The developer of the long-delayed “midtown” project in Portland’s Bayside neighborhood has applied for $4.3 million in tax credits from a state program that has been a target of criticism from regulators and legislators.

The Finance Authority of Maine is considering an application from an investment group seeking approval for a $10 million investment in a subsidiary of The Federated Cos., the Miami-based developer of the midtown project. Such an investment would trigger the release of nearly $4.3 million in taxpayer-financed tax credits.

The application is the first to test new rules adopted by the state agency that oversees the Maine New Markets Capital Investment program.

CityScape Capital Group, an investment company based in Princeton, New Jersey, submitted its application to the finance authority Nov. 6. The application is the first received since the authority’s board changed the New Markets program rules to prohibit use of the investments for refinancing old debt and the use of so-called “one-day” loans.

The program came under heavy regulatory and legislative scrutiny after a Maine Sunday Telegram examination in April revealed abuses of the tax credit program that cost state taxpayers millions. In its wake, the finance authority’s staff adopted new protocols to close loopholes in the program, which is intended to help businesses in low-income communities.

The authority’s staff has vetted CityScape’s proposed investment and is recommending that the agency approve it, according to a memo written by Christoper Roney, the authority’s general counsel. The memo describes midtown as a “mixed use” project in the Bayside neighborhood, and makes clear it is eligible under the program’s new rules.

“Of particular note, the transaction involves investment proceeds to be used for prospective costs only, and no refinancing of prior costs,” Roney wrote to the board. “The transaction does not involve a ‘one-day’ loan.”

TAX CREDIT APPLICATION ON HOLD

The authority’s board was expected to consider the application at its Nov. 19 meeting, but The Federated Cos. requested a postponement to consider the “suitability” of the New Markets program for the project. The next board meeting is scheduled for Dec. 17, but it’s unclear whether the application will be on the agenda.

“We inquired into the availability of New Markets Tax Credit financing, but have not yet made a determination regarding its suitability,” Patrick Venne, a spokesman for The Federated Cos., said Tuesday. “As a result, we have not completed the FAME application process whereby we would request approval of any such investment.”

Venne said Federated asked Cityscape and the finance authority to hold the application until the company can analyze its impact.

The Federated Cos.’ proposed $100 million midtown project would be built on 3.5 acres along Somerset Street between Pearl and Elm streets, a former industrial neighborhood next to Interstate 295 that has been home to rail yards, scrap yards and warehouses. The project would include 450 residential units, 840 parking spaces and 90,000 square feet of retail and commercial space, according to the application. The New Markets investment would specifically target the first phase of the project, a seven-story building with 38,000 square feet of retail space on the first floor and the 840-space parking garage on upper floors.

The midtown project has been delayed for five years, undergoing two redesigns and a lawsuit. The Federated Cos. reached a new agreement with the city in October that will allow the modified project to proceed.

“When complete, the project will be one of the most significant commercial real estate developments the Portland market has ever witnessed,” according to a summary of community benefits included in CityScape’s application to the finance authority. The summary estimated it would provide work for more than 300 construction workers and create 113 new retail jobs once complete.

The Maine Legislature created the New Markets program to attract investment in low-income communities by providing state tax credits to investors who put money into businesses in those communities. The credits are worth 39 percent of the total investment, payable over seven years. It’s modeled after the federal New Markets Tax Credit program, but unlike the federal program the Maine tax credits are refundable and can be redeemed for cash if the holder has no Maine income tax liability.

Low-income communities are deemed eligible if they have a poverty rate of at least 20 percent and a median family income of 80 percent or less of that area’s median family income. Portland’s Bayside neighborhood is eligible because it has a poverty rate of 47.3 percent and a median family income of 41 percent of the area’s median, according to CityScape’s application.

COMPLICATED MOVEMENT OF FUNDS

New Markets investment deals are complex. CityScape is not investing $10 million of its own funds in The Federated Cos. This deal includes five entities: a CityScape subsidiary, two Federated Cos. subsidiaries, and two subsidiaries of U.S. Bank.

Nearly $8.1 million of the $10 million total investment will have originated with The Federated Cos. itself. If the deal moves ahead as outlined, a Federated subsidiary, Federated Equities LLC, will lend $8.1 million to an investment fund operated by U.S. Bank, which will then bundle the Federated loan with nearly $2.9 million of its own cash and then lend that $10.95 million to a CityScape subsidiary. It’s that $10.95 million figure that the finance authority uses to determine the amount of tax credits that would be released to U.S. Bank as an equity investor (39 percent of $10.95 million is about $4.3 million).

CityScape is essentially just a middleman. After it receives the $10.95 million, it lends $10 million to another Federated subsidiary with the obscure name FEDEQ DV001 LLC. The application names this subsidiary as “the owner” of the first phase of the midtown project.

In the end, The Federated Cos. will have leveraged $8.1 million of its own money to receive $10 million, while U.S. Bank will have invested nearly $2.9 million up front for the promise of $4.3 million in taxpayer-funded tax credits over the next seven years.

For its part, CityScape receives a $950,000 fee off the top of the initial investment from the U.S. Bank investment fund.