Originally published in the Novogradac Journal of Tax Credits Volume 10 Issue 6
Approaching mid-year 2019, the new markets tax credit (NMTC) landscape is in a stable, yet strategic position.
Despite the government shutdown causing delays in this year’s allocation award and the sunset of the program looming over the NMTC community, the overall investor market has stabilized now that tax reform is well in the rearview mirror. With some slight shifts in the investor pool and changes in appetite from investor to investor, the overall appetite remains active and healthy.
A Stable, Yet Strategic Appetite
Though the market remains strong and competitive, there has been a noticeable shift in the overall legacy investor landscape within the NMTC community. This is not to say the appetite has decreased. While some longstanding NMTC investors lowered their level of investment, others were quick to pick up the slack. There was also an increase in the tax credit appetite of local and regional banks.
“We have seen some shift in the makeup of the investors,” said En Jung Kim, executive director of community development banking–new markets tax credit group with Chase. “In some markets, we’ve seen local banks testing out NMTC investment and some banks have been inactive in the past 18 months or so, while others stepped up their investment during that time frame.”
Through this shift, community development entities (CDEs) and qualified active low-income community businesses have still been able to have their investment needs met as the program is considered a safe and steady investment play among investors looking for credits, but not wanting the project-level risk that might be present with other tax-advantaged investments.
“Due to limited supply and a robust secondary market, the credit remains in high demand, overall,” said Laura Vowell, director of business development for U.S. Bancorp Community Development Corporation. “While reduction in the corporate income tax rate has reduced or even eliminated some investors’ ability to claim tax credits, the NMTC is increasingly judged against other credit types in terms of which provides the right balance of profitability, tax attributes [such as capital gains at exit] or treatment on financial statements.”
There have also been signs that investors are looking to be more strategic in their project selection. For example, many investors are showing a preference in NMTC investments that allow them to provide more value to a project by using multiple lines of business in one development, such as bringing in an affiliate foundation’s support, identifying lending opportunities from other parts of a bank or providing additional tax credit capital along with NMTC investment.
Market Trends
The flexibility of the NMTC program to support a wide variety of asset types still holds true.
Investors and CDEs maintain their own deployment strategy and continue to look for projects that fit with their mission. High-impact developments that generate quality and accessible jobs, demonstrable community or commercial goods and services that are tailored to an individual community’s needs continue to command the interest of multiple investors and have served to keep pricing solid. Several investors increased their levels of support for smaller-scale projects as part of their innovative use of QLICI investments. While some have been successful, cost efficiency and initial underwriting remain a challenge for projects of this size.
Steady interest rates over the past 18 months have created an increase in overall development activity. From a planning perspective, this steadiness has allowed developments to better predict and plan for predevelopment and transactional costs and remain competitive among investors from a project-readiness perspective.
The stability and quality of NMTC-eligible projects do not appear to have triggered a shift in NMTC pricing. While this time last year pricing had dipped in the wake of tax reform and in light of higher interest rates, today’s pricing for NMTC equity remains steady in the low- to mid-80-cent range. As in prior years, projects must continually seek additional complimentary sources of capital to pair with the NMTC equity.
Several CDEs have noted local municipalities are playing a larger role in community development financing. “We have seen a steady increase in both local and state agencies providing financial support through the creation of TIF [tax-increment financing] districts, support through bridge financing and other avenues,” said Tabitha Atkins, vice president of Urban Action Community Development. “This is incredibly valuable for projects–not only from a financial perspective, but it also shows a strong level of community support for the project.”
Sunset ‘Threat’ and Advocacy Efforts
This year’s stability could be the calm before the storm. Despite the fact that NMTC has proven to be one of the most effective tools for community revitalization, it is set to expire at the end of 2019. At the moment, there are fortunately few signs of concern or change in the current investment market. Investors continue to seek out projects to support, CDEs continue to deploy allocation in amounts similar to previous years and project sponsors continue to move full steam ahead in marketing their project to capital providers.
“The NMTC program has had bipartisan support and has successfully demonstrated its successes in supporting low-income communities, job creation and the availability of vital goods and services to those in need,” said Bob Rapoza, founder and president of Rapoza Associates. “We are actively working to ensure elected officials understand the importance of the program and we’re urging industry members and project sponsors to showcase the positive impact it has had on their community.”
Industry leaders, including the New Markets Tax Credit Coalition and the Partnership for Job Creation, have been actively involved in advocating to make the NMTC permanent. In March, the New Markets Tax Credit Extension Act of 2019 was introduced in the House and the Senate, which at the time of this writing, has 61 co-sponsors in the House and 19 co-sponsors in the Senate.
To garner additional support, the NMTC Coalition recently hosted a lobby day to connect industry advocates, project sponsors and community leaders with members of Congress to share the positive impacts of the program. These efforts resulted in 35 additional House and Senate co-sponsors signing on to the bill.
NMTC advocates are ramping up efforts this spring and summer by taking advantage of the upcoming Congressional recesses. They’re urging supporters to invite members of Congress to visit NMTC projects in their districts to better understand the value and impact of the program.
Investors join CDEs, project sponsors, and other industry stakeholders in encouraging a reauthorization of the program. As Vowell notes, “permanency will allow the CDFI Fund to return to a consistent schedule, which may allow for more investor entrants in the market and for the best projects to receive NMTC benefit efficiently.”
Merrill Hoopenardner is president of the National Trust Community Investment Corporation (NTCIC), where she directs fundraising and acquisitions opportunities, develops and implements overall strategy and new lines of business for the company and coordinates governing board/staff relations.
Mike Palien is NTCIC’s senior marketing specialist, who helps develop and execute NTCIC’s marketing strategies to reach a broader audience through brand awareness, promotion and community impact storytelling. He supports the legislative affairs advocacy work of NTCIC’s public policy team.