After Allocation Announcement, NMTC World Should Brace for Hectic 2023

Published by Brad Elphick on Tuesday, November 8, 2022 - 12:00am

After the Oct. 28 announcement of the calendar year (CY) 2021 new markets tax credit (NMTC) allocation awards, the next few months will be busy for stakeholders. The start of 2023 may be more frantic.

“The awards will not impact this year, but will make a very productive first quarter,” said Steve Kramer, senior vice president, U.S. Bancorp Community Development Corporation, during the “Investors, Inflation and Your Development” panel that I moderated at the Novogradac 2022 Fall New Markets Tax Credit Conference in New Orleans at the end of October. “We have our pipeline of deals and we’re looking to manage that. It will be a very busy start to next year. This is definitely different from last year, when the awards came out in September and there was a huge rush of activity in the final quarter.”

The NMTC awards will make the rest of 2022 busy as community development entities (CDEs) and qualified active low-income community businesses (QALICBs) work through the details, including allocation agreements. But conference panelists said it will be even busier in the first quarter of 2023.

“What we’re going to see is all this activity will spill into 2023,” said Jim Howard, president of Dudley Ventures, at the conference panel. “Having the awards earlier would have had us look at it differently.”

In addition to finalizing allocation agreements, the first quarter of 2023 will likely include the release of the CY 2022 application (which could conceivably be released in late 2022) and a possible reporting date for the minimum threshold for qualified equity issuance.

“We’re seeing a very busy year-end,” said Howard. “That’s largely because of the new allocation, but we’re also trying to get deals out the door that have been delayed for any reason. It never really ends. It’s a matter of managing expectations and getting various factors in alignment.”

The early 2023 rush was one of several topics addressed during the panel.

Pricing: Going Up?

Panelists also addressed NMTC equity pricing, suggesting that a conference attendee poll (which indicated the highest pricing for NMTCs in 2022 was a range of 77 cents to 79 cents per credit) was an accurate representation–but that changes could come in 2023.

“I think we’re all predicting a great 2023, so I think pricing will stay the same if not go up a little bit,” said Chimeka Gladney, senior vice president for NMTCs at Truist Community Capital. “We’re all kind of in the same range. There are probably very few deals getting done at higher numbers that make sense for particular investors in a deal, given the relationships, CRA needs and strong impact stories. For those, you’ll see pricing that’s very competitive [and higher]. Other than that, you’ll probably see prices where they are now.”

Kramer agreed.

“Our average probably falls into same range that the majority [in the conference poll],” he said. “There are a lot of factors at play that are still undetermined. A corporate minimum book tax [which was part of the Inflation Reduction Act] may create some additional entries in the market and there are other factors that could affect demand. The increase from $3.5 billion to $5 billion [in annual NMTC allocation starting with the CY 2020 round] could affect how much people will pay for credits.”

Howard said he expects 2023 to see strong competition among investors.

“What you’re hearing is that 2023 should be a robust year,” said Howard. “I think barring a major economic calamity, we’re likely to continue to see this competitive environment.”

Inflation, Interest Rate Effects

Conference panelists said inflation and the related increases in interest rates haven’t yet made a huge impact on the NMTC investor world, but that is coming.

“The first thing that we’re seeing is additional due diligence on the lending side around the quality of the developer and tenants, if there are tenants in place,” said Gladney. “We do a lot of deals with our own bankers, who have a great sense of what they’re looking for in terms of understanding the balance sheet. … Some debt service coverage ratio requirements could go up a bit, which would limit the amount of debt available to a project. The new markets tax credit can fill some of the [financing] gap, but it can’t fill all of that gap.”

Spencer Gagnet, managing director and manager, Tax Credit Finance Department at Capital One, said one group disproportionately affected by inflation and interest rate changes is nonprofit developers.

“Nonprofits are more limited, and it will be more difficult,” he said. “We’re seeing a lot of deals getting downsized and seeing deals closed with what [financing] you have. The impact of rising interest rates hasn’t weaved its way into the market yet, it’s happening now. So, if you think it’s going to get significantly higher, you’ll see it next year.”

Yet another item to keep watch on in early 2023.