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Late Allocation Announcements, Market Maturity Create High Demand for NMTCs

Published by Mark O’Meara on Sunday, June 1, 2014

Journal cover June 2014   Download PDF

At this time last year, new markets tax credit (NMTC) investors and community development entities (CDEs) were reporting that a smaller allocation, smaller average individual awards and a delay in announcing the awards had created an increase in the demand for credits.

At the time of this writing, industry experts were still waiting for the Community Development Financial Institutions (CDFI) Fund to allocate the calendar year 2013 NMTC awards. The announcement was expected to occur in early June. In part because of legislative delays, the timing of each year’s announcement has migrated to later dates over the past two years, with round 9 announced in February 2012 and round 10 in April 2013. And because of this, Eric Rosen, NMTC program director at SunTrust Community Capital, described the industry as “anxious” as CDEs wait to find out the size of their NMTC allocations or if they will receive an allocation at all.

Some of this anxiety stems from the competitive nature of the awards. Of the $21.9 billion in credit authority requested by 282 applicants in the 2012 round, the CDFI Fund only had the authority to award $3.5 billion, which it allocated to 85 CDEs. And the 2013 round, or round 11, looks to be just as competitive, if not more so. The CDFI Fund announced in October that it received 310 applications for round 11. The applicants requested $25.8 billion in NMTC allocation authority. The CDFI Fund again only has $3.5 billion to allocate.

Matt Reilein, senior vice president and head of the NMTC group at JPMorgan Chase, said that if awards don’t come out until June extra pressure will be put on CDEs and investors to close deals.

U.S. Bancorp Community Development Corporation (USBCDC) is also expecting that the industry as a whole will be strained by the late arrival of the NMTC allocation announcement. “We see the timing of the announcements of the current round of allocation awards as being a challenge,” Matthew L. Philpott, senior vice president, director of new production at USBCDC. “Depending on the renewal of the program and issuance and timing of the next application and its requirements, the third and especially fourth quarters will be incredibly challenging and a stress on everyone’s resources.”

Credit Prices
Pricing for NMTCs is relatively stable, according to industry experts. Deborah La Franchi, president of the National New Markets Fund (NNMF), said that the NNMF has seen credits go for the low-to-mid 80s. Scott Sporte, chief leading officer at Capital Impact Partners, a CDE headquartered in Arlington, Va., has seen a slightly larger range: from 78 to 85 cents per credit. Richard Campbell, chief financial officer of Hope Enterprise Corporation, said that he has seen credits go for 82 to 86 cents. “We are a mission-based CDFI,” said Campbell. “We are looking for projects that meet our mission beyond the new markets criteria.” That mission, Campbell said, is to serve low-income communities that are underserved by mainstream financial institutions.

Industry experts also say that NMTC investors are not as Community Reinvestment Act (CRA) driven in terms of their investments as low-income housing tax credit investors may be, meaning they won’t overpay for credits just because a development is in their CRA footprint. “From our experience, the disparity in tax credit pricing is more project driven than CRA driven,” said La Franchi. “We’ve seen projects where the investors are willing to pay above market for certain projects that have phenomenal community impacts–of course this is great for the project.” However, Rosen said that he has seen CRA investors pay “in the high 80s” for credits. Rosen added that investing in SunTrust’s CRA area is very important to the company.

“In recent years we have seen steep increases in pricing due to growing investor appetite and market competition. Current pricing ranges from low-to-mid $0.80s,” said Philpott. “In few high demand markets, we have seen pricing slightly above that. The general sense from investors is that pricing will plateau at this level given minimum yield requirements.”

Shifts in the Market
While many investors and CDEs like to serve specific regions or CRA markets, the CDFI Fund has created an inducement to invest in certain areas across the country that have the most need. The CDFI Fund has created a list of 10 states that have received the fewest dollars in qualified low-income community investments (QLICIs) in proportion to their statewide population that resides in low-income communities. These states include: Alabama, Arkansas, Florida, Georgia, Idaho, Kansas, Nebraska, Nevada, Tennessee and Texas. Puerto Rico is also on this list. One of the newest questions in the NMTC application is a business strategy question, which focuses on innovative financing. A CDE’s commitment to invest in the targeted states is one of several ways that a CDE can obtain the points available for that question.

“This heightened focus on the targeted states has been an effective means of motivating CDEs to increase their originations efforts within these states, ultimately leading to a more equitable distribution of the tax credits across the country,” La Franchi said.

“There is some gravitation toward those target states that are underserved,” said Rosen. “That’s a focus for investors.” Reilein added that the incentive has proven to work because some of the states listed originally have now been moved off the list. This includes West Virginia, which was targeted in 2012, but not in 2013.

Few New Investors in the Market
Industry experts are finding that few new investors are entering the marketplace. This is happening for a number of reasons. “I think a lack of permanency and the complexity of the program create problems [for new investors],” said Rosen. He said new investors may be hesitant to enter into the market because of the lack of permanency.

Others said the lack of permanency makes it difficult for investors and CDEs to operate in the market. “It is hard to build a program that is inconsistent,” said Sporte.

“The lack of permanency is an issue,” said Brian Oxford, senior new markets manager at CAHEC New Markets, a CDE that operates in the Southeast and Mid-Atlantic. “It makes business planning tough. Given the short term extensions and the strong CDE competition for allocation, you do not know if you will get funded year-to-year. Permanency or an extension longer than one or two years would boost the overall New Markets Tax Credit program.”

TJ Cox, president and chief operating officer at Central Valley NMTC LLC, a CDE that operates in a four-county region in California’s Central Valley, said, “The big players, these investors are easy to deal with. They give very good pricing for credits. It is tough for people with no track record to get a foothold in the market.” Reilein agrees, saying that relationships play a big role in who JPMorgan Chase partners with on any transaction.

That being said, industry experts are saying that the market’s maturity is creating an opportunity for smaller investors. “I’ve been seeing banks that haven’t participated wanting to step up their presence in new markets,” said Sporte. “This is a signal of the maturity of the market.”

Conclusion
Industry experts agree that while the maturity of the program has brought in a few new investors to the market, a spike in participation won’t occur until the NMTC program is permanently extended.

“The overall market has grown and matured since program inception, with NMTC investments making considerable impact in communities of need, nationally,” said Philpott. “The program and associated benefits are becoming more well-known but the availability of the allocation has decreased, making it a very competitive market for project sponsors seeking NMTC financing.”

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