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NMTC Extension Eases Minds of Industry Participants

Published by Mark O’Meara on Wednesday, May 4, 2016

Journal cover May 2016   Download PDF

The recent five-year extension of the New Markets Tax Credit (NMTC) program provided an important thing: time. “NMTC stakeholders can be proactive in our long-term goals because we don’t have to dedicate our collective efforts toward the mere survival of the program,” said National New Markets Fund President Deborah La Franchi. “We have a great opportunity because of the five-year extension. Rather than expending an intensive amount of time and energy garnering congressional support for a one- or two-year extension, we can focus more effort on improving the program and–of course–making the program permanent.” 

Others agree. Robert Poznanski, senior vice president, chief operating officer of Local Initiatives Support Corporation’s (LISC’s) NMTC subsidiary, said, “We are so appreciative of the extension. It’s a relief to have a five-year window to operate in. This gives us an opportunity to see how we can improve the program.” And Ryanne Shuey, NMTC relationship manager at PNC, said, “With the extension we can put more energy into finding even more impactful deals. Each year the quality of transactions is getting higher.” Kevin Goldsmith, program manager for Chase’s NMTC Group, agrees with Shuey, saying, “The five-year extension gives us more of a runway to plan with high-impact projects that have longer timelines.”

Demand 

With fewer question marks about the program comes increased demand. “Demand is certainly very robust. Totally oversubscribed,” said Poznanski. LISC has received NMTC allocations in all but two rounds of awards, with total allocations of $908 million. 

Increased competition can make it hard for new investors and community development entities (CDEs) to enter the market. “There is a limited amount of new equity investors entering the market,” said Poznanski. Poznanski added that LISC typically works with a number of the major investors, including U.S. Bank, JPMorgan Chase, Wells Fargo, Bank of America, Capital One and PNC Bank. “These top investors do 85 to 90 percent of our work,” said Poznanski. “There is more demand among those large investors than there are credits.” In the most recent round, LISC received $70 million in NMTC allocation. This was the third-largest allocation in the 2014 round, behind Rural Development Partners LLC and AMCREF Community Capital LLC, both of which received $75 million in allocations.

A portion of LISC’s allocation authority goes into its Healthy Futures Fund, which is run by director Emily Chen. The fund, which received $47 million in NMTC allocation to date, seeks to improve community health by expanding health care access through a co-location model for health centers and affordable housing developments. The fund combines NMTCs and low-income housing tax credits (LIHTCs) with grants and technical assistance to get developments financed. After recently closing its first fund, the Healthy Futures Fund is looking to compile $50 million in NMTC allocations for its second. Chen said the NMTC allocations come from LISC and other CDEs. 
 
Others are seeing the same level of competition for credits among CDEs and investors. “The application pool continues to be strong, which makes it challenging for new CDEs to be awarded allocations,” said La Franchi. “The application process is very intense given the level of detail on track record, impacts and prospective projects that is required–not only must the organization be highly qualified, as a start, but they must be ready to make a very substantial time commitment to pull a strong application together.” As a result, La Franchi sees more potential applicants scrutinize–before pulling the trigger on undertaking an application–whether their organization and track record are a strong fit. La Franchi said the new applicants seeking awards are very aware of how competitive it is to be selected for an allocation; thus, some drop out before applying if they determine they do not have a compelling alignment or track record. Those that move forward seem to put forth stronger applications compared to previous rounds. “There seems to be more self-screening now compared to earlier years in the program–potential applicants have a better understanding of the need for strong financing alignment as well as the extensive time and effort that must be committed to the application process,” she said.

PNC’s Shuey said this is a “very mature market.” She said there are few new investors entering the market because there is an experienced core group of investors providing significant investment across the country. She also said the program’s steep learning curve makes it tough for new investors to enter. However, Shuey asked, “With the five-year extension, will other investors dip their toe in?” The extension gives the industry more certainty about the program, which is attractive to potential investors and CDEs looking to enter the market, she said. 

Matthew Philpott, senior vice president of NMTC production at U.S. Bank, said demand for credits continues to increase. “The supply of credits continues to be considerably less than the demand,” he said. “It’s unfortunate that the full $5 billion hasn’t been awarded.” The last time the CDFI Fund awarded $5 billion in NMTC allocation authority was the seventh round in 2009. “Demand is pent up because of an availability issue. Obviously, there was much more supply when the full $5 billion was issued,” said Philpott. As a result, CDEs have to make hard choices between viable projects. 

“There are a lot of experienced folks that do not win an award every year,” said Eric Rosen, NMTC program director at SunTrust Community Capital. Those CDEs that receive an allocation are receiving smaller amounts on average. Rosen said CDEs are no longer getting that $100 million allocation and are rarely getting around $75 million. He said CDEs are seeing average allocations of about $45 million. With the average project needing about $8 million in allocation, Rosen said each CDE’s award can only go to a few developments. SunTrust has won seven allocations over the past nine rounds. SunTrust provides allocation to a variety of different developments, from charter schools to outpatient health care facilities to hospitals to developments that create jobs or promote health and wellness. 

With smaller average allocations, it’s more difficult for a single CDE to provide enough allocation to larger developments. As a result, the industry is seeing more multi-CDE developments. Poznanski said that 50 percent of LISC’s developments are multi-CDE transactions. While some prefer to be the sole CDE in order to minimize transaction costs, most CDEs work on these multi-CDE deals. That being said, Mike Morrell, vice president of Sunrise Banks, said multi-CDE projects allow CDEs to participate in more projects. 

“In our experience, investor competition and businesses on the West Coast have shown the highest demand for NMTCs,” Philpott said. “At the other end of the supply-demand continuum, there is demand in areas with fewer or no local CDEs covering these service areas, but they have difficulty attracting NMTCs due to lack of service area coverage and existing NMTC infrastructure. The CDFI Fund’s focus on directing some NMTCs to underserved states has helped to increase awareness, availability and infrastructure in these areas.”

Pricing

Industry leaders have found NMTC pricing to be as high and competitive as ever. “The strength of the market has increased gradually over the past 18 months,” said Goldsmith. Compared to several years ago, pricing is much higher, he said. Goldsmith has seen very few additional investors enter the market, but “current investors have a stronger appetite for credits.” Rosen said that investor appetite for credits is “very strong and growing. This is made evident by the increase in pricing.” Rosen says credits go from the low- to high-80s. Morrell is seeing between 82 and 85 cents per credit. Morrell said, “The competition for credits is driving price up. Prices are much higher than when we first got into the business.” Morrell said the bank has been an active CDE since 2011 and a leverage lender since 2009. 

LISC reports credits going for the mid-80s. Others agree, seeing credits go for between 80 and 89 cents. La Franchi has seen a tighter window of credits from 84 to 86 cents per credit. Shuey reaffirmed that pricing really depends on the quality of the deal, and she notes that Community Reinvestment Act (CRA) needs of an investor is one driver of pricing. 

Improvements and Outlook

Goldsmith said the industry would benefit from more clarity about when applications are due and when awards come out. “There is a lot of pent-up demand and the timing of projects is hard as a result,” said Goldsmith. Shuey agreed, adding, “It is hard to educate projects of when awards come out.” Shuey said this uncertainty can force owners to take the risk of moving forward with the development before NMTC financing is fully secured. 

While pleased with the five-year extension, investors and CDEs alike are pushing for permanency. “Obviously, program permanency would be huge,” said Morrell. “The five-year extension was very good for the industry, but permanency is what everyone is hoping for.” Rosen said, “Our primary focus–despite the five-year extension–is program permanency.” 

Philpott agreed. “We have a five-year runway now. That is going to help the industry stabilize and work on its operating efficiency.” To that end, practitioners recommend sharing developments with members of Congress to demonstrate the program’s good work. Looking forward, the industry will have its eyes on the upcoming election as Congress and the new president could have a large impact on the future of the NMTC.

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