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Using New Markets Tax Credits and Collateral Support Programs for Community
Development
Presentation to the National Association of Counties
Rural Action Caucus Steering Committee Meeting
October 11, 2013 Santa Fe, NM
FLEXIBLE SOURCES OF PRIVATE CAPITAL FOR ECONOMIC AND COMMUNITY
DEVELOPMENT
New Markets Tax Credits
NMTC Overview
Created in 2000, the NMTC program is a “shallow” tax credit focused on economic and community development in low-income communities nationwide The NMTC program is administered through the Community
Development Financial Institutions Fund, an arm of Treasury, and credits awarded through an annual competitive process. Award-winning Community Development Entities (“CDEs”) invest
the NMTC credit into qualifying projects such as business creation/expansion to community facilities to commercial real estate
What Are New Markets Tax Credits?
3
NMTCs are an income tax credit, not cash. The credit provides a 39% earned over 7 years, 5% in each of the first 3 years and 6% in the remaining years. Credits are sold to investors at a discount and the cash is invested
into qualifying projects in low-income census tracts. In general allocation is typically placed in areas considered to be
“highly distressed,” which includes areas with at least 30% of the population living in poverty and “non-metro” counties with at least 20% of population living in poverty.
What Are New Markets Tax Credits?
4
Most NMTCs are financed using a “leverage” model which runs capital secured by the borrower through a series of special purpose entities. In today’s market, NMTCs fill financing gaps of about 25%.
NMTCs are flexible in that the source of the leverage loan can come from banks, investors, cities, counties, Pueblos and even self-leveraged.
Finance New Mexico, the for-profit limited liability company created by the New Mexico Finance Authority for its NMTC program, financed two community projects on the Pueblo of Laguna using innovative structures
What Are New Markets Tax Credits?
5
Sample NMTC Leveraged Transaction Diagram
Community Development Entity (CDE)
Legal, Modeling &
Structure
NMTC Investor / Fund
Manager
Investment Fund (Makes QEI in CDE)
100% owned by CDC
Leverage Lender
Sub - Community Development Entity Retains $1,000 of Cash
99.99% Investment Fund .01% CDE
Qualified Active Low-Income Community Business (QALICB)
$2.925 MM Capital Contribution
100% of Cash Flow, Profits & Losses
100% of NMTC $3.9 MM
$7. 075 MM Loan
Interest and Balloon Payments
NMTC Allocation
Investment ($1k)
CDE Placement Fee ($300k)
Annual CDE Manager Fee
Success Fee at Exit
($500k)
Legal, Modeling & Structuring
Debt Service
$2.725 MM NMTC Note
$7.075 MM
Senior Note
$10,000,000 QEI funded
at closing
100% of NMTC 99.99% of Cash Flow, Profits & Losses
$200k - $300k
Note: Assumes credits purchased at $0.75 per $1.00 of NMTC received
$10 million example
6
Where: Pueblo of Laguna
Project: Grocery Store
Source of Leverage: Laguna Pueblo Development Corporation
Project Description: This new grocery store replaces an antiquated store that was unable to provide a full range of healthy foods to Pueblo members and nearby communities. The project cost $5,000,000 to demolish the old store, construct and equip the new store. The new store has amenities such as, larger refrigeration and freezer storage areas, a deli and essential items that are found in most modern grocery stores.
Laguna Development Corp. – Grocery Store
Community Benefit: The desperately needed improvements will provide its residents with a variety of healthier foods to choose from along with a greater selection of fresh produce, frozen foods, and fresh deli items. This project created 150 construction jobs and replace a store that is 30 years old and outdated.
7
Where: Pueblo of Laguna
Project: Water & Wastewater
Source of Leverage: USDA funding was leveraged by the Pueblo of Laguna
Project Description: 4Points Laguna project will repair, replacement and construction of new water and wastewater lines, wastewater lagoons and collection systems within all six villages; rebuild and expand the three current water sources on the Pueblo to allow for 60% additional capacity; and provide additional pressure into the lines in order to provide fire flow and an appropriate fire protection system throughout the Pueblo.
Laguna Water & Wastewater Project
Community Benefit: The improvements to the water and wastewater
system are necessary and vital to maintain a good quality of life for the
members of the Pueblo. The system had line breaks which has been a
major issue for the past several years which in some cases the Pueblo was without water for 12 days. This project resolves these issues.
8
TO HELP STIMULATE ECONOMIC DEVELOPMENT BY PROVIDING GREATER
ACCESS TO CAPITAL IN RURAL AND UNDERSERVED AREAS OF THE STATE
Collateral Support Participation Program
Small Business Jobs Act of 2010 provided each State with federal funds (based upon population). The funding was not competitive, but each state had to demonstrate ability to deliver and leverage the federal funds. It was created to help provide direct support to states for use in programs
designed increase credit availability for small businesses. The program is overseen by the US Department of Treasury and allows
funds to be used for “Capital Access Programs” and “Other Collateral Support Programs,” such as loan participations, state-sponsored venture capital programs and loan guarantees. The program requires that by 2016 each state leverage $10 of private capital
for each dollar of federal funds provided.
State Small Business Credit Initiative – SSBCI 10
Finance Authority and the New Mexico Economic Development Department conducted a focus group with some New Mexico banks and the Community Development Financial Institution (CDFI) – Division in the US Treasury
Outcomes from that focus group included:
More collateral support programs
Ability for subordinated positions
Getting rural business more access
Examine Revolving Lines of Credits
Not more competition but more support for your
Finance Authority and NMEDD put together its application based upon these ideas
Determining New Mexico’s SSBCI Program 11
Collateral Support Loan Participation Program
Why a Loan Participation Program?
In addition to filling a significant need, the Collateral Support Loan Participation
Program can be quickly implemented, providing benefit sooner
No fees and single point of application reduces the paperwork and burden for both the participating bank and the benefiting borrower
This tool will enhance and complement New Mexico’s efforts to encourage new private sector investment
This will ensure that the $13,168,350 in SSBCI funding will leverage at least $132 million, thereby achieving the 10:1 private capital leverage required by December 31, 2016.
12
Finance Authority’s Loan Participation Programs
Program SSBCI Smart Money
Location Rural Urban Statewide
Terms pari-passu subordinate pari-passu subordinate pari-passu
Application and Closing Fees $ - $ - $ - $ - $ -
Max Term for Eligible Proceeds
Building 25 years 25 years 25 years 20 years 25 years
Equipment 10 years 10 years 10 years 10 years 15 years
Working Capital Term Note 4 years 4 years 4 years 4 years 3 years
Working Capital RLOC (1 year) 5 years 5 years 5 years 5 years 5 years
Max Borrower Size <500 <500 <500 <500 none
Max Total Bank/NMFA Loan Size $7.5 million $7.5 million $5 million $5 million none
Max SSBCI Participation $3 million $2.5 million $ 2 million $2 million $5 million
1 year Revolving Line of Credit 40% 30% 40% 30% 49%
3-5 year term note 30% 25% 25% 20% 49%
6-15 year term 25% 20% 20% 15% 49%
More than 15 years 20% 15% 15% 10% 49%
Average NMFA Portion of Loan $850,000 $850,000 $1.45 million $1.2 million $1.2 million
Average Total Bank/NMFA Loan Size $2.75 million $2.75 million $4.75 million $3.75 million $3.75 million
13
Our goal is partner with Banks to help those with need. There is no additional cost or paperwork for the
borrower. We look to reduce the Bank’s exposure if possible. Simple application process. We minimize the costs of borrowing money by:
Covering the cost of issuance.
Having our legal team draft all of the closing documents.
We pay you to maintain a good relationship with your borrower.
Why NMFA? 14
Bank is able to do a deal that otherwise may not be possible
NMFA will pay a 25bp as a loan servicing fee
Unlike other government programs, limited amount of paperwork and NO FEES for your client
Bank is able to build a relationship with client for other bank services such a wealth services and other banking products
Incentives to Local Lenders 15
N E W M E X I C O F I N A N C E A U T H O R I T Y 2 0 7 S H E L B Y S T R E E T
S A N TA F E , N M 8 7 5 0 1
( 5 0 5 ) 9 8 4 - 1 4 5 4 T O L L F R E E 1 - 8 7 7 A S K N M FA FA C S I M I L E ( 5 0 5 ) 9 9 2 - 9 6 3 5
W W W. N M FA . N E T
¡Believing in New Mexico!