New Market Tax Credits

CRDC, the largest of New Hampshire’s ten recognized regional development corporations, has partnered with Coastal Enterprises, Inc. (CEI) of Portland, Maine to market and package New Market Tax Credit (NMTC) projects in New Hampshire. The NMTC program was established to attract capital to historically underserved projects and communities. It provides an incentive to debt and equity investors in the form of a 39 percent federal income tax credit over a seven year period for investing capital into qualified projects in eligible targeted areas. CRDC has been selected by CEI as its sole New Hampshire partner to identify and structure suitable projects.

As noted above, CRDC is the largest of the ten recognized non-profit New Hampshire regional development corporations established to offer a variety of economic development services, primarily targeted to Merrimack and Sullivan Counties, and several Hillsborough County communities along the I-93 corridor. NMTC resources are offered throughout eligible New Hampshire communities.

CRDC is a mission driven organization focused on providing tools that result in private sector job creation and tax base enhancement. We are successful because of our strong partnerships with the financial community, municipalities and local and regional economic development groups. In an effort to assist as many businesses as possible, CRDC offers the following 3 core services: small business lending, real estate development, and economic development consulting.

The following provides more detail on the New Market Tax Credit program.

                        List of Funded Projects: May 2010

Program Overview
The New markets Tax Credit (NMTC) program, established by Congress in December 2000, gives individual and corporate taxpayers the opportunity to receive a credit against income taxes by investing in qualified investment entities. This program also allows CEI to participate in large-scale projects that meet its unique project criteria.
Investors can earn attractive rates of return while meeting a community need, qualified businesses gain access to development funds at reasonable rates, and community development entities fulfill their mission by helping stimulate economic growth and job creation in specifically targeted lower income communities.
Projects must be in designated low-income areas (pre-qualified census tracts or specially-approved target areas). CRDC can help you determine whether your project is geographically eligible.

The program is already proving to be a powerful tool is helping underserved communities attract smart capital to good projects on favorable terms and is allowing investors to book new business with enhanced returns, while helping create greater opportunities for low-income communities.

The program is very flexible and allows the tax credits to be structured into a deal in a variety of ways to best meet the needs of the investors (banks and private equity), borrowers (project), and the sponsor (CEI). The tax credits, for instance, can be used to enhance an investor’s Internal Rate of Return, provide a borrower with access to debt at a reduced interest rate (typically 1.00-3.00% below market), and/or repay equity investors with tax credits as opposed to actual cash. The financial success of a project depends on balancing all of the interests so that all needs are met. The types of business investments eligible under the NMTC program are very broad, allowing virtually any real estate project or operating business. Projects can be undertaken by either for profit or nonprofit entities.

Basic Components of CEI Facilitated “Model” NMTC Project
Model NMTC Project Components:

• Project or business capital requirement of $4.0 million to $30 million.
• Deals in which “substantially all” (85%) of the capital can stay invested in the project for the 7-year tax credit period (with acceptable refinance risk at the end of this seven years).
• The type of business investments eligible under the NMTC program is very broad allowing virtually any real estate project or operating business. Projects can be undertaken by either for-profit or nonprofit entities.
• CEI brings a mission-oriented perspective to underwriting proposed NMTC transactions. An evaluation of a project’s likelihood of financial success is only one element that we consider. CEI approaches each deal more holistically using a “triple bottom-line” approach. This more dimensional review of a proposed NMTC project is sometimes also referred to as “three-E” underwriting.
  • Strong economic development impact (direct or indirect), such as helping to create or retain jobs; acting as the catalyst for larger or additional development or redevelopment, infusing sources of new investment capital info an under-served, low-income area; creating new access to community services.
  • Positive social and environmental impacts that could include efforts such as providing new or expanded community services, creating or retaining jobs for low-income people, using recycled materials, increasing energy efficiency, advancing “green” building concepts, supporting sustainable forestry, etc.

Structural Elements of NMTC Transaction
NMTC transactions are typically modeled on one of two general structures:

Direct Investment Model

Bifurcated or Leveraged Investment Model

The NMTC program is very flexible with the boundaries of the eligible geographic areas. Capital can flow to companies as debt, equity, or both. There are even ways to “leverage” these tax credits using a bifurcated capital structure so they can be sold to tax credit investors (who may need limited or no other return of capital from the project).

In an NMTC deal, the capital flows through a special-purpose financing LLC, known as a Certified Development Entity (CDE). The investor(s) own 99.99% of the CDE. A sponsor organized and manages it, and retains a 0.01% membership interest. The business gets the capital on favorable terms and the investor(s) gets the tax credits.
The 39% tax credit on the amount invested is realized over seven (7) years. The 39% tax credit is allocated so that 5% is available for each of the first three years with 6% available for each of the last four years (5% + 5% + 5%+6%+6%+6% +6% =39%). During this period “substantially all” (85%) of the original capital must be available to the borrower and must remain invested. The investor(s) can get cash flow (return on capital) but no return of capital. (Any principal repayments must be held in reserve at the CDE level).

A bank, private equity investor, or other NMTC capital source can invest directly in the CDE (direct investment model) or through an upper tier “conduit” LLC as a means of leveraging the equity capital and bifurcating the tax credits (leveraged investment model). Simple examples are attached.

In a leveraged transaction, investors can provide the debt, equity, or both. The equity provider would most likely receive its return using the available tax credits calculated on the basis of the combined total investment amount (debt & equity), thereby assuming nominal project risk. Any debt financing in such a leveraged NMTC model could be at market rates if the available tax credits are mostly allocated to the equity investors. Alternatively, some tax credits could be allocated to the debt provider as incentive to make the capital available at more attractive financing rates and terms.

Debt providers (i.e. banks and others) can structure effective security interests in the underlying assets pledged to the CDE and can perform typical bank lending functions. Loan amortization (i.e. principal payment made at the borrower level) can be achieved by retaining reserve accounts at the CDE or borrower levels (since no return of capital is allowed for the seven years).

“Substantially all” (85%) of the capital must stay invested in the project for the 7-year tax credit period. Any unexpected capital repayment would be held at the CDE level so that it could be redeployed to other NMTC eligible projects within a 12-month grace period. Such redeployment any returned capital to either the same project or another eligible project within the 12 –month grace period avoids any potential recapture of the tax credits.

The NMTC sponsor is responsible for obtaining the tax credit investment allocations from the U.S. Government, allocating these credits to the investors, and servicing the investment for the seven-year life of the tax credit transaction. The sponsor’s fees are paid using a combination of up front, management, and back end fees.

For additional information contact:
Stephen Heavener, executive director
603/228-1872
sheavener@crdc-nh.com

In order to bring the benefits of the NMTC program to New Hampshire CRDC has partnered with Coastal Enterprises, Inc. of Portland, Maine. One of the most successful CDE’s in the country, CEI has been allocated over $200 million in NMTC tax credits to award to eligible projects. One of the first such projects in New Hampshire was the Plymouth Community Health Center, a $3,700,000 project sponsored by CRDC. A $1,340,000 tax credit awarded to project investors by CEI allowed a CRDC subsidiary to borrow funds at over 3% below market rate and structure an affordable lease.