NMTC Equity Market Adjusting to COVID-19 Environment

Published by Brad Elphick, H. Blair Kincer on Friday, May 15, 2020 - 12:00am

The new markets tax credit (NMTC) equity market—like so many others—is affected by the COVID-19 pandemic.

However, the incentive helps finance many of the deemed ‘essential businesses.’  

“The types of businesses we are financing are the ones whose work is needed now more than ever,” said Gina Nisbeth, director at Citi Community Capital. Nisbeth said those business sectors include grocery stores, education, manufacturing and health care.

Even though qualified equity investment (QEI) issuance reports from the Community Development Financial Institutions Fund show a strong first quarter in 2020 in terms of the amount of QEIs issued, the effects of COVID-19 have NMTC investors moving forward cautiously. 

“There is going to be smart people out there at any downturn figuring out how to do well. This won’t be different,” said Bill Pollard, president of River Gorge Capital, a CDE. “It’s just going to be an appetite shift, but there will be an appetite.”  

“We are carefully open for business. We are taking on a number of new deals,” said Lee Winslett, senior vice president and division manager of the NMTC Group at Wells Fargo, a NMTC investor and CDE. “We are being really selective to ensure the deals are still feasible. Do they make sense in this new environment?” Winslett said Wells Fargo is prioritizing investments that have immediate need such as health care facilities.

“We are seeing everything from pausing to cautiously remaining in the game,” said Nisbeth.

“We are cautiously issuing new term sheets,” said Laura Vowell, director of business development at U.S. Bancorp Community Development Corporation (USBCDC), a NMTC investor and CDE. “There is a lot of uncertainty. No one knows when this will end or how deep this impact will go.” Vowell is hearing that investors don’t have as much appetite for tax credits as they did before the pandemic.

COVID-19 is Exacerbating Existing Trends

While it’s still too early to know the full effect, community development professionals say pricing for NMTC equity has decreased as a result of the uncertainty caused by COVID-19. However, this downward pricing trend appears to have started before the pandemic.

“[Early] last year we saw a much fuller market and more people ready to invest. Pricing ranged based on structure, but generally speaking we were seeing prices in the 80s and we were seeing most investors interested in projects,” said Laurel Tinsley, CEO of MBS Urban Initiatives CDE. “[We] saw a chilling of pricing early this year before COVID-19. We were dropping into the high 70s. After [the pandemic] there were some deals getting credits in the mid-to-low 70s depending on the market.”

“The market was weakening before COVID-19,” said Vowell. “We did see some very aggressive pricing [earlier on], but the strength of the market hasn’t been sustained.”

Winslett is also seeing this trend. “The pre-COVID-19 market had peaked. COVID-19 accelerated that drop off in pricing because of the level of uncertainty and the curtailment from investors. It reset the supply and demand balance,” said Winslett. “New deals are probably priced substantially lower than one month ago. Pricing is still uncertain. There have not been enough deals [to really tell].”  

“We are seeing quite a response across the industry that pricing has changed,” said Nisbeth. “Deal terms are also changing. Commitments may be no longer than 30 days and deals have different guarantee requirements.”

Monica Blanton, vice president of River Gorge Capital, saw equity pricing around 83 cents per credit in early March. However, she is now hearing that tax credit equity pricing has dipped into the 70s.

River Gorge Capital has allocation currently available and is optimistic about finding investments with a need for the subsidy that is greater now as a result of COVID-19. “We are selecting projects from an impact standpoint, focusing on the mission of the NMTC,” said Pollard. “We are making sure that projects have a true need for the credit, especially in this time.” 

However, the economic slowdown is also affecting financing options available as leverage loan sources to qualified active low-income community businesses. “On the other hand, there may be fewer deals ready because of a need for leverage [financing],” said Blanton.

How does today’s dip in tax credit equity pricing compare to what happened after the Great Recession?

Data from a Novogradac survey indicates that tax credit equity pricing was generally in the high-70s to mid-80s range before the Great Recession in 2005 and 2006. Similar to today’s current pricing, there was a dip in tax credit equity pricing during the recession with prices reaching their lowest in 2010. In 2010, equity pricing was seen as low as 60 cents per credit, but averaged in the mid-60s to low-70s range.

After 2010, tax credit equity pricing started to rebound.  In 2011, Novogradac’s survey results show pricing from the low 70s to the high 70s. By 2014, investors were pricing some investments as high as 85 cents.  In 2017, tax credit equity pricing generally peaked with some prices above 90 cents.  More recently, tax credit equity pricing dipped slightly to the low- to mid-80 cent range in 2018-2019 and early 2020.  

Average NMTC Equity Price Trends
Click to Enlarge

Comparing Economic Downturns—Similar, but Different

Vowell sees similarities between the effects of the Great Recession of the late 2000s and the COVID-19 pandemic. “A lot of this is very similar to 2009. It feels like that for us in certain ways, especially with NMTC appetite,” said Vowell. “These are two different animals, but both give us a similar feeling as investors.”

The two events are also different.

“This feels like completely uncharted territory,” said Winslett. “The pandemic is creating a lot of uncertainty. It’s different than anything we have encountered in our lifetime.”

The Great Recession had an effect on the types of capital sources available and the types of investments that were financed. 

“A lot of projects were no longer feasible after the Great Recession, especially real estate projects,” said Winslett. Winslett added that after the Great Recession more operating businesses and community facilities were financed as a result.

“I don’t know if the Great Recession changed the types of projects being built, but it changed the capital stack,” said Nisbeth. “After the recession, there was less hard debt on projects and much more soft financing.” In a post-COVID-19 market, Nisbeth expects project preferences will include job creators, health care facilities, education and food.

Vowell added that projects with larger sponsors were more successful after the Great Recession as were projects with nonprofit sponsors who had raised capital before the recession. Vowell said that existing small businesses and health care facilities may need NMTC financing more than real estate projects and new community facilities in the post-COVID-19 market.

“People are assessing the damage from COVID-19,” said Winslett. “It’ll absolutely change what projects get financed and we will help those most impacted and most vulnerable.”

Winslett said there is a silver lining. “The Great Recession was a huge shock to our system, but we adapted to it,” said Winslett. “One positive that came from the recession was a return to the greater mission of the program. Coming out of the recession, everyone recommitted to the mission-rich deals. That’ll likely happen again here [when the industry comes out of the COVID-19 pandemic].”

Advocacy for the NMTC Program

Even in the midst of everything that is currently affecting the NMTC markets, advocacy efforts for the incentive remain paramount. NMTC practitioners continue to advocate for permanency and larger amounts of annual allocation.

“This is the perfect opportunity to make a strong case for an increased allocation on an annual basis. The program has done a good job of accomplishing its goal. I don’t know why you wouldn’t advocate for more allocation,” said Pollard. “If we believe the economy is going to turn [for the better], then we should want enough allocation when investor appetite is back.”

“I think that it’s a really important time for investors and CDEs to be supporting this credit with its possibility to expire. Previously, when there was a push to renew the credit there was widespread support,” said Tinsley. “There are ways to continue to establish demand and need for this credit because it is an important gap filler for funding mission-driven developments. If this program goes away, nothing will take its place that is as meaningful, and drives impacts to the low-income community.”

“I believe there is enough resourcefulness [from community development participants] and need for this tool,” said Winslett. “I believe it could be figured out how to use up a larger allocation.” Winslett said that Wells Fargo continues to have interest in this incentive and is keeping a close eye on its tax capacity.

With so many forces at play, what is the best way to advocate for the NMTC?

“My goal is to sustain as much appetite for NMTCs as possible,” which Vowell said is vital since USBCDC is a large investor. “[This can be done] by reducing the impact of less favorable accounting treatments and increasing the number of syndicated investors.”

Nisbeth said keeping long-term community development professionals engaged in the NMTC program is vital in these uncertain times.

“Under these circumstances, I understand that current investors may not have the appetite they once had,” said Nisbeth. “We should [additionally] focus advocacy efforts on how to incentivize the overall benefit of the program.”  She said increasing the value of Community Reinvestment Act consideration received for NMTC projects, reducing restrictions on the portion of an investor’s tax liability that can be offset by the tax credit and getting better accounting treatment might help stabilize pricing and keep long-term participants involved as well as attract new ones.