The developer behind a major real estate development in Portland’s Bayside neighborhood will not pursue a financing deal that would have sent $4.3 million of Maine taxpayers’ money to one of the country’s largest banks.

The Federated Cos., the Miami-based developer of the $100 million, mixed-use “midtown” project, confirmed in an email to the Portland Press Herald that it has withdrawn an application to use the state’s New Markets Capital Investment program, a 4-year-old program that provides investors with income tax credits if they invest in businesses in low-income communities.

The New Markets tax program has been heavily criticized for delivering more benefits to investors than to the community businesses they were intended to support.

“Federated has determined that the limitations imposed by the transaction structure, coupled with fees in excess of $1 million, or more than half of the cash benefit, dilute the program’s effectiveness and render the benefit unattractive,” wrote Patrick Venne, a spokesman for the company. He did not respond to a request to elaborate.

CityScape Capital Group, a Princeton, New Jersey-based financial services company that acts as a middleman in New Markets investment deals, submitted an application in early November to the Finance Authority of Maine, which administers the program.

The proposed investment deal would have allowed The Federated Cos. to leverage $8.1 million of its own cash to receive an additional $2.9 million from U.S. Bank, one of the country’s largest financial institutions. CityScape, acting as the middleman, intended to collect the nearly $11 million in an investment pot, which would have triggered the payout of $4.3 million in taxpayer-funded tax credits over the next seven years to U.S. Bank. The deal also would have paid CityScape nearly $1 million in fees.

TRYING TO REMOVE LOOPHOLES

The Federated Cos.’ proposed midtown project is expected to 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 includes 450 residential units, 840 parking spaces and 90,000 square feet of retail and commercial space. The New Markets investment would have specifically helped finance 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 the upper floors.

The company, which has been trying to launch the project since 2010, intends to break ground in January.

The finance authority’s staff already had recommended to its board of directors that CityScape’s application to use the New Markets program be approved. The authority determined that Portland’s Bayside neighborhood is eligible because it has a poverty rate of 47.3 percent with a median family income that is 41 percent of Portland’s median, according to CityScape’s application.

The Maine New Markets program has been heavily scrutinized since a Press Herald/Maine Sunday Telegram investigation last spring showed how financial transactions were designed so investors received millions more in taxpayer-funded tax credits than they originally invested in the low-income community businesses. The tax credits are equal to 39 percent of the total investment. They are also refundable, which means if the investor doesn’t have income tax liability in Maine, it can redeem the credits for cash.

The Legislature tried to close loopholes in the program, including the use of so-called “one-day loans,” but failed to get a bipartisan compromise passed.

The finance authority then adopted its own rule changes to prevent investors from using the program to pay down old debt, or refinance existing debt, effectively scuttling the use of “one-day loans.”

But those changes haven’t gone far enough in upholding the program’s goal of directing investment to poor communities, some critics say.

Rep. Ryan Fecteau, D-Biddeford, a member of the Legislature’s labor and economic development committee, didn’t want to comment on the midtown proposal specifically, but said he has concerns about the program being used in cities like Portland that already attract investment.

“I have a little bit of an uneasiness when it comes to Portland because Portland is already a destination area to begin with,” he said. “The program is designed to attract development. If the project was already in the works for five years, it seems to me there is some convenience here that they’re applying because there’s money available.”

UNCLEAR IF TAX PROGRAM WORKING

Criticism such as Fecteau’s has been heard since 2000, when Congress created the federal New Markets Tax Credit program, upon which Maine’s program is based, said Julia Sass Rubin, a professor at Rutgers University’s Edward J. Bloustein School of Planning and Public Policy.

The federal and state programs are designed to funnel investment into projects in low-income areas that wouldn’t otherwise receive investments, but there’s really no way to prove whether a project would happen with or without the tax credit financing, Rubin said.

“The problem is the program can’t be monitored. You have almost no way of knowing if the deals would have happened anyway,” she said.

The lack of oversight of for-profit entities creates a situation ripe for abuse, Rubin said.

“When you have organizations with an objective to maximize profits and a situation that’s almost impossible to monitor, you’re going to have at best a lot of greed, and at worst, abuse of the system,” she said. “Because you can’t monitor it, you’d be crazy to think people aren’t going to try to cheat.”

Rep. Paul Gilbert, a Democrat from Jay who serves on the labor and economic development committee with Fecteau, said he didn’t know enough about the midtown project to comment on it. But he wasn’t bothered with the program being used for a real estate development in Portland, as long as it met the criteria.

“Low-income areas are not only in the 2nd District,” Gilbert said. “There are some low-income areas right in Portland.”

He said he has faith in the finance authority.

“I think FAME is doing a good job right now. We tried to get the changes passed in the Legislature and we couldn’t, and FAME took it up and corrected a couple things. They closed the loopholes so that what happened at Great Northern won’t happen again,” he said, referring to the New Markets deal involving the paper mill at the center of the Press Herald/Telegram’s examination, published in April.

Rubin is critical of what she believes are systemic problems with the New Markets program, but she also believes the program does some good.

“There’s so little federal subsidies, and some of this money is going to legitimate projects,” she said. “So the question is: ‘Is it worth it?’ How much do you have to waste to get this money to legitimate community development projects?”