‘Feverish’ 2017 Follows Record $7 Billion NMTC Allocation Round

Published by Teresa Garcia on Wednesday, August 2, 2017

What do you get after making a record $7 billion in new markets tax credit (NMTC) allocation authority available in one round? A “feverish” year, said active NMTC investor panelists at the Novogradac 2017 New Markets Tax Credit Spring Conference in Washington, D.C.

Panelists said that by the time the 2015-2016 allocation round awardees were announced in November, investors were “chomping at the bit” for a chance to invest in a piece of the $7 billion pie. 

The pent-up demand kept investor appetite and competition for NMTCs strong through the midpoint of 2017. “Because of the delayed announcement, our 2016 volume was lower,” said Laura Vowell, head of U.S. Bancorp Community Development Corporation’s (USBCDC’s) business development for NMTC and historic tax credit (HTC) investments. “But this year, everyone was ready to do deals and had big, full pipelines.”

Demand Drivers

The desire to meet Community Reinvestment Act (CRA) targets is a stronger motivation for some NMTC investors. Zoila Jennings, vice president of community development banking for Chase’s NMTC group, said Chase meets its CRA needs through multiple avenues, such as mortgage lending and affordable housing. NMTCs are one component of their strategy. “We have a large tax appetite, so we’re looking for strong projects and if they fall within our CRA footprint that’s added bonus,” said Jennings.

A smaller but still notable factor in the NMTC’s strong start was the stall in low-income housing tax credit (LIHTC) investments during the first few months of 2017, triggered by the perceived likelihood of tax reform after the presidential election. Vowell said some investors who took a pause in LIHTC investments in early 2017 looked to the NMTC to fulfill their tax credit appetite and CRA needs. Unlike the LIHTC, the NMTC would be more profitable under a lower tax rate on a cumulative after-tax cash basis, because it’s a taxable credit. Some investors have said they’re already looking at investing more aggressively in the NMTC if corporate tax rates decrease.

Credit Pricing and Active Participants

The typical NMTC transaction commands a price per credit in the mid-80-cents range. More desirable deals can fetch marginally more, but likely not higher than 90 cents. “Competition among investors to be involved in the best NMTC deals is a leading driver of pricing,” said Ryanne Shuey, NMTC relationship manager for PNC’s tax credit investment group.

The majority of NMTC investments continue to come from the same handful of major banks that have invested in the credit since the inception of the program. “The usual suspects are still around,” said Jennings. In addition to the mainstays, some local and regional institutions are venturing off the sidelines–albeit not in droves–to provide equity or debt through relationships with more experienced participants.

“There are a lot of regional banks that don’t have a tax credit appetite, but who do have a lending appetite,” said Jennings. “We bring in our lending partners–if we don’t do it in-house, we work with local players.”

Allocation Round Trends

“The underserved states played a big part in this year’s allocation round and there’s been a bigger push to see how we can help those underserved markets,” said Jennings. 

Even developments not in target areas received more attention in the 2015-2016 allocation round. “Because of the larger amount of allocation that’s available, you’re seeing deals that may not have been funded in previous rounds when there was a lot less supply out there getting funded,” said Vowell, referring to smaller secondary markets that don’t necessarily fit into targeted rural or underserved areas. “The larger allocation amount is getting out to more places.”

The greater allocation authority means more credits can be poured into individual developments to help fill the gap left by shrinking public resources. “Our average deal size has increased by $3 [million] to $4 million allocation-wise,” said Vowell. “CDEs are putting in more when they see the need is there and it fits into their program.”

For the most part, the trend of projects with multiple community development entities (CDEs) has continued, but single-CDE projects are slowly becoming more prevalent. “Previously, we had multi-CDE deals with two CDEs splitting the allocation. Now, we are seeing situations with a single CDE offering the entire $10-to-$15 million [allocation],” Vowell said.

Don’t expect activity to slow down any time soon. Investors describe 2017 as wave after wave of activity. The first batch of closings were shovel-ready projects that just needed allocation, the second wave came from entities with a June 30 year-end, the third push is for previous allocatees to meet qualified equity investment (QEI) issuance thresholds by Aug. 18 and the fourth is expected for impactful developments that were just missing one leverage loan source or were stuck in a permit cycle that they couldn’t get out of until later in the year.

“There are a lot of impactful projects in the back log,” said Jennings. “I think what’s going to happen is musical chairs at the end of the year. … Maybe one project you’re holding out on is not ready yet, so you move your allocation to a different deal.”

Legislative Outlook

One thing investors will keep an eye on through the close of 2017 is the preservation of the NMTC in tax reform. With lawmakers and the White House targeting tax reform before the end of the year, NMTC advocates continue to make the case for preserving, expanding and extending the program past its 2019 scheduled sunset.

Shuey said, “This is not a new challenge, but one that we see as critical for the industry will be for NMTC participants–CDEs, investors, QALICBs [qualified active low-income community businesses]–to work together to continue to advocate for the NMTC program to ensure that the successes that we have achieved in low-income communities all across this country are known by members of Congress and the administration.”