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Tax Reform ‘Disruption’ Settles in NMTC World

Published by Brad Stanhope on Thursday, August 2, 2018

Journal cover August 2018   Download PDF

The New Markets Tax Credit (NMTC) program is in a different place than a year ago.

“Globally, we’re much different than we were last year,” said Tom Oldenburg, business development officer at U.S. Bancorp Community Development Corporation. “Last year, folks were aware of tax reform and we saw a lot of people try to close as many deals as they could before the end of the year. The appetite and volume was high last year. This year, I’d categorize the markets as doing what they do when there’s a disruption … sorting itself out.”

“Disruption” came in the form of legislation that dropped the top corporate tax rate from 35 percent to 21 percent and introduced the Base Erosion Anti-abuse Tax (BEAT), against which the NMTC can’t be taken.

“There is a real stratification in the marketplace,” said Gina Nisbeth, director and community development banker at Citi Community Capital. “All the investors took tax reform seriously and have taken time to digest it. We’re seeing some investors pull away and others trying to take more of the market.”

The result is a drop in pricing for NMTCs, something Oldenburg said was coming regardless.

“I think pricing was at an all-time high last year,” Oldenburg said. “It definitely changed. The new tax law made the appetite lower. Investors need fewer tax credits because they have less tax. The pricing probably reached a crescendo last year and I think you were going to see a change in price no matter what happened with the new tax law.”

Tax Reform’s Impact

When the Republican-sponsored tax legislation passed and was signed into law by President Donald Trump just before Christmas 2017, the impact was immediate.

“Legislation passed the 22nd and by the 23rd, prices went down,” said John Panno, senior vice president, tax credit equity at Bank of America Merrill Lynch. “It was very quick. The word was out there and sponsors adjusted.”

Oldenburg agreed.

“[The change] took effect immediately,” Oldenburg said. “People had to get with their tax planners and figure out how the changes impacted business as far as the appetite, demand and pricing.”

While a lower tax rate reduced the appetite for credits, it wasn’t as dramatic in the NMTC world as in others.

“The low-income housing tax credit was affected more by tax reform than the new markets,” Nisbeth said. “Some investors are looking to do more in the new markets [tax credit] arena. At the end of last year, I didn’t perceive any pullback in the market at all. … It was more ramping up than ramping down. At the start of the year, however, there was a pause while investors figured out whether they’d have need.”

For many investors, it was a period of recalculation.

“It took [us] until about April, because it was complicated,” said Spencer Gagnet, senior vice president at Capital One Bank. “It’s not just new markets; it’s all the tax credit programs that were impacted. There were a lot of things that had to be considered for how to go forward.”

Mixed BEAT

One major factor was the BEAT. Since the NMTC can’t be taken against the new tax, the credit was suddenly unattractive to a few large investors. Some, but not all, since the tax hits primarily very large international corporations.

“I think a lot of investors look at the BEAT and how it impacts their appetite,” Oldenburg said. “At U.S. Bank, we’re not affected by BEAT. We’re fortunate that it doesn’t affect us–we’re driven by appetite and demand.”

The impact wasn’t as big as some feared.

“I wouldn’t say anyone has called out BEAT as a significant reason to pull out,” Gagnet said.

One consensus: Whether it’s an inevitable reaction to high prices last year or a result of a lower corporate tax rate and the introduction of the BEAT, prices dropped.

Pricing Down

“Pricing is fairly consistent among banks,” Panno said. “Before tax reform, when there was no BEAT, it was very competitive, regardless of the area. You rarely saw it below 85 cents per dollar and it was as high as 90 cents. But now, generally prices have fallen about a nickel, to 80 cents to 83 cents for the most part.”

Others contacted for this article agreed on that range.

“It may stay here,” Panno said of the price range. “With that [tax] rate to 21 percent, even for big supporters of community development, there’s got to be some type of benefit [to justify investment]. The margins are really thin and you can’t go higher. Interest rates are going up and the cost of capital is rising.”

Opportunity Zones

Another provision of the tax legislation was the introduction of the opportunity zones (OZ) incentive, which allows investors to defer paying tax on gains if those gains are invested in qualified opportunity funds that invest in economically distressed communities.

When the OZ incentive was introduced, there was an immediate expectation that it might pair well with the NMTC.

“It’s a new program and it takes time to figure it out, even for the government,” Oldenburg said. “I certainly don’t think it takes away from the New Markets Tax Credit program. … There are some similarities if you look through the lens of the new markets tax credit, people tend to lump them together, but I’m not sure if that’s right.”

There is plenty of interest.

“It’s too early to tell [the impact of OZs], but we’ve seen an enormous amount of interest with our development partners on opportunity zones,” Nisbeth said.

What’s Hot, Not

At mid-2018, certain types of NMTC transactions were popular.

“I would say health care projects are still in favor,” Panno said. “Rural developments are getting more focus because the feds want money to go to low-income rural areas. Community facilities do not appear to be attracting as much allocation.”

Oldenburg sees another area of strength.

“I think you’re seeing a good amount of nonprofit deals getting done,” Oldenburg said. “That trend is strong and it wasn’t five years ago. I think it may be part of a larger economic trend of plugging a gap. The philanthropic dollars are where the soft government sources used to be.”

Nisbeth said the popular deals keep changing.

“There’s always sort of a flavor-of-the-year type of transaction,” Nisbeth said. “You see less of charter schools, for example. And we’re seeing more of the small business incubators and next-generation technology and business-technology innovation.”

Extension Would Help

As always, NMTC practitioners would like to see the credit made an indefinite part of the tax code.

“This program is only extended through 2019,” Panno said. “It’s still subject to Congress’ whims. It was on the chopping block and people are talking about more tax reform. This could come up again.”

The industry has gotten used to uncertainty.

“We’ve been on year-to-year appropriations for a long time,” Oldenburg said. “We got the five-year runway just a few years ago. I think we’re all of the opinion that every year we’re good stewards of the subsidy and we’re trying to do a good job of presenting the case to lawmakers.”

Nisbeth said the program remains a priority.

“The significant impacts we have made with the program include creating jobs for local low-income residents, expanding quality health care and education opportunities and growing small businesses, just to name a few,” Nisbeth said. “With a widening wealth gap among Americans, NMTCs are as critical today in helping to close that gap as they were at the inception of the program.”


With prices adjusted and February’s allocation round hitting the market, things in the NMTC world are stable. 

“The market is pretty strong,” Panno said. “We’ve accepted where the rates are and are figuring out what’s subject to the BEAT.”

Nisbeth said to stay tuned.

“We can absolutely say the market has shifted,” Nisbeth said. “But it’s still early in the new markets year, since allocations were made in February and it’s taken time for the allocations to hit the street.”

Gagnet sees more of the same.

“There’s always been certain CRA [Community Reinvestment Act] hot spots and particular investors have different regional focus,” Gagnet said. “Besides that, I think most of us are looking at the same formula: strong community impact with strong outcomes to low-income communities. The CRA has a strong impact.”

A shadow from 2017 hangs over it all.

“I think the biggest impact is the mammoth impact of tax reform,” Gagnet said. “It was a game-changer.” 

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