NMTC Investors Say Prices Stabilizing, Racial Equity Developments Attractive

Published by Brad Stanhope on Friday, February 25, 2022
Journal Cover Thumb March 2022

The landscape for new markets tax credit (NMTC) equity in 2022 looks good–but there’s a possible hurdle.

“If there’s not another allocation in 2022, that will be problematic because there are a lot of QALICBs [qualified active low-income community businesses] looking for allocation and it will get used,” said Steve Kramer, senior vice president of U.S. Bancorp Community Development Corp. “The challenge is when the next round is going to come out. Right now, the CDFI Fund says [the calendar year 2021 round is] coming out in the fall, but we know that could mean December, which would be problematic.”

A late-2022 allocation announcement would mean a delay to invest. Kramer was a panelist on the Equity, Investors and the NMTC panel Jan. 20 at the Novogradac 2022 New Markets Tax Credit Conference in San Diego.

Panelists said NMTC equity prices stabilized after a rocky 2020.

“I think 2020 was definitely the fluctuation and 2021 was a stabilizing year,” said Kramer. “Frankly, there was more demand than we were anticipating.”

Nicole Boone, executive director of community development banking at JPMorgan Chase, said prices fluctuated, but within a bigger zone.

“I’ve seen a range of pricing as much as 15 cents,” said Boone. “The average price is in the mid-70s [cents per dollar of credit] and I think it will largely remain the same in 2022. What’s going to drive prices higher is racial equity projects, deals in strong bank CRA [Community Reinvestment Act] markets and really impactful marquee deals.”

Kramer echoed the idea about the pricing range.

“We’re seeing the same thing–the mid-70s,” said Kramer. “Given the increase in demand and the offsetting increase in supply with the increased allocation amount [with the annual allocation amount going from $3.5 billion to $5 billion in the CY 2020 round], we’re hoping we’re at a stabilized place in the market.”

Donna Nuccio, the vice president of NMTC investing at New Markets Support Company, said a stable market is good news.

“Having a plateau in the market is helpful,” said Nuccio. “The mid-70s is what we’re seeing. We’re lucky to be on the higher end because we have impact investors.”

Looking Back at 2021

Panelists said 2021 was a better year than expected.

Boone said Chase did about one-third more business than projected in 2021 and said that about 30% of the bank’s NMTC business was related to racial equity developments.

Kramer said U.S. Bank did about 50% above expectations in 2021.

“We started off the year unsure what was going to happen, so we set our expectations accordingly,” Kramer said. “We would have liked to have done more. We had syndicated investors looking for more, but the delay of the allocation [until Sept. 1, 2021,] certainly prohibited us from doing the amount we wanted to.”

What’s Hot, What’s Not

Transactions that are attractive to NMTC investors may change, but there was one clear point of emphasis for all panelists.

“Racial equity is definitely going to be at the top of our list as a CDE [community development entity] and is a main consideration for us as an investor,” said Kramer. “We’re not unique in that–for most investors, that’s a big consideration.”

Nuccio agreed and pointed out a nuance.

“Racial equity is less about what [the recipient] does, but about who is behind it, who are the sponsors,” Nuccio said.

Boone highlighted some other changes in the market, but agreed that racial equity transactions are popular.

“Charter schools were the darlings of the new markets five years ago and as a result of a lot of political regulations, I’ve seen fewer being done,” said Boone. “Going forward, racial equity transactions will continue to be important. Multiuse, multitenant properties will be hot and community facilities are always in season. Manufacturing, rural underserved and non-real estate will continue to be popular for investors.”

The other panelists weighed in on attractive NMTC investments.

“Having lived through a pandemic, there is increased focus on health care,” said Nuccio. “There’s more about community health, in addition to health care services.”

“[Next to racial equity], we’re driven by location,” said Kramer. “Bigger cities and CRA considerations impact pricing.”

Kramer shared some investments that are struggling in 2022.

“I think hospitality and entertainment are going to continue to be a challenge for financing in any aspect, let alone the NMTC,” said Kramer. “Commercial real estate, office and retail are still recovering asset classes. So many CDEs are very specific and really stick to what they say they are going to do.”

Making a Transaction Attractive

While the type of investment is important, panelists said other things make transactions attractive to CDEs and NMTC investors.

“We’re looking for projects that are community-driven and focused,” said Nuccio. “So, if you’re talking about job creation, tell us about those jobs and their quality and how you’re operationalizing them. We have an impact team that is really digging in on that. If you’re a community-driven project, be able to articulate that and talk about how you will achieve the impacts.”

Boone said to be prepared.

“One thing that shouldn’t be underappreciated is project readiness, especially as we don’t know when the next award will come out,” said Boone. “If your project is ready to go and has strong underwriting, you’re going to have people ready [to invest].”

She also encouraged thoughtfulness about who leads the project.

“If it’s a real estate project, having a competent owner representative is important,” Boone said. “Have someone who is asking questions on the front end and who is going to oversee the project so it can produce the impact you want.”

Change in NMTC Treatment

The Emerging Issues Task Force of the Financial Accounting Standards Board is considering a change in the generally accepted accounting practices (GAAP) for NMTCs, putting them in line with low-income housing tax credits by allowing the proportional amortization method.

Panelists said that change would make a difference–making NMTCs more attractive to publicly traded companies.

“It would certainly open up the market, but I don’t know how quickly that would change the market timeline,” said Nuccio.

Kramer agreed.

“It would bring in a lot of investors who have not gotten into the NMTC for that reason,” said Kramer. “Simple economics say that if more investors come in and create more demand, it should raise pricing. What the timeline is, I have no idea. It’s a pretty complex issue.”

Boone said the sophistication of the NMTC market might present a hurdle.

“Folks might be slightly reticent to undertake the NMTC as new investors, because it’s a complicated market,” Boone said. “I think it would have an impact on pricing, but the timing would be TBD.”

Immediate Future Bright

Despite questions related to GAAP treatment of NMTCs, the timing of the next NMTC award announcement and more, panelists remain bullish on the market.

“Community development is sort of the golden child of the moment and we’re seeing CDFIs being flush with capital because folks are focused on community development projects,” Boone said. “You have municipalities and foundations bringing money to the table and we’re seeing our projects getting more traditional and nontraditional debt and getting it at a lower rate than prior industry financing.”