By Brian Goray, Karen Kosiba Edwards

Building Tomorrow is a curated series offering exclusive one-on-one discussions with prominent executives across the real estate spectrum. Through a refined lens, each installment unpacks trends, challenges and exemplary leadership strategies steering the trajectory of specific segments within the real estate landscape, offering a concise yet comprehensive understanding of market dynamics.

This interview features James D. Howard, Jr., President of Dudley Ventures, LLC. Part one of two explores the foundation and evolution of tax credits, alongside an insightful analysis of the current state of tax credit markets, offering valuable insights into trends, opportunities, and growth prospects for investors and developers. In part two, we will shift our focus to the critical elements of management and leadership.


Part I: Tracing Tax Credit Roots to Present Market Dynamics

The Origins of Tax Credits

Boyden: Can you help us understand the tax credit market?

Howard: At the federal level, tax credits are a creation of Congress.  Transferrable tax credits, involving outside investors, are a way to raise capital where Congress has created a policy incentive.  The tax credit is a dollar-for-dollar reduction in federal income tax liability. 

Boyden: Why were they created?

Howard: Congress allows certain categories of investors/developers to use this benefit for specific purposes.  For example, New Markets Tax Credits (NMTCs) encourage community development projects. Our expertise in NMTCs and  credits for renewable energy, specifically target a very niche marketplace.  The NMTC market is about $5 billion a year; the renewable energy market could be $50-80 billion over the next few years.

Boyden: It sounds like a big market.

Howard: Yes, but in the grand scheme of Congressional budget numbers, these are relatively niche programs in which the ultimate investor must have federal tax capacity, meaning the ability to use credits against a federal tax liability.

Boyden: How did it all get started?

Howard: Back in the early 1980s, there were all kinds of tax shelters selling losses to individual investors, such as syndicators selling real estate and oil & gas partnerships. By the way, those oil & gas tax incentives have not totally gone away in the tax code. There were a lot of abuses at the time, so Congress revoked many tax shelter provisions in the Tax Reform Act of 1986. They were replaced with other incentives to achieve Congress’s public policy goals. The first provision to eliminate abuses and create new incentives was the Low-Income Housing Tax Credit (LIHTC) program, which remains robust today.

Boyden: How does it work?

Howard: LIHTCs are widely used to develop affordable housing.  The credits are sold to investors with the proceeds providing capital to subsidize housing rented to low-income residents.  The capital stays in for some required period and then there is an exit strategy for the investors. 

Boyden: It’s that simple?

Howard: That’s it in a nutshell, describing this huge industry which includes low income housing tax credits, new markets tax credits, historic tax credits, and the renewable energy credits as a bundle.  There’s also the R & D credit, and other tax credits that tend to be used by the companies engaged in those activities.  They have very big numbers associated with them, but they’re not the type of credit that can be sold off to a third-party investor.

Boyden: How does the market work for tax credit sales?

Howard: The four credits I mentioned are sold to investors and prices for the credits fluctuate.  And there’s strong bipartisan support for these credits:  Republicans love it because there’s a marketplace, and Democrats love it because of where the money gets invested.  Not all the credits are permanent; Congress schedules some of them to sunset.  You’ll certainly see an attempt to scale back the renewables credit if Republicans rule the House and Senate after November.  But once the credits have been used by an investor, they can’t be clawed back.

Boyden: How does the allocation process work, for New Markets Tax Credits for example?

Howard: There’s an instrument of the Treasury known as the CDFI Fund.  Community Development Entities must apply to the CDFI Fund annually for an NMTC award.  Approximately $5 billion is awarded each year; last year DV Community Investment received $65 million. We have been awarded close to $600 million over the life of the program.  It’s an annual process where we all go into “application lockdown mode” and stop everything so our team can assess what we did last year:  to see what we used the credits for, ask ourselves if we are happy with the results, and then we decide what we will do with the next allocation of credits. 

Boyden: Was Valley National an investor before your merger?

Howard: Yes, they were one of our investors for 17 years prior to the merger.  It made the sale process easier, since they were our largest long-standing customer and their current CEO approved our first transaction when he was in the Treasury Department at the bank.  That’s how long we’ve known each other.  It’s a unique circumstance.

Boyden: How does that work for a bank? 

Howard: Two ways:  The CRA (Community Reinvestment Act) encourages banks to invest in under-served neighborhoods, and Congress continues to change the way that works.  In addition, banks are taxpayers, and the more they lower their tax rate, the more they can return to their shareholders.  The money center banks are all in this in a major way -- not only for new markets, but also for renewables, low-income housing, and historic preservation.  They invest close to a billion dollars each year.

Boyden: It seems like there’s overlap in the public policy behind low income and new markets tax credits.  How do they differ for investors?

Howard: We structure deals in the NMTC world so the tax credits are not dependent on the underlying real estate.  That’s not the case with LIHTC, where there is risk for lease-up and operations, and where the investor also owns the depreciation and other characteristics.  With the NMTC, you own the CDE (Community Development Entity) that makes the loans, so what happens at the project level is not as important.  Each product has its own dynamics: how is it structured, what is the tax code, and what are the risks and rewards associated with the credits?

Boyden: You mentioned quality of sponsorship as being important to your underwriting.

Howard: There is underwriting at the project level.  What we are most concerned about is after-tax internal rate of return.  There’s a matrix of criteria that informs how we sell these credits.

Boyden: Has that target IRR changed as interest rates and cap rates have changed?

Howard: The price of the credits fluctuates, and the price reflects the tax capacity of investors more than anything else.  So, if tax rates go up, or a company is making a lot of money, demand goes up and that may be reflected in the price of the credits.  There was a drop-off in the market under the Trump-era tax cuts.

Boyden: And the tax credits help support the real estate market?

Howard: When you look at community development (NMTC), housing (LIHTC), and historic preservation, a lot of this money will flow into real estate.  For renewable energy, a lot of it goes into equipment.

Boyden: And you do all of it?

Howard: We do all the asset classes.  Projects come to us with good sponsorship and some capital needs; we match the capital sources (tax credit investors) with the projects that best meet the needs of the sponsor.  Our community development entity is awarded credits regularly.  We do three things at Dudley Ventures:  (1) We syndicate the credits to institutional investors, including Valley National Bank, our parent;   (2) We do advisory work for people trying to access the credits for qualified projects; and  (3) And we have a CDE which applies to the Treasury for a credit allocation.

Tax Credit Markets: Current Climate

Boyden: You mentioned a new product you have created:  tax credits for high-net-worth taxpayers.

Howard: One of the things I’ve been working on is making the benefits of tax credits available to individuals.  This involves both Congress and the Internal Revenue Service for rulemaking.  There’s no longer any reason for these tax credits to be restricted. 

Boyden: How does it work?

Howard: We’re doing it with a one-year stream of credits, which has never been done before, so we’re starting small.  I’m very pleased with where we are.  It has helped that the tax credit space, with the Inflation Reduction Act, has grown from an $8 billion market to a potential $1 trillion market, according to Goldman Sachs. 

Boyden: Is that available yet?

Howard: It is available.  We’re rolling it out slowly through Valley National Bank’s broker-dealer.  This is a securities product sold only to ultra-high net worth individuals through a Private Placement Memorandum.  Essentially, we’ve securitized tax credits so they are useful to individuals.

Boyden: Is it liquid or tradable?

Howard: Not really.  Just like the banks, individuals need to have a tax liability for the credits to be useful.  NMTCs are a 7-year credit.  LIHTC is a 15-year credit.  The renewables ITC is only a one-year credit, but individuals are not eligible. 

Boyden: Is this something you sell to family offices and multi-family offices?

Howard: We do.  The best candidates are not real estate investors, because they are able to use depreciation to minimize their taxable income.  They also have 1031 Exchanges available to sell and buy properties without incurring a taxable event.  But for founders of operating companies with a lot of dividend income, the tax credits can be a shelter against that income.  It’s a better fit.       

Boyden: The commercial real estate market is turbulent in some sectors today.  Does the tax credit money ameliorate difficulties caused by high interest rates?

Howard: A little bit, but not enough.  What’s happened is state credit programs and grants have intervened.  That’s how affordable housing is being developed.  There is more block grant money available.  Interest rates have made a difference, and Congress has tweaked the LIHTC program a bit to allow it to be more value-driven.  But there’s still a huge gap, and a tremendous amount needs to be done in the marketplace.

Boyden: When interest rates eventually come down – maybe not as much as people are hoping – will some of this magnify the effect of LIHTC?

Howard: The tax credits are largely used to their capacity now.  There’s only so much affordable housing that can get zoned (by local governments) and built.  Workforce housing may not be as dependent on the LIHTC subsidy, and we’ll see more of those projects – and other real estate deals – built when interest rates come down. There were a lot of LIHTC deals in the pipeline, with financing locked in, before interest rates spiked.  Look at a place like Phoenix.  They’ve seen an incredible amount of multifamily housing starts due to increased public transit and urbanization.

Boyden: Despite the lack of water?

Howard: Well there really isn’t a lack of water in Phoenix; that’s something of a misconception.  Interestingly, as agriculture uses less water and technology drives greywater systems to re-use the water we have, we are managing well.  I don’t want to diminish the lack of snowmass and other serious issues, but the City of Phoenix has done a good job storing water and permitting usage.  A lot of this was done under the Babbitt administration in State government.

Boyden: How do the tax credits help determine whether a deal gets done or not?  And what kind of deals are you investing in these days?

Howard: We are seeing a lot of NMTC deals, which are driven by job creation designed to serve low-income community members.  Think about federally qualified health centers, Boys & Girls Clubs, YMCAs and so forth.  Rural hospitals face challenges, as do other community institutions that are fundamental in both urban and rural America but where the economic feasibility might not work without a subsidy.  For example, a Boys & Girls Club that wants to expand will have a capital campaign but it won’t fully cover the expansion.  If it’s a $10 million expansion, they might be short $2 million.  But for the tax credits, the project would not go forward to its full capacity.  That’s community development the New Markets Tax Credits facilitate. 

Boyden: What else can NMTCs be used for?

Howard: The other thing we try to use it for is to create jobs that pay a living wage and are accessible.  A rural manufacturer, for example, creating jobs that can be accessed by young people without a college degree, or needing significant job or life skills training.  NMTCs address these needs.  It’s a competitive program.  To apply, entities need a plan to utilize these credits, and they need to talk about meeting the objectives of the NMTC.  It’s a unique program because it measures outcomes.

Executive Biography

James D. Howard, Jr. is the President of Dudley Ventures, LLC, an investment and advisory services firm specializing in congressionally-sanctioned tax credits and other tax advantaged investments. With a 20+ year track record, Dudley Ventures is a subsidiary of Valley National Bancorp (NASDAQ:VLY), one of the top 30 publicly-traded banks with over $61B in assets.

A native of The Bronx, New York, Mr. Howard earned degrees from The College of the Holy Cross in Worcester, Massachusetts, and Georgetown University Law Center.

Dudley Ventures was founded by Mr. Howard in 1996, has been an innovator in the field and manages over $2 billion in tax credit investments. Mr. Howard has authored numerous articles on tax credit investing is, a regular speaker at conferences, and is a Board Member of the New Markets Tax Credit Coalition.

About the Authors
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