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NMTC Participants Expect More Investors to Return Ahead of $5 Billion Allocation Round
After months of pandemic-induced volatility, there is cautious optimism in the new markets tax credit (NMTC) community as investors return to the marketplace, following a large-scale slowdown in investment during the second half of 2020. Participants say that investors coming off the sidelines starting in the early part of 2021 has slowly helped tax credit equity pricing recover after dipping as low as 68 cents per dollar of tax credits for some transactions last year.
“We were on pause for five to six months [in 2020] in the third and fourth quarter, but we started getting back into the market and prices started going up from there,” said John Chamberlain, a senior vice president at Capital One and leader of its NMTC group.
NMTC Equity Pricing: The Great Recession vs. the Current Market
The current economic climate draws comparisons to the last major dip in NMTC equity pricing: the Great Recession. According to an internal Novogradac NMTC pricing survey, the average NMTC equity price per credit was 79 cents in 2006, the year before the economic crash. Over the next four years, NMTC equity pricing continued to decline until it bottomed out at 69 cents in 2010, nearly a 12.7% decline from 2006. As the economy recovered over the next few years, investors saw their tax liabilities begin to increase, which boosted their appetite to offset those taxes with incentives, such as the NMTC.
In the aftermath of the Great Recession, NMTC pricing increased 26% over seven years, hitting a peak average price of 87 cents in 2017. Pricing then experienced a marginal decline as tax reform enacted at the end of 2017 reduced the top corporate tax rate, thereby decreasing investor tax liability and appetite for credits. When the pandemic occurred, average equity pricing dropped from 84 cents in 2019 to 76 cents on transactions closed in 2020 as many investors took a pause to reevaluate their future tax appetite.
“A lot of investors put the brakes on after following through on existing deal commitments,” said Susan Seagren, managing director of AMCREF, which has a community development entity (CDE) that was awarded $60 million in NMTC allocation authority under the calendar year 2019 NMTC round. Seagren said that CDEs that were able to find investors in the second half of 2020s typically saw tax credit equity pricing fall to the high-60-cent range, with only a few Community Reinvestment Act (CRA)-driven investments commanding a higher price.
One important distinction between the pandemic-induced slowdown and the Great Recession is that NMTC transactions are still attracting investors and penciling out, despite a dip in pricing. “At that time [during the Great Recession], we felt it was much harder to find investors for deals,” said Seagren.
Experts say one silver lining to the drop in NMTC equity pricing is that the increase in investor yields helped attract some investors to return to the marketplace. “Any time you see an increase in the rate of return, it opens things up for investors who are yield-driven,” said Novogradac partner Brad Elphick, CPA, who leads the Novogradac NMTC Working Group. He said what remains to be seen is whether new investors will enter the market en masse, and if so, up to what point they will stay.
“[Demand for tax credits] has increased significantly in 2021,” said Seagren. “We saw multiple investors take a pause at the end of 2020 and overall pricing was lower. Now I’m definitely seeing higher prices and more investors coming back to the market. Starting in early 2021, we are also noticing more fluctuation in credit prices, ranging from 68 to 76 cents. That’s a really broad range. Usually there’s only a couple of pennies price difference with investors.”
Some investors, such as Chase, actually increased their investment volume during the pandemic. “Recognizing the need for investor capital to support impactful projects, in 2020 we provided about 40% more in investment from our original volume goal,” said En Jung Kim, the executive director of Chase’s community development banking group, where she is primarily responsible for managing the originations team for NMTC investments nationally. “In 2021, we expect to invest more [than] in 2020.”
Investors are seeing a relative slowdown or pause on certain qualified active low-income community business (QALICB) types that have been especially hit hard by the pandemic and shutdowns, such as office space and hospitality. In contrast, QALICBs that have been allowed to continue operating as essential businesses during the pandemic–such as manufacturing facilities and health care centers–are faring relatively better. High-impact developments with a focus on job creation, as well as ones in hot CRA assessment areas, tend to get more competitive pricing, said Chamberlain.
Matt Orr, director of Stonehenge Community Development, said he sees an opportunity for more purpose-driven investments. “I think a big opportunity for the NMTC investors going forward is to invest into NMTC projects that try to address social justice, equality, environmental [issues], etc.,” said Orr.
Elphick said some investors have put into place better pricing for transactions that address issues such as social justice, equality and environmental concerns.
The NMTC community is hopeful about the future of the NMTC market, with several factors still up in the air that could affect investor interest, such as proposals to increase the corporate tax rate.
“Other factors that affect pricing are accounting issues, related to how the NMTCs are reported,” said Elphick. “The current way is not the most favorable accounting treatment and ultimately impacts investors’ decision on whether to make NMTC investments when compared to other tax credit investments that have more favorable accounting treatment.”
In addition, the five-year extension and expansion of the NMTC provides a longer runway for the incentive and more opportunities for investors and CDEs to offer capital to underserved communities. At the same time, NMTC participants are waiting to see how the additional supply of credits will affect competition and tax credit equity pricing.
“From an NMTC perspective, I’m hopeful that some of this uncertainty will subside and investors in the equity market will transact with the same competitiveness as we have seen in prior years before the pandemic,” said Orr. “This bears monitoring. … The five-year extension at $5 billion just added substantial supply. We know that there’s demand for the subsidy among [low-income community] -based businesses and developers, the question is how the investor community will respond.”
Chamberlain agreed. “I hope it’s going to be very robust,” he said. “There’s going to be a lot of credits awarded this summer, $5 billion with another $5 billion next year. It’s important that investors get back and start closing deals so that CDEs are not just sitting on allocation.”
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