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Union Bank of California
Union Bank of California, using the public welfare investment authority, invested in the California Affordable Housing Fund 2001-I, a low-income housing tax credit fund investing in regional projects like this one for low- and moderate-income persons.
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Public Welfare Investment Authority Encourages Broad Array of Investment Activities
Sharon Canavan, Community Relations Expert, OCC
National banks are using their public welfare investment authority to invest capital in much-needed community and economic development and affordable housing projects. Banks are investing in affordable housing, community and economic development, small business ventures, historic preservation, and renewable energy projects.
This article provides an overview of the common types of public welfare investments made by banks in 2009. Many of those investments served a dual purpose because they helped communities and helped banks meet their Community Reinvestment Act (CRA) goals.
Low-Income Housing Tax Credit
The federal Low-Income Housing Tax Credit (LIHTC) is the most popular type of public welfare investment. Created in 1986, LIHTC has helped to stimulate the production of nearly 2 million affordable-housing units. In 2009, national banks made LIHTC investments totaling almost $2 billion.
Typically, banks invest either in individual projects or in funds containing multiple projects that qualify for LIHTC. Some banks are involved in syndicating and selling interests in LIHTC funds and marketing such interests to other investors. Many of the projects involve nonprofit housing sponsors providing a range of social services.
In the past two decades, the OCC has approved investments in hundreds of LIHTC tax credit funds. Some funds are national; others are regional. Either way, investors typically target funds benefiting areas surrounding banks’ CRA assessment areas. The OCC has posted a list of these projects on its Public Welfare Investments (12 CFR 24) Web page under an OCC compendium of National Bank Public Welfare Investments in Community and Economic Development Entities (1997 to 2010).
For more information, visit these resources:
New Markets Tax Credits
The New Markets Tax Credit (NMTC) program is designed to spur investment of private capital in distressed communities. The program, first approved as a public welfare investment in 2002, provides tax credits to taxpayers who make qualified equity investments in designated Community Development Entities (CDE).
Investors receive a credit of 39 percent of the investment in a CDE, claimed over a seven-year credit allowance period. Banks may invest in CDEs. Some banks have established their own CDEs to more fully take advantage of the NMTC program. In 2009, $6.5 billion in NMTCs was awarded.
In 2009, 13 banks or entities associated with banks received $770 million in new market tax credit allocations to
- Attract new industry and higher-paying jobs into rural areas.
- Provide community services, such as job training, child care centers, ambulatory health clinics, charter schools, theaters, and arts facilities.
- Make flexible loans and equity investments with attractive rates, terms, and conditions to support housing and economic development activities by community-based organizations, nonprofits, Community Development Corporations (CDC), and community development financial institutions (CDFI) that may not have access to traditional sources of capital. This also supports such activities as small business lending, rehabilitating blighted urban communities, and constructing urban retail, office, industrial, mixed-use, housing, and community development facility projects.
- Make equity investments that are combined with other investment tax credits in support of historic rehabilitation and solar energy projects.
Also, banks are significant investors in New Markets Tax Credit Funds and investments even when they do not participate directly by requesting a NMTC allocation. In 2009, the OCC approved more than $185 million in NMTC investments under the public welfare investment authority.
A list of recent NMTC awardees is available on the CDFI Fund Web site.
For more information, visit these resources:
Bank Investments in CDCs and CDFIs
Many banks are using the public welfare investment authority to support CDCs or CDFIs that support housing or community and economic development.
Banks may make investments in and own stock in CDCs or CDFIs. Some banks pool their resources to finance community development activities through multibank CDCs. Other banks establish bank-owned CDCs. Banks can also use the public welfare investment authority to support CDFIs.
In 2009, national banks made 21 investments totaling more than $50 million in local CDCs and CDFIs that focused on affordable housing, community investment, and sustainable economic development in low- to-moderate income (LMI) areas. Investments in CDFIs, certified by the U.S. Department of Treasury’s Community Development Financial Institutions Fund, may be eligible for Bank Enterprise Awards (see CDFI Fund Web site for details).
In 2009, public welfare investments included housing-focused investments through CDCs. Some of these CDCs are intermediaries and use the monies to provide gap financing for projects they finance. Other CDCs are affordable housing developers who use the monies for predevelopment expenses and for project financing.
Other bank investments in CDCs and CDFIs were used to foster economic development for LMI individuals or areas. CDCs and CDFIs are often more familiar with local partners and can provide technical support and services that increase the success rate for small businesses. Once the businesses become more established, the owners often are referred to traditional bank partners for loans and other bank services.
In addition to their public welfare investments, banks often provide other resources to CDCs and CDFIs, such as office space, staffing, and equipment. Further, bank employees may serve on CDC and CDFI boards of directors and loan review committees.
For more information, visit these resources:
Small Business Capital
Under the public welfare investment authority, banks can make equity investments in qualifying funds that support small business. In 2009, public welfare investments specifically targeted to small businesses totaled nearly $20 million.
Banks using the public investment authority often invest in two types of small business funds:
Small Business Investment Company (SBIC): The SBIC program is a public-private partnership administered by the U.S. Small Business Administration (SBA) to bridge the gap between entrepreneurs' need for capital and traditional financing sources.
In 2009, national banks invested more than $15 million in SBICs using the public welfare investment authority. (National banks may also use the authority under 15 USC 682(b) to make investments in SBICs of up to 5 percent of their capital and surplus.) The structure of the program is unique: SBICs are privately owned and managed investment funds that use their own venture capital plus funds borrowed with an SBA guarantee to make equity and debt investments in qualifying small businesses.
Typically, SBICs support small business start-ups and expansions by providing a combination of longer-term debt, equity investments, and management counseling. SBICs make investments in a broad range of industries, geographies, and stages of investment. Debenture SBICs focus primarily on providing debt or debt with equity features to small businesses that are mature enough to make current interest payments on the SBIC investment. The SBA licenses and regulates SBIC funds. For additional information about SBICs, read the article on Eligibility and Submission Requirements.
Community Development Venture Capital (CDVC): CDVC companies raise private funds and in many ways operate similar to an SBIC, but there is no SBA involvement. CDVC investments may be made by banks under the public welfare investment authority when the fund’s investments directly or indirectly benefit low- or moderate-income communities and families by fulfilling the needs for housing, supplying vital services, growing businesses, or creating jobs.
CDVCs provide equity financing in underserved communities, while at the same time offering market-rate financial returns for their investors. Often CDVC investments receive positive consideration in a bank’s CRA examination. For example, community development venture capital companies that promote economic development by financing small businesses are qualified investments under CRA.
A national bank that chooses to invest in any CDVC fund should secure assurances from the CDVC fund that its investments meet the public welfare investment authority guidelines.
For more information, visit these resources:
Historic Tax Credits
The Historic Tax Credit (HTC) program encourages the rehabilitation of certified historic buildings by providing a tax credit to property owners for 20 percent of the qualified renovation expenditures.
In 2009, the OCC approved more than $80 million in HTC investments that were made by national banks under public welfare investment authority. These HTC investments created affordable housing units or supported economic development benefiting LMI areas or government-targeted revitalization zones. HTC investments can be structured to take advantage of NMTC, as well.
For more information, visit these resources:
Investment Tax Credit for Renewable Energy
In 2008 and 2009, several investments in solar energy equipment using the Investment Tax Credit (ITC) program were approved under the public welfare investment authority.
The ITC offers a tax credit of 30 percent of the eligible construction and equipment costs for building a solar energy facility. The basis for approving these investments under the public welfare investment authority was the benefit provided to LMI individuals from reduced energy costs and/or the economic benefit derived from the jobs created for the installation and ongoing maintenance of the solar energy facility.
In one instance, the solar equipment was placed on existing LIHTC multifamily developments. To enhance affordability, the bank created a “twinned” deal structure that used both the ITC and the NMTC. That deal also benefited from a grant award under a state program that encourages solar energy in affordable housing.
For more information, visit these resources:
OCC's Community Affairs Department
(202) 874-5556
E-mail CommunityAffairs@occ.treas.gov
to receive a print copy of this Community Developments Investments or another publication.
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