Market Participants Report Rising Demand, Pricing for New Markets Tax Credits

Published by Teresa Garcia on Monday, July 1, 2013
Journal thumb July 2013

Although Congress reauthorized the New Markets Tax Credit (NMTC) program in January, community development entities (CDEs) say that the two-year extension and $3.5 billion annual program cap are not enough to keep up with increasing demand for the credit. Of the $21.9 billion in credit authority requested by 282 applicants for the 2012 round, the Community Development Financial Institutions (CDFI) Fund was only able to award the maximum $3.5 billion to 85 CDEs. When the Novogradac Journal of Tax Credits spoke with allocatees in May about the current state of the NMTC market, many CDEs agreed that a permanent extension of the program and increased funding would better facilitate development of catalytic community projects.

“It has always been the case where demand has outstretched supply, but this year is much more dramatic,” said Scott Sporte, NCB Capital Impact’s chief lending officer. “The combination of a smaller allocation, a smaller average for individual awards and a delay in announcing the awards helped build up demand even more.”

Credit Prices Rise
CDEs say that an overall demand increase has steadily driven up pricing for NMTCs in the past year. “What we are seeing for very high impact projects is the low- and even mid-80s [cents],” said Deborah La Franchi, co-founder and president of the National New Markets Fund. Others have reported prices from the low 70s up to the mid-80s, with most prices around 82 cents.

Competition has pushed credit prices as high as 90 cents in some cases, said Jay Harrison, Clearinghouse CDFI’s chief investment officer. “When this happens, it is usually because an experienced group of partners has rallied around a high-impact project and is really ready to move forward. This limits the execution risk in the deal,” said Harrison.

Investor Interest Increases
Investor interest has also been on the rise. “There’s a dramatic difference in the overall eagerness that investors are showing for the credit. I think investors that have embraced the program are now increasing their goal to have greater impact and making it a larger part of their business,” said Sporte.

Elaine DiPietro, vice president of Enterprise’s NMTC program, attributes renewed activity to the economy’s overall recovery. “[Investor interest] decreased in 2008 and 2009 because investors didn’t have as much income, so they didn’t need as much tax credit to offset that income. Now there’s more use for the credit,” she said.

SunTrust is one investor, lender and CDE spurred by the improving economy and market maturity that is working to increase its presence in the NMTC market. “We have a significant appetite for tax credit investments now, compared to several years ago. We’re looking to be a large player in the market,” said Eric Rosen, NMTC program director at SunTrust Community Capital LLC, a subsidiary of SunTrust Bank.

One exception to the general increase in investor interest has been NMTC projects that use historic rehabilitation tax credits, said DiPietro. She said the Historic Boardwalk Hall LLC v. Commissioner ruling and subsequent uncertainty about how the Internal Revenue Service (IRS) will treat partnership structures have made investors cautious about investing in such transactions.

Debt Availability Remains Limited
Most allocatees indicated that lenders are still wary about reentering the NMTC marketplace. “Debt is definitely not flowing like it was before 2008,” said La Franchi. Many projects she sees, especially among nonprofit transactions, are self-funded through capital campaigns and philanthropic efforts. She noted, however, that there is a visible and positive uptick in terms of commercial debt, bond financing and private equity returning to the NMTC scene relative to leverage being used to finance operating companies.

Although awardees agree that debt is still not as readily available as it was before the recession, some CDEs have reported seeing lenders slowly becoming more active again. “Lenders are starting to creep back in and doors that were shut before are opening again,” said Michael Johnson, managing director of Advantage Capital Community Development Fund LLC. “I’m definitely getting more yeses than in the past, as banks are starting to get healthier.”

Rosen said that regional and community banks in particular are working to be more active in the NMTC market.

Matthew Reilein, NMTC program manager at JPMorgan Chase, attributes recovering debt availability to program maturity. “Lenders are more accustomed to the new markets tax credit, so it’s not the new thing on the block anymore. They’re more accustomed to the nuances of lending to the new markets structure,” he said.

Shortage of leveraged loan financing for NMTC projects continues to be a concern. “The leveraged debt piece has always been hard to find. I haven’t seen a whole lot of movement there and it’s still very difficult,” said Charlie Spies, CEO of CEI Capital Management LLC.

Harrison had similar observations. He believes that leverage loans from banks may remain in short supply until their regulatory environment improves. Harrison said that a loan made to an investment fund has a higher risk weighting than a direct mortgage loan from a regulatory point of view, which could be a powerful disincentive.

Project Competition Grows
Compared to previous years, developers are taking a more proactive role in approaching allocatees with project proposals. “In the early rounds, we got the allocation and were contacted by investors. We weren’t contacted by any borrowers,” said Doug Bystry, president and CEO of Clearinghouse CDFI. He said Clearinghouse CDFI has so far received 60 to 75 inquiries from developers about projects for the current allocation round.

Although Clearinghouse CDFI received $80 million in NMTC authority for the 2012 round Bystry said there isn’t as much funding available for projects as some would think and projects often need NMTCs from more than one CDE. “We’re still very squeezed … There are more and more deals chasing less and less allocation,” he said.

Reilein also noticed that the high demand for credits and smaller award sizes on average have created a trend of projects involving multiple CDEs. “That means even smaller- or medium-sized projects become multiple-CDE projects. … It makes putting together a project more complex and time consuming,” said Reilein.

Other allocatees have seen high credit demand and uncertainty about the program’s future accelerate the process of CDEs choosing projects to support. Many potential qualified active low-income community businesses (QALICBs) that submitted funding applications after the award announcement found that most CDEs had prepared a project pipeline, said DiPietro. “It’s interesting that the allocations were announced in April and there are already groups saying they’ve committed or earmarked most of their allocations for investments,” she said.

Advocating Program Permanence
Allocatees said that the biggest challenge facing the NMTC industry is uncertainty about the program’s reauthorization. “This annual reauthorization process is too unpredictable, making it difficult to build a pipeline if you’re wondering if the program is going to exist in the future,” said Sporte. He added that the program has earned the reputation of being overly complicated and expensive. Sporte suggested bolstering support for the program by reducing the cost of executing projects and to making it easier to replicate transactions.

DiPietro said that there isn’t strong opposition to the program. “It’s a matter of not having broad enough support. We need broader support and Congress has so many other things on its mind that it’s hard to get its attention,” said DiPietro. She suggested educating Congress about the benefits of the program and its effects in their districts.

Johnson agreed that NMTC supporters need to continue sharing their success stories. “It’s incumbent on us to tell the story of what we do, why the program is beneficial and why a dollar in the program impacts the economy several times over,” he said.