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Allocatees Report Improvement in NMTC Market

Published by Jennifer Dockery on Wednesday, June 1, 2011

Journal cover June 2011   Download PDF

When Congress reauthorized the New Markets Tax Credit (NMTC) program in late December, community development entities (CDEs) breathed a sigh of relief. Market activity had increased in 2010 and the CDEs expected a stronger 2011. When the Novogradac Journal of Tax Credits spoke with 21 allocatees in April, the CDEs were seeking projects and investors for an additional $3.5 billion in NMTC allocations. Many CDEs expressed cautious optimism about the state of the NMTC market, reporting that credit prices had risen, investors were back and debt was available. Yet they also said that smaller NMTC allocations and the program’s temporary nature were negatively affecting the market.

“The market has matured. CDEs have more capacity to do a higher volume of transactions,” said NCB Capital Impact’s Annie Donovan. “There’s more capacity, and there’s more demand than there are credits.”

Rising Prices
“Earnings at financial institutions have firmed up people’s interest in new markets tax credits,” said Stonehenge Capital Company LLC’s David Webber.

Increased investor interest has led to higher prices per credit. CDEs reported a range of NMTC pricing between 65 and 75 cents per credit; the lowest prices were reported in smaller markets. Carolina First Community Development Corporation, which uses its allocation for projects in North Carolina, South Carolina and Florida, and Rural Development Partners (RDP), which focuses on rural projects in Iowa, both reported average prices in the 65- to 70-cent range. Clearinghouse CDFI and Banc of America CDE reported seeing prices of as much as 75 cents. The majority of CDEs reported prices in the high 60s to low 70s.

“We now consistently see pricing between 71 and 74 cents for very high impact projects, which is a level that simply wasn’t available in the market six months ago,” said National New Markets Fund’s Deborah La Franchi.

Investor Interest
In 2009 and 2010, allocatees struggled to find equity investors and lenders for projects; that is not the case in 2011. Twelve CDEs said that investors’ tax appetite has increased and investors have returned, with most investments coming from large financial institutions. Those financial institutions that previously left the market or cut back to only investing in their own NMTC allocations have an increased appetite and regional banks and insurance companies have entered the market. At press time, one allocatee was working on its first deal with a private investment group, another had received inquiries from media companies and the Wisconsin Community Development Legacy Fund Inc. (WCDLF), a subsidiary of the Wisconsin Housing and Economic Development Authority, had been approaching C-corporations that have purchased low-income housing tax credits (LIHTCs), ascertaining their interest in investing in NMTCs.

“As the economy has come back, we’ve seen promising interest from some new investors and regular investors …” said WCDLF’s Farshad Maltes.

Debt Availability
Opinions differed on project debt availability. Several industry participants described the debt market as challenging while others said that debt availability had increased. Key Community Development New Markets LLC is seeing more loans coming from soft debt providers. The Community Reinvestment Fund USA’s (CRF’s) Frank Altman said that today’s deals feature federal, state and local sources of leverage financing as well as funds raised through capital campaigns and other philanthropic efforts. Clearinghouse has seen debt coming from foundations, cities and counties. Many qualified active low-income community businesses (QALICBs) are funding leverage dollars from a parent-affiliated company. National Trust Community Investment Corporation (NTCIC) is working with smaller local lenders on its NMTC/historic tax credit projects. Some CDEs controlled by larger banks, such as
Bank of America Corporation (BAC), indicated that they prefer deals in which they can provide debt and the equity. U.S. Bank Community Development Corporation, however, indicated that it did not have a debt preference and that most of its transactions involve debt from third parties. No matter what the debt sources, all projects face tougher underwriting requirements than they did a few years ago.

“Because of the change in the loan appetite with banks and such, projects tend to be higher quality or need more credit enhancement,” said Midwest Minnesota Community Development Corporation’s Julia Nelmark.

Increased Competition
Potential QALICBs face an increasingly competitive market in 2011. Congress capped the 2010 NMTC allocation at $3.5 billion, $1.5 billion less than the Community Development Financial Institutions Fund awarded in the previous round. The $3.5 billion was awarded to 99 CDEs, but allocations were smaller than in previous rounds. Many CDEs committed their entire allocation to existing projects and are not seeking new projects, further reducing the available credit. This has put pressure on developers to prove community impact, need and readiness to proceed.

“To us [the question is] is it really in a highly distressed area and does the project really need the credits to move forward?” said RDP’s Terry Carpenter.

“We are amazed at the number of really solid transactions we’re being approached with this year,” said Local Initiatives Support Corporation’s Kevin Boes. The allocatee anticipates completing 10 transactions this year.

A glut of potential projects seeking NMTCs has made direct impact the name of the game. CDEs want projects that provide high numbers of jobs creation or goods and services directed to low-income people, preferably in highly-distressed low-income areas. Projects need to demonstrate that they will have a lasting effect on the surrounding community.

“The impact story of the project itself is the single greatest variable,” said BAC’s Leigh Ann Smith. She said that BAC wants to fund projects that will create direct jobs or services for low-income individuals. Clearinghouse is seeking projects that provide jobs or improve access to education. CRF wants to see projects that create or retain living wage jobs. NTCIC requires project developers to create community benefit agreements and Enterprise Community Investment Inc.’s CDE, ESIC New Markets Partners LP, wants environmentally friendly projects.

CDEs prefer shovel-ready projects, preferably with secured capital sources and confirmed end users. CEI Capital Management LLC (CCML) wants to see leveraged debt and genuine interest from an investor when it considers a project. Key’s Amy Dosen said, “We are shying away from the mixed-used deals. Given the state of the commercial real estate market, unless they have solid tenants lined up, those are hard to underwrite and get through the approval process. We have shifted to community and business growth projects.”

An Uncertain Future
The majority of CDEs cited the program’s reauthorization as their top concern. “The mission of the credits needs to be improved, but without credits authorized you can’t improve the program,” said The Reinvestment Fund’s Don Hinkle-Brown.

CCML’s Charles Spies said that Congress needs to pass at least a five-year extension to create certainty. “The greatest challenge in the industry is to create certainty at the federal level,” he said.

Advantage Capital’s Jonathan Goldstein worried that the uncertain future of the program might limit program participation because CDEs would be unable to justify staffing and other expenses. Enterprise’s Elaine Martin agreed, noting that LIHTC pricing improved when the program became permanent.

“Folks are looking for allocation for their projects,” said David Trevisani of the National Development Council. “The need is out there more than ever for a program like this.”

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