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Investment Resources for Part 24 Authority

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New Markets Tax Credit Resources

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OCC's Community Affairs Department
(202) 874-5556
CommunityAffairs
@occ.treas.gov

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New Markets Credits Turn
"Un-doable" Deals into "Can Do" Deals

Man working on a roof

This workman in repairing the remaining roof supports in preparation for the reconstruction of the dilapidated Longwood Plaza.   This gut renovation was only "doable" because of the financial infusion from the sale of new markets tax credits.

Banks that want to increase their investment in economically distressed communities are turning to the four-year-old New Market Tax Credits (NMTC) Program, enacted as part of the Community Renewal Tax Relief Act of 2000.

In the first two rounds of NMTC awards, 31 depository institutions received $1.2 billion in tax credit allocations. A third funding round of $2 billion is expected later this year and then another $7 billion is scheduled for allocation by 2007. NMTC's offer banks an opportunity to inject investment capital into economically distressed neighborhoods.

The NMTC program is run by the Community Development Financial Institutions (CDFI) Fund, which selects for-profit community development entities (CDEs) to market the tax credits to banks, venture capitalists, individuals, and corporations. Among the more than 1,300 registered CDEs are MetaFund and Key Corporation's subsidiary, Key CDC.

Although the two CDCs have taken different paths with their NMTCs, both roads have led to the same destination -- closings of deals that would not have worked without the incentive of tax credits.

Collaboration

"What we like to do is what I call a 'but for' transaction - 'but for' our involvement, the transaction wouldn't happen. We don't want to do a project a bank or investor would do anyway."
MetaFund Chairman and President A. Thomas Loy

Metafund's mission criteria include funding loans and investments that benefit low- to moderate-income distressed areas or residents of distressed areas, as well as financial viability, according to MetaFund Chairman and President A. Thomas Loy.   Of Metafund's $10 million capitalization, $5 million came from six national banks under the Part 24 authority.

The banks are the eyes and ears of the fund in that they supply potential deals that Loy refers to as "but for" deals because they would not occur without the support of NMTC.

To date, this hybrid between a bank and a venture capital firm has funded over 20 businesses and projects in its home state, supplying $4 million for single- and multi-family housing and commercial real estate projects. MetaFund received a $50 million NMTC allocation in 2003. It plans to use the credits help companies in all stages of the business life cycle via loans, equity and near-equity investments. An estimated 50 percent of its activities target urban areas, 35 percent target rural areas, and the remaining 15 percent will target suburban areas of Oklahoma.

To allow investors to target their funds to a particular project, MetaFund developed an LLC structure that uses preferred series stock to isolate an investor's project. A bank can invest in a single preferred series of MetaFund stock, which becomes the exclusive domain of investments from that bank investor. The bank then services the loan, with MetaFund providing a vehicle for flowing the tax credits back to the bank.

NMTC Investments and Loans Eligible for CRA Consideration

Investments in community development entities (CDEs) can receive qualified investment consideration when the investment benefits the bank's assessment areas, provided the CDE's financial tools (loans or investments) promote economic development financing small businesses or farms and help to revitalize or stabilize low- and moderate-income areas.

Financial institution CDE loans to qualified active low-income community businesses (QALICB) or CDEs can receive community development loan consideration under CRA.   Loans less than $1 million are reported as small business loans, and larger loans reported as community development loans (similar loans made by wholesale and limited purpose banks would all be considered community development loans).

See: /static/interpretations-and-precedents/feb04/int984.pdf

Saving Jobs

In its first NMTC deal, MetaFund partnered with Stillwater National Bank to put together a 'but for' loan that saved more than a dozen jobs in a small, central Oklahoma town. The loan funded the purchase of a defunct manufacturer that built a pipeline gas-flow measurement device. The purchasing company, which holds a patent on the measurement device, resurrected the business and retained the employees.

Stillwater Executive Vice President and Chief Lending Officer Jerry Lanier says the $3.8 million NMTC deal benefited the bank and the borrower, which got a lower interest rate. "It's a small town that needed the industry and because [the plant was in] a rural county, the additional Oklahoma tax credits were greater than if they were in a metropolitan area, so that benefited the bank. We would certainly do it again," Lanier says.

An Existing Structure

Key Bank, NA looks at NMTCs as an opportunity to increase the reach and flexibility of its 15-year-old community development banking operation, which includes a community development lending and equity group and a home mortgage origination group focused on the low- and moderate-income segment. Community Development Bankings 105 staff members handle affordable housing, construction and permanent loans, equity investments, infill single-family construction loans, home mortgage loans, and economic development lending deals brought in by the group's community development loan officers spread across a 12-state footprint.

"The New Markets Tax Credit program has expanded our scope by giving us the flexibility of using the credits in our pricing on the loan side, making the financing more affordable."
John Kastellic, Key Bank senior vice president and national manager of Community Development Lending

There are many benefits to being both a NMTC investor and NMTC grantee, says Key Bank's Senior Vice President and National Manager of Community Development Lending John Kastellic. One is that loans are more affordable for community borrowers. On the equity side, rates of return are lifted on projects that might not otherwise offer enough cash flow or real estate tax benefit.

Going forward, Key hopes to use the NMTC as a partial guarantee -- primarily for small business lending -- for loans that would not be bankable because of their credit risk. Those loans would be priced conventionally with the NMTCs viewed as an additional loan loss reserve.

Key Community Development New Markets I LLC will use its $150 million allocation primarily for shorter-term, construction-only loans and plans to recycle the returned funds as projects pay off.

Recent Project

Before and after photos

Key closed its first NMTC loan in January 2004, a neighborhood shopping center deal in an economically fragile area of Cleveland. Raising all of the financing for the shopping center deal was tricky, says Russell Berusch, senior vice president of New Village Corp., the nonprofit developer of the project.

"Without the lower interest rate that Key provided by virtue of having the NMTC allocation, the project would not have gotten done. This project is fragile economically, because it's in an extremely poor neighborhood. The blended cost of funds had to be low, so the tenants could have rents that they could live with," says Berusch. "Without the NMTC program this project could not have been financed."

Today, the 39,000 sq. ft. center is in the midst of a $6 million renovation including a new facade, brighter lighting, improved landscaping, increased security and a 19,000 sq. ft. Dave's Supermarket. Key Corp provided just over $1 million of the project's funding, with the remainder coming from National City Community Development Corp., the City of Cleveland, federal grants and a $25,000 equity contribution from New Village.

Alike More than Different

While Key and MetaFund have taken two very different approaches in the way they implement the NMTC program, they share a common goal: improving the lives of residents and businesses with programs that benefit all. And in the end, what's important is not so much how each CDC got where it was going, but rather that it was able to get deals going with NMTC that otherwise wouldn't fly.