Why DC could send $6 million in Strand Theater tax credits to LA instead

For more than a year, DC Housing Enterprises, a subsidiary of the District’s Housing Authority, had $6 million in federal tax credits set aside to help redevelop the Strand Theater, a historic, now-abandoned movie theater that was once a focal point for Deanwood’s Black community. Officials want to turn the space into a restaurant with an arts and entertainment program.

But in mid-December, DCHE asked the Housing Authority Board of Commissioners for permission to direct those tax credits to a hospital project not in the District, but in Los Angeles.

The board approved the move, but many expressed disappointment. In the December 11 meeting, John Falcicchio called the move “hard to stomach.” One resident and longtime activist, Debra Frazier, said the incident indicated that “whatever team was doing oversight of the development team dropped the ball.”

Merrick Malone, who as head of DCHE was asking for permission to redirect the tax credits, said he too was disappointed. “Everyone wants to do the Strand. I want to do the Strand. We all want to do the Strand,” Malone told the board.

So how did these tax credits end up on a path to an LA hospital? Some of it may have been administrative mismanagement. Some of it is just the baffling, seemingly arbitrary rules of federal bureaucracy. But like so much in 2020, the pandemic also has a lot to do with it.

How New Market Tax Credits work

DC Housing Enterprises is a separate community development entity within the DC Housing Authority that was set up to dole out New Market Tax Credits, a federal program out of the Treasury’s Community Development and Financial Institutions Fund that channels investment into low-income communities.

It works like this: the feds give DCHE the authority to dispense federal tax credits — in 2016, their last allocation, they authorized DCHE to distribute $45 million.

Then DCHE finds businesses and development projects to support that serve low-income communities. Those projects can use DCHE’s tax credits to reel in financing: in return for investing, the investor can use the credit to offset their federal tax liability.

What’s in it for the Housing Authority? They collect fees off the deals that can get funneled back into housing programs.

Since launching the program in 2009, the Housing Authority has allocated $122 million in tax credits to projects around DC. The Howard Theater, Achievement Prep Academy and Bread for the City’s new facility are just some of the projects funded in part with New Market Tax Credits.

One key aspect of these tax credits: you have to use them all before the deadline. Malone warned the Housing Authority board that if the credits aren’t deployed by the end of 2020, it will trigger a rare “recapture event.”

Recapture events have only happened three times in the history of the New Market Tax Credit program, Malone said, and such an event could lock the Housing Authority out of the federal program in the future. He told the Board that only by sending the last $6 million to the LA project by the end of the year could DCHE preserve the program, and with it the millions of dollars in future tax credits that could be allocated to DC in coming years.

A redevelopment years in the making

DCHE has allocated all but a final $6 million of its New Market Tax Credits, setting those credits aside to redevelop the Strand Theater on Nannie Helen Burroughs Avenue in Deanwood.

Built in 1928, the Strand served as a 600-seat movie theater, dance hall, and pool room for more than 40 years. According to the DC Preservation League, the building, designed in a “stripped-down version of the Renaissance Revival style,” was the first movie theater built for Black patrons east of the Anacostia River. The League listed the theater on their list of endangered places starting in 2007.

The District bought the abandoned theater in 2006 in order to stabilize and preserve it. Officials spent more than a decade trying to lock down redevelopment plans for the space. Finally, in 2017, a group of developers filed plans to turn the theater into retail and community space, while adding apartment units on an adjacent lot.

The 86-unit Strand Residences is currently under construction, with a third of the units set to be replacement homes for public housing residents of Lincoln Heights and Richardson Dwellings, which are being redeveloped. Scott Barkan, who is managing the project for the NHP Foundation, one of the developers, said the apartments are scheduled to be finished in the second quarter of 2021 (the other developers are the Warrenton Group and the Washington Metropolitan Community Development Corporation, a church subsidiary).

Renovating the theater itself is a separate project, though not unrelated — Housing Authority commissioner Falcicchio noted that as residents move in, it would be beneficial to have jobs and amenities next door. Developers plan to spend around $10 million to turn the theater into a restaurant that would focus on hiring locally. They signed on restaurateur Greg Casten, owner of Ivy City Smokehouse and a number of other local restaurants.

The Strand Theater tax credits were awarded in mid-2019. But developers ran into a series of financing mishaps. In June, District funding came through to try to help fill the gap. But as DC funding came in, other funding fell through. And by that time, coronavirus was spreading across the US and the economy was in crisis.

Tax credits are a hard sell in a pandemic

In the most simplified terms, when companies are making a lot of money, they owe the feds a lot in taxes. But when things slow down — in a pandemic, for instance — their tax liability drops. And if your tax liability drops? Well, tax credits won’t do as much for you.

According to Barkan, that pandemic math has seemingly reduced the demand for tax credits among financial institutions, making a project like the Strand less tempting (the fact that the project is a restaurant can’t have helped in an era of dining restrictions).

“The pandemic has made it a challenge to attract the right investor to the project,” Barkan said.

Earlier in 2020, with the Strand financing looking uncertain, DCHE began looking for other projects to direct the funds. But Malone said the three other projects they looked at, including the Children’s National Hospital at Walter Reed and the Martin Luther King Plaza project, also couldn’t close financing before the deadline.

“It’s not anybody’s fault,” Malone said. “What happened in terms of COVID, a lot of the market deals, these deals have had trouble getting financing and therefore not being able to close.”

With the deadline looming before a dreaded recapture event, Malone said the agency turned to a last resort option. While DCHE can only allocate tax credits within the District, it can allocate them to another District-based community development enterprise, which can then distribute the tax credits nationally.

They asked DC-based CDE Renaissance Equity Partners to search for a qualified project that would be ready to close by the deadline. They found one: Martin Luther King Jr. Community Hospital, a project in a low-income, medically underserved area of South Central Los Angeles.

“Obviously, none of us wanted to have to do this, and we would have preferred to have done the project in the District,” Malone told the Board. “But in order to preserve our program and live another day to invest again, we have to close.” After a lot of back and forth, the Board agreed, and passed a resolution allowing the transaction.

What’s next?

If the LA project closes (as of December 18, it still had not been finalized) it will generate some $180,000 in closing fees for DCHA, and will generate more going forward.

DCHE has put in an application for another round of New Market Tax Credits, and Malone said an answer about whether and how much is allocated is likely to come in spring 2021. If the agency does get another round, the Board’s resolution will require them to put the first $10 million of tax credits toward the Strand redevelopment.

As for the Strand’s developers, Barkan said the future is promising.

“Although we’ve had challenges in the past with lining up all of our sources, we are very confident we are going to be able to move forward in the very near future,” Barkan said.