effect on the use of the tax credit. First, with respect to policy and to the dismay of developers, the Kentucky legislature specifically did not raise the current maximum project credit cap of $400,000 on commercial property to $5,000,000, as proposed. The other issue was just a flat out mistake. Unlike the HRTC, the KHPTC allows a project to simply make an election to transfer the tax credit for cash, but, as required under KRS 171.317, the recipient of the tax credit must be a business entity subject to the bank franchise tax. However, recent legislation repealed the Kentucky bank franchise tax effective January 1, 2021, and consequently, the situation exists where Kentucky projects will not be able to transfer KHPTCs for cash for the projects since there are no permissible buyers since there is no longer a Kentucky bank franchise tax. As of the date of this publication, the Kentucky Department of Revenue is currently reviewing the situation.

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