The Equity Factor

Small-Scale Manufacturers See New Markets Tax Credits as Future Hope

An investment in creating jobs, not chasing smokestacks.

Detroit’s Fisher Body Plant 21 has been vacant since 1993. (Photo by Andrew Jameson)

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On Nov. 17, the U.S. government’s Community Development Financial Institutions Fund announced it was awarding an unprecedented amount of tax credits to investors focused on job creation and other economy boosters in communities hit hard by poverty. The amount of the credits, known as New Markets Tax Credits, totaled $7 billion, with about 60 percent of that going to urban areas.

According to a 2015 New Markets Tax Credit Progress Report the last award round can be tied to 64 buildings housing manufacturing projects and the creation of 9,949 full-time and construction jobs, the highest economic contribution of any sector in 2014 thanks to the 15-year-old federal program. The tax credits generally go toward new equipment or sprucing up old facilities.

The numbers are a foil to the long-touted story of U.S. manufacturing’s decline. As big factories shuttered operations, they pulled out the rug from beneath dependent city and regional economies in the Rust Belt. But small-scale manufacturers may be the ones that can help bring the industry back — albeit in a new form that’s leaner, smaller and pays better than many of the monolithic operators from pre-Recession times.

Traditionally, state- and city-level initiatives have given the most support to these manufacturers, which can easily pop up in abandoned retail spaces downtown because they leave a small noise and environmental footprint. They’re also appealing to federal programs like NMTC because they can pull workers from impoverished communities into good-paying jobs that don’t always require college degrees.

More and more community development enterprises (CDEs), or local financing institutions that back small-scale manufacturing projects and can qualify for NMTCs, appear to be interested in linking small-scale manufacturing operations into their building rehab projects because of that thread, says Ilana Preuss, founder of small-scale manufacturing resource center Recast City.

She says it’s a process of getting the CDEs that hold the financing keys for small operations to realize they can kill two birds with one stone when they, for example, want to prop up a commercial project in a vacant lot. Vendors and the local manufacturers that supply them may fit beneath the same roof, in a way that “really pulls up the businesses they’re supporting and also invests in hubs that can act as neighborhood centers as well,” says Preuss.

OpenWorks in Baltimore, Maryland, is one example. That project was managed by the Baltimore Arts Realty Corporation with $3.5 million in NMTCs. The multipurpose center gives local creators a place to build and test out new products, while also acting as a youth programming center, workforce development center, and small business administrator.

“It makes me almost hopeful that [CDEs] understand there’s a connection between placemaking and the location of these small-scale manufacturing businesses,” says Preuss.

In 2014, an estimated three-quarters of the 251,901 manufacturing firms up and running in the U.S. were small-scale manufacturers employing less than 20 people, meaning a significant chunk of manufacturing’s $2.1 trillion contribution to the U.S. economy comes from the types of operations Preuss is talking about.

Taken as a whole, the manufacturing industry in the U.S. pays its workers $81,289 on average — benefits included.

As the National Association of Manufacturers puts it, that $2.1 trillion would rank U.S. manufacturing as the ninth-largest economy in the world, if stacked side by side with nation states. But there are more small-scale players looking to get in, and going forward, the CDFI Fund’s New Markets Tax Credits program could be one way that the federal government can start having a bigger impact at the neighborhood level. Preuss says small makers often stumble in their initial hunt for capital, and between 90 and 97 percent of NMTC-backed investments offer entrepreneurs lower loan interest rates that mature over a longer period of time, among other benefits.

Billion-dollar enterprises that can up and leave on a whim, slashing years of history with their base city and the payroll of thousands of employees in pursuit of non-U.S. labor rates, are also less and less enticing to city workforce programs than smaller enterprises, says Preuss.

“I think economic development leadership in many communities were taught to chase the smokestacks,” she says. “You know, find one big company, give them lots of subsidies to stay and keep them as long as you can, where lots of research shows that that doesn’t really price out in the end for neighborhoods.”

“They’re starting to realize that there are a lot of benefits to homegrown businesses,” she says. She’s currently collaborating with Fremont, California’s economic development agency to help get more support mechanisms up and running to back small-scale manufacturers.

That city is the home of Tesla’s 4.5-million-square-foot manufacturing plant. But city leaders want to start looking right now to find out which local manufacturer will be the next big employer — instead of placing all their eggs in the Tesla basket.

“Why is this important to the real estate community and the city of Fremont?” said Kelly Kline, economic development director and chief innovation officer, during an Economic Development Advisory Commission meeting on Sept. 8. “These tenants add new options for ground-floor use. These businesses can activate an area. These are local jobs.”

Putting a small-scale manufacturer on the ground level of a retail building also brings a visual component to the neighborhood. “People love seeing stuff being made, so there’s a great vibrancy that often comes with these types of businesses,” says Preuss.

But the connect between what happens in that long-abandoned ground level retail space and the tax credits doled out to progressive projects by the CDFI Fund needs to be emboldened to see more success stories around the U.S. like OpenWorks — and more paradigm shifts away from depending on major operators like what we’re seeing in Fremont.

“It’s a role that more CDCs and land banks are starting to get involved in,” says Preuss, noting that giving small-scale manufacturers a place to run shop is on financial institutions’ radars. “There are a ton of homegrown skills — these are people that have worked in industry and are entrepreneurs by nature. So now the question is how we support those people either to become businesses or to scale the ones that have been really small for a long time.”

The Equity Factor is made possible with the support of the Surdna Foundation.

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Johnny Magdaleno is a journalist, writer and photographer. His writing and photographs have been published by The Guardian, Al Jazeera, NPR, Newsweek, VICE News, the Huffington Post, the Christian Science Monitor and others. He was the 2016-2017 equitable cities fellow at Next City. 

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Tags: jobsmanufacturingnew markets tax credit

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