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NMTC Program Paves Way for Expansion of Investing in Rural America

Published by Kevin Goldsmith on Thursday, May 2, 2019

Journal cover May 2019   Download PDF

The New Markets Tax Credit (NMTC) program continues to expand its scope to serve the most distressed communities across the United States. 

Initially left behind in the race to access the program, rural America has made significant strides to use NMTCs for new manufacturing investments to support low-income areas.

The Historical Shortfall of NMTC for Rural America

Historically, rural communities across the United States have faced several unique challenges to economic development finance compared to their urban counterparts. In 2004, Congress and the Department of Treasury recognized this and amended the NMTC program to ensure a proportionate share of NMTCs be targeted to non-metropolitan counties. Since that time, 20 percent has been allocated to rural communities.

Economic development finance is always challenging, but select obstacles can become compounded in rural areas.

Project size: NMTCs are predominantly used to support real estate developments, due to the tenure of the investment and program compliance requirements. Fund models have been developed to support smaller projects, but many projects are still structured with a single investment focus. General guidance is that minimum development size should be approximately $5 million to $7 million in order to be most efficient and receive sufficient net benefit for the complexity of NMTC execution. Many properties in rural areas (especially smaller nonprofits) face challenges achieving a single project financing of that scale. 

Shortage of capital sources: The NMTC program targets the most impactful projects in highly distressed communities. As a result, the financing gap to achieve project viability can require multiple soft sources of capital beyond the NMTC subsidy. Rural areas have often been at a disadvantage, with fewer public and patient sources of capital. Municipal loan and improvement programs, tax-increment financing, and other public subsidies can be sparse or unfamiliar with NMTC requirements to be leveraged. Foundations and grant programs are less common and economic professionals serving rural areas are often less familiar with NMTCs. 

A narrow definition of rural: The NMTC application is extremely competitive and requires that community development entities (CDEs) demonstrate a strong track record of raising and deploying capital in their target markets. Many of the industry-leading CDEs and community development financial institutions have served urban and suburban markets (including exurban areas many of us would consider rural). However, the definition of “rural” is very narrow (e.g., counties touching an urban metropolitan statistical area fall ineligible, based on what’s considered rural). This can be particularly limiting in states with large counties.

An Industry Focus: Manufacturing 

In recent years, rural America seems to be gaining NMTC ground. There are several components supporting this trend beyond the 20 percent allocation requirement. The manufacturing industry in particular is a great example of that impact. According to the NMTC Coalition’s 2018 Progress Report, the most common NMTC developments over the past four years were in the manufacturing space.

Bringing jobs to rural America: Manufacturing businesses are often in a good position to demonstrate direct job creation resulting from capital investment. We have seen a few CDEs try to develop a metric of minimum jobs to be created per dollar of NMTC allocation. Quality jobs that provide a living wage and benefits are prioritized by the industry. Job training is also a critical component, as CDEs and investors favor projects that create opportunities for employee advancement and the development of transferable skills. Manufacturing companies that are able to demonstrate prior experience and a job-creation aspect of their projects can strongly compete against others seeking limited NMTC allocation.

Several of the rural manufacturing businesses we invested in were attractive to CDEs because of project job creation commitments and workforce training offered to employees. As an example, Chase served as the tax credit investor for a $45 million NMTC development in rural Tennessee to support the construction of a 250,000-square-foot food-processing facility. The local community has a high unemployment rate of mid-skilled manufacturing workers, and this investment is expected to create over 300 full-time jobs.

Creating awareness and building confidence in the program: Manufacturing companies making investments in rural areas are often represented by sophisticated accounting and law firms. As the industry matured, awareness of the program is more common and companies are able to obtain professional guidance from existing advisors with the knowledge of and in some cases prior experience with the NMTC program. This awareness helps address the sponsor’s tax, accounting and compliance needs. Once companies become familiar with NMTC financing, they can more efficiently access the program to support investment in low-income communities. In rural Arkansas, Chase served as the investor for three separate phases of a leasehold expansion and equipment purchase for a steel company. The company’s experience with the NMTC program allowed the process to go swiftly. The $9.6 million expansion is expected to create 55 permanent jobs that pay nearly double the area’s median family income.

The Future of NMTCs for Rural Areas

NMTC activity in rural areas will likely continue to expand. In addition to the market trends supportive of manufacturing projects, there are additional dynamics that should allow for more nonprofit and small business financing to be achieved. The maturity of the program has led to continued transaction cost efficiencies, with the smallest direct financings now viable for nonprofits in the $4 million to $5 million range. Further, many CDEs have pushed to create funds that can be supportive of transactions less than $2 million in project cost. The continued growth and success of the NMTC industry for rural America is a testament to the program’s strong economic development support for underserved communities. 

Kevin Goldsmith is the community development tax credits program manager for Chase’s Community Development Banking group. Chase is a leading new markets tax credit (NMTC) equity investor, leverage lender and allocatee, with a dedicated team of industry experts committed to supporting community development. 

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