Community Development Financial Institutions (CDFIs) Participation in the New Markets Tax Credit (NMTC) Program.

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1 Community Development Financial Institutions (s) Participation in the New Markets Tax Credit (NMTC) Program. A Coalition Analysis of the First Three Rounds of New Markets Tax Credit Allocations June 2005 On May 11, 2005, Treasury Secretary John Snow and Fund Director Art Garcia announced that 41 organizations had been selected to receive allocations of New Markets Tax Credits under the third round of the NMTC program. This year, 11 of the allocatees (or 27%) are certified s or affiliates of certified s. s received allocations totaling $494 million (or %) of the $2 billion in allocations available in The NMTC Program, administered by the Fund, provides tax credit allocations to Community Development Entities (CDEs) on a competitive basis. The Coalition is a strong proponent of the NMTC program and in assuring that s participate fully in utilizing this important community development tool. Background The New Markets Tax Credit program was enacted in December 2000 as part of the Community Renewal Tax Relief Act of 2000 (PL ). The NMTC program provides $15 billion in tax credits to investors who make qualified equity investments through Community Development Entities (CDEs). Certified by the Fund, CDEs are organizations with a primary mission of serving or providing investment capital to low-income communities. In addition, CDEs must demonstrate accountability to residents of low-income communities. CDEs apply to the Fund for awards of tax credit allocations, which they then pass on to investors. CDEs use the capital generated by the tax credit to make a range of qualified investments in low-income communities. The credit provided to the investor totals 39% of the cost of the investment and is claimed over a seven-year period.

2 Participation of s and Affiliates in First Three Rounds of New Markets Tax Credit Allocations NMTC Round (Allocations Announced) Total Number of Allocatees Number of Allocatees that are s or affiliates Percentage of Allocatees that are s or affiliates Total Allocation (in $billions) Allocation to s or affiliates (in $billions) Percentage of Allocation going to s or affiliates (in dollars) Round 1 (3/14/03) Round 2 (5/6/04)** Round 3 (5/11/05) % $2.50 $ % % $3.50 $ % % $2.00 $ % TOTALS % $8.00 $ % ** Round 2 encompassed FY Over the course of three rounds of allocations, a total of $8 billion has been awarded to 170 Community Development Entities (CDEs). Of this total, 51 (or 30.00%) of the 170 CDE recipients of NMTC allocations have been s or affiliates. $ billion (or 22.17%) of the $8 billion NMTC allocations disbursed thus far have been made to certified s or affiliates of certified s. Eleven (or 26.83%) of the 41 allocatees in the third round were certified s or affiliates of certified s. The 11 certified allocatees accounted for $494 million (or 24.47%) of the $2 billion in tax credits allocated in the third round. s and affiliates have demonstrated strong interest in each of the three rounds conducted. Several s and affiliates have been successful in receiving a NMTC allocation in more than one round. s and their affiliates receiving multiple allocation awards are: Alaska Growth Capital Bidco, Inc, Coastal Enterprises, Inc., Lenders for Community Development, Louisville Development Bancorp., Massachusetts Housing Investment Corporation, Rural Enterprise of Oklahoma, Inc., and Self Help Ventures. See appendix for profiles of the 11 Third Round allocatees. 2

3 s Enjoy a High Success Rate in Securing NMTC Allocations When Compared with Other Types of CDEs Round (Allocations Announced) Total Number of CDEs Applying Total Number of Allocatees Number of s or Affiliates Applying Successful or Affiliate Applicants or Affiliate Success Rate Number of CDE Applicants (not s or Affiliates) Successful Applicants (not s or Affiliates) CDE Success Rate (excluding s and affiliates) Round 1 (3/14/03) Round 2 (5/6/04)** Round 3 (5/11/05) % % % % % % TOTALS % % ** Round 2 encompassed FY s fared much better than other types of entities in successfully competing for a NMTC allocation. In round 3, one third of the certified s or affiliates applicants received NMTC allocations. The average success rate for s or affiliates over the life of the program is 31.1%. In contrast, the historical success rate for CDE applicants that are not certified s is only 18.03%. While the number of s applying to the NMTC program dropped significantly from FY 2002 to FY , the share of s comprising the applicant pool has remained consistent the last two allocation cycles at approximately 15% of the total, down from a high of 26% during the first round. The number of applicants for NMTC allocations in each round has dropped in each year of the first three years of allocations being awarded. This decline may be due to the rigorous application process, the complexities involved in deploying New Markets Tax Credit allocations, or other factors potential applicants weigh in determining their chances for success in a highly competitive process. After each allocation round is announced, the Fund provides specific debriefing comments to each unsuccessful applicant. Based on the information contained in the debriefing comments, a CDE may decide that their chances of successfully competing for a future NMTC allocation are poor and therefore do not reapply to the program. In addition, the Fund has required allocatees to demonstrate that a significant amount of their credits have been deployed before they may compete for an additional allocation. 3

4 s May Use the NMTC to Increase Their Community Impact Without Receiving an Allocation Directly There are advantages to a of becoming certified as a Community Development Entity 1 even if the has no intention of applying for a NMTC allocation. Certain NMTC allocatees are actively pursuing strategies to partner with s in many of their NMTC investments. CDEs, including s, may receive investments from or sell loans to for-profit CDEs with a NMTC credit allocation. s can be excellent sources of qualifying equity investments in targeted markets. Two NMTC recipients, National Community Investment Fund and the National New Markets Tax Credit Fund, Inc. have been successful in deploying tax credits through a wide network of s. National Community Investment Fund (NCIF) is a certified and CDE that invests equity and debt in banks, thrifts and credit unions (collectively, Community Development Banking Institutions or CDBIs) with a primary mission of community development. NCIF raises equity using its NMTC allocation which is then invested in CDE bank holding companies or CDE operating banks which can be leveraged to raise deposits. NCIF s investments enable the CDBIs to support local community economic activity by providing loans to Qualified Active Low-Income Community Businesses (QALICB). The economic development impact is magnified since the funding base of these CDBIs is significantly enhanced by low cost NCIF NMTC capital. Community Reinvestment Fund (CRF), a Minneapolis-based non-profit organization, is a national leader in bringing capital to public and private, nonprofit community development lenders through the secondary market for loans. CRF s for-profit affiliate, the National New Markets Tax Credit Fund, Inc purchases economic development loans from s and other CDEs, passing on the benefit of the NMTC credit. The NMTC can Strengthen and Expand the Nation s Network In an underserved neighborhood in New Orleans (LA), Jackson (MS) and throughout the Mid- South states of Arkansas, Louisiana, and Mississippi, the NMTC helped extend credit to residents by capitalizing the HOPE Community Credit Union, a in Central City New Orleans. The Enterprise Corporation for the Delta utilized its NMTC allocation to attract investors to capitalize this new branch of the credit union so it could begin providing access to capital to residents near its new branch in New Orleans and across the Mid-South. The Enterprise Corporation for the Delta (ECD) is a private, nonprofit community development financial institution (), that provides commercial financing, mortgage loans and technical 1 Entities already certified as a by the Fund may register on the Fund s website and automatically qualify as a Community Development Entity (CDE). 4

5 assistance to support businesses, entrepreneurs, home buyers and community development projects. ECD's mission is to strengthen communities, build assets and improve lives of people in economically distressed areas of Arkansas, Louisiana and Mississippi. HOPE Community Credit Union partnering with ECD leveraged corporate investments by using the incentives of the New Markets Tax Credit program. HOPE plans to leverage the capital investment by raising additional deposits of at least 10 times the NMTC investment. HOPE is the first credit union in the country using a NMTC allocation to help capitalize an expansion in services. Conclusion By utilizing their specialized knowledge of local markets and community development needs, s have accomplished a great deal using the New Markets Tax Credit during the early years of the program. The industry is well positioned to accomplish even more during the remaining two years of available NMTC allocations. s have every incentive to work with other CDEs and community development practitioners to extend and reauthorize the NMTC so it will remain a valuable tool beyond 2007 when the current NMTC program expires. For more information, contact the Coalition at info@cdfi.org or

6 Appendix Profiles of the Third Round and Affiliate NMTC Allocatees 2 Cincinnati Development Fund ($52,000,000) Cincinnati, OH The Cincinnati Development Fund (CDF) will provide loans and investments to induce financing activities to improve the economically distressed neighborhoods known as "Uptown Cincinnati" (Avondale, Clifton Heights, Corryville and Mt. Auburn). The allocation of NMTCs will enable CDF to: 1) provide flexible and customized below- market rate loans, including senior and subordinated debt in support of mixed-use commercial revitalization; 2) build and rehab forsale housing in eligible low- income communities; and 3) invest in small businesses in the City's Federally-chartered Empowerment Zone. The Uptown Cincinnati Development Fund is expected to serve as the catalyst for a reinvigorated Uptown Cincinnati and leverage over $1 billion in commercial real estate and public revenue bond financing activity. The Clearinghouse ($75,000,000) Lake Forest, CA The Clearinghouse will use its NMTC allocation to: 1) make direct loans to women, minority-owned and non-profit businesses; 2) make direct loans for commercial, industrial and community facility projects; and 3) make equity investments in real estate projects that create new affordable for-sale housing units. The NMTC allocation will allow Clearinghouse the ability to offer greater flexibility in underwriting standards and loans at up to 500 basis points below market rates. It will also allow them to offer a broader mix of investment products, including equity and debt with equity components, than would be possible without the NMTC allocation. Community Ventures Corporation ($12,000,000) Lexington, KY Community Ventures Corporation, Inc. (CVC), a certified, will use its NMTC allocation to provide commercial real estate, community facilities and small business loans in low-income communities located throughout Kentucky. CVC will target three main markets: (1) the 42 counties of the Appalachian Region, (2) tobacco dependent counties, which need significant investment to preserve jobs due to decline in quotas and demand for tobacco, and (3) three of Kentucky s major urban centers. The NMTC Allocation will enable CVC to offer loans up to 300 basis points below market with longer amortization periods and lower fees. Kentucky Highlands Investment Corp. ($22,000,000) London, KY Kentucky Highlands Investment Corporation (KHIC), a certified, will make loans to healthcare-related businesses for investments in healthcare-related community facilities as well as for healthcare-related equipment purchases and working capital funds. Its loan products will be at below market rates and better than standard terms and conditions for this type of financing. KHICs target area is 100% rural and consists of twenty-two counties in southeastern Kentucky. All twenty-two counties are federally-designated as medically underserved areas (MUA) and sixteen of the twenty-two counties are federally designated health professional shortage areas (HPSA). These designations mean that access to primary medical and preventive services is 2 Fund Third Round (2005) NMTC Allocation Recipients By State, May 11,

7 inadequate or that the health status of these counties or their sub-populations exhibit health disparities. Lenders for Community Development ($25,000,000) San Jose, CA Lenders for Community Development (LCD) provides financial products that help create and grow small businesses, and that help develop affordable housing and non-profit facilities. With its NMTC allocation, LCD will provide interest-only, below- market rate loans to support anchor projects with significant development impact located in high-distress communities. The NMTC allocation will also allow LCD to significantly expand the volume of its loans and the scope of its lending products. Local Initiatives Support Corporation ($90,000,000) New York, NY Local Initiatives Support Corporation (LISC) provides investments to its national service area through its 33 local offices and rural program. LISC will use its NMTC allocation to provide loans and equity investments in low-income communities served by the community development corporations that it supports. LISC expects to use nearly all of its NMTC allocation to make loans and investments that finance office, retail, and mixed-use real-estate developments, as well as community facilities, such as charter schools. LISC will use its NMTC allocation to offer more favorable debt and equity products to community development projects within its program areas. Louisville Development Bancorp ($8,000,000) Louisville, KY Louisville Development Bancorp (LDB), a certified, will make loans to small businesses and real estate projects that contribute to the revitalization of low-income communities in Louisville, KY. With its NMTC allocation, LDB will be able to offer its borrowers more favorable interest rates (200 to 400 basis points below market rate) and more flexible terms, such as interest only payments during the initial seven years of a loan. LDB will target businesses or projects that either could not be completed at all, or could not be completed to the same size or scope, without the NMTC investment. MA Housing Investment Corporation ($54,000,000) Boston, MA The Massachusetts Housing Investment Corporation (MHIC), a certified, will use its NMTC allocation to provide financing to support commercial real estate acquisition and development. The NMTC allocation will enable MHIC to offer interest-only construction and permanent first mortgage loans, zero to 5% interest-only subordinate loans, and equity investments that will represent up to 25% of total project costs. Eligible projects include community centers, office and retail space, theatres and performing arts centers, public markets, health centers, artist studios and gallery space, and light industrial/small business centers. NAB Bank ($5,000,000) Chicago, IL NAB Bank, a certified, will use its NMTC allocation to help expand its business lending in low-income communities. NAB Bank will focus on businesses seeking to relocate or expand inside NAB Bank's community; established Chicago community businesses looking to expand locally; and start-ups within the community. The NMTC allocation will allow NAB Bank to 7

8 offer a wider range of flexible banking products to its customers, who are predominantly lowincome Asian immigrants and Asian Americans. REI New Markets Investment of Rural Enterprise of OK ($56,000,000) Durant OK REI New Markets Investment, LLC (LLC) is a wholly owned subsidiary of Rural Enterprises of Oklahoma, Inc. (REI), a certified. The LLC will use its NMTC Allocation to provide three principal financial products: (1) a gap financing debt product of up to $2 million to larger scale businesses; (2) a more traditional debt instrument through which the LLC provides loans of up to $15 million to start-up or non-traditional businesses that are unable to secure conventional financing; and (3) an equity product targeted to start-up and expanding businesses. The NMTC allocation will enable REI to expand its work providing flexible debt financing and equity capital investments to qualified businesses operating throughout the state of Oklahoma. Particular focus is placed on businesses in rural communities that will create jobs and generate economic growth in the state. Self Help Ventures Fund ($95,000,000) Durham, NC Self-Help Ventures Fund (SHVF) makes commercial loans to businesses, community facilities and commercial real estate projects (retail centers, office buildings and mix- used projects) located in low-income communities. With its allocation, SHVF will continue to expand its geographic lending territory and offer loan products that provide better terms and conditions, such as loans at interest rates up to 2% lower than SHVF s regular, risk adjusted loan rates. SHVF will also provide more flexible terms than is available in the market, including longer amortization periods of up to 20 years, lower debt coverage ratios, lower origination fees, more flexible credit standards, acceptance of non-standard forms of collateral, and loan to value ratios as high at 100%. 8