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FINANCING SMALL BUSINESS WITH NMTCs
Pat Thomson, NDC’s Grow America Fund Angela Butler, Carver CDC (CCDC)
Charlie Spies, CEI Capital Management Julia Nelmark, Midwest Minnesota CDC
November 3, 2010
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New Markets Tax Credit Program Overview
• Legislation Passed in 2000 Encouraging Private Investment in Low-Income Communities (LICs) – New Markets Tax Credit (NMTC) program – Operated by the Community Development Financial
Institution (CDFI) Fund (www.cdfifund.gov) – Division of the U.S. Department of the Treasury
• First loans closed in late 2003, early 2004
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New Markets Tax Credit Program Overview (cont.)
– Designed to spur investment and promote economic development in rural and urban low-income communities (LICs)
– Provides investors a credit against federal income tax liability for a qualified investment
• Credit totals 39% over 7 years • LICs defined by decennial Census data • Census tract with > 20% poverty OR • < 80% median family income
– Community Development Entities (CDEs) compete for tax credit allocations
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Lending to Small Business Using NMTC
• Difficulties due to high transaction costs • Loan Pool as vehicle to spread the costs • Investor Issues • CDE Issues • Borrower Issues
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NMTC Flow of Funds
Leveraged Equity Model
Sub-CDE (Project Specific)
QALICB (Project or Business)
CDE with NMTC
Allocation
Sub- Allocation
QEI ($ into CDE) – must be Equity
Fees & Reserves
QLICI ($ into Project) – can be Debt or Equity
A/B Loan Structure or A Loan with Equity
Investment Fund L.P. or LLC (Accumulates Investment Funds)
Debt -Interest-only -Forbearance
Equity NMTC
Investor
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Merrill Lynch Community Development Corporation (MLCDC) – GAF Model
• Typical terms End Borrower– MLCDC Allocation – QEI - $5 million – Loan Amount - $190,000 -$2,000,000, average loan
$800,000 – SBA guarantee – 75-90% – Interest Rate – 2.5% – 3.75% – Amortization – 25 years, fully amortizing – NMTC supports the guaranteed portion – GAF equity supports the unguaranteed portion – Deployment risk taken by MLCDC – Investor takeout Year 7 – Secondary market or GAF
investor partners
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Players
• CDE Allocatee – Merrill Lynch Community Development Company (MLCDC)
• Sub-CDE – Merrill Lynch NMTC Corp. (MLNMTC) • Investor – Merrill Lynch Bank USA CDC (MLBUSACDC) • Lender – Merrill Lynch Bank USA CDC (MLBUSACDC) • CDE – Grow America Fund • QALICBs – 7 small businesses
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QALICB $2 mm Loan
$1.5 mm NMTC
QEI ($5,000,000)
MLNMTC (Sub-CDE)
QALICB $1.16 mm Loan $885 K NMTC
QALICB $465 K Loan $418 K NMTC
GAF (CDE) QLICI $5,000,000
QALICB $500 K Loan $375 NMTC
QALICB $632 K Loan $569 NMTC
QALICB $192 K Loan $173 K NMTC
QALICB $1.2 mm Loan $1.1 mm NMTC
MLCDC (CDE Allocatee)
Equity Merrill Lynch
Bank USA CDC (MLBUSACDC)
Debt Merrill Lynch
Bank USA CDC (MLBUSACDC)
$5,000,000
Sub Allocation
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Dental Kidz Pediatric Dentistry
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CCML SME Pilot Pool
• Community Bank and Sub-debt Funders • Statewide coverage in Maine • Joint underwriting with Lender and CEI • $9,500,000 Pool Created • Target deals in $200K to $2MM range • Pricing loans at about 1.5% below market • 25 year amortization / balloon at year 7
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SME New Markets Loan Fund
Investment Fund $9,812,655 - all tranches CCML Maine Investment Fund II LLC (99.99% interest in CDE)
Total NMTCs $3,704,629
$9,500,000 QEI Equity Investment
CDE $9,500,000 - all tranches CCM Small Business and Community Facilities LLC
CCML Member Manager (0.01%)
Senior Debt Bangor Savings Bank
$5,812,655 Loan @ FHLB CDA + 150 bps
CCML Non-Member Manager
QALICB 1 QALICB 2 QALICB 4 QALICB 5 QALICB 3
$9,292,883 Total QLICI’s
NMTCs $3,704,629
$2,700,000 Equity
Investment
Equity Bangor Savings Bank (100% of Investment Fund)
Subordinated Debt CEI plus A-D
$1,300,000 Loan @ FHLB CDA + 50 bps Plus 300 bps accrued
C $100K
B $500K
A $110K
D $50K
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Baxter Library
Renovation
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CCML SME Pool Current Reality
• One half of pool deployed to date • Deal size larger than hoped for @ $2MM+ • Expect to deploy remainder in one year.
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CCML’s Likely Next Pool
• Seek standardized replicable deals – Distributed energy systems such as anaerobic digesters
and roof-top solar – Possibly rural health centers or assisted living
• Same documents • Same structure
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Midwest Minnesota CDC – “Synergy” Loan Funds
• “One Eye Blind” Loan Funds – QEI - $8 - 10 million – Target Loan Amount - $250,000-$3,000,000 – Interest Rates Vary by Partner Bank
• Range from Prime – 1% to Prime + 3/4% • Usually with minimum rate, 4%-5.5%
– Amortization – little or none • Mostly interest-only for 7 years • Some sinking funds or upper tier participations
– B&I or SBA guarantee on a few loans – Debt forgiveness 15% - 19% – Takeout Year 7 – MMCDC, Partner Bank, Parent
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Perham Veteran’s Museum: “In Their Own Words”
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Midwest Minnesota CDC – Grouping NMTC Loans
• Pairing Projects to Share Transaction Costs – QEI - $4.5 - 7 million – Loan Amounts - $1,400,000-$3,000,000 – Interest Rates Vary by Partner Bank
• Range from Prime – 1% to Prime + 3/4% • Usually with minimum rate, 4%-5.5%
– Amortization – usually none – B&I guarantee on one project
• Two years interest-only, five years amortizing • Redeploy to same borrower (equipment)
– Debt forgiveness 17% - 19% remaining loans – Takeout Year 7 – MMCDC, Partner Bank, Parent
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Manufacturing Expansions
• Rural manufacturing • Combined NMTC
allocation $4.9 million • Overseas competition,
price pressure • Created 30 jobs at
each, maintained several hundred more
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MMCDC Loan Fund Status
• Filling 4th “blind” pool – Two rural, two urban – Using form loan documents – Local RE attorney closes and records
• Closing 4th project group, all rural • Loan Sizes vary
– $225,000 to $2.8 million (3 revolved) – 32 loans under $3 million so far (+6 in process) – High Demand
• Four leverage lenders (two repeats)
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Native Entrepreneurship Equity Fund (derived from fee income)
Reservation loans that don’t meet loan standards: • Forgivable Loans up to $10,000 • Requires $ for $ Match • Submit a Business Plan, Local Endorsement • If all conditions are met, repayment not required
OR • Intensive Entrepreneur Training – Web-based • Potential Funding throughout Process
Slow to realize ….
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Grow America Fund and Carver CDC
• Typical terms End Borrower – QEI - $5 million – Loan Amount - $300,000-$2,000,000 – SBA guarantee – 75-90% – Interest Rate – prime + 1.5 fixed for 7 years – Amortization – 25 years, fully amortizing – NMTC supports the guaranteed portion – GAF equity supports the unguaranteed portion – Takeout Year 7 – Secondary market or GAF investor
partners
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Players
• CDE – Carver CDC allocation • Sub-CDE – Grow America Fund, not a separate entity • Investor – US Bank CDC • Leveraged Lender – Carver CDC • Not yet Closed – Attorneys +++
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QALICB $1.2 mm loan
$120k from GAF equity
Carver CDC Sub-
Allocation
QEI ($5,000,000)
Fees & Reserves
Investment Fund L.P. or LLC (Accumulates Investment Funds)
Debt Carver CDC
Equity US Bank
QALICB $2 mm loan
$200k from GAF equity
QALICB $2 mm loan
$200k from GAF equity
Carver CDE
GAF
1,800,000 1,800,000 1,080,000
QLICI $4,850,000
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Investor Issues
• Slow deployment due to economic conditions has weakened enthusiasm
• Bank investor may require significant risk mitigation – with sub-debt and NMTC equity – higher indemnity – SBA or USDA guarantee
• Higher risk with multiple loans over time (Substantially All)
• Leverage Lender – not a typical loan, lots of education
• Redeployment risk
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CDE Issues
• Compliance and small businesses a challenge • Non-Qualified Financial Property • Additional transaction costs: upfront and ongoing • Less sophisticated borrowers, lots of education • Amortization of principal • Recourse/guarantee of credits
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Borrower Issues
• Rate environment • 7-year refinance • Balance sheet restructure / creation of SPE • Simplified process – less flexibility, less
complexity • Forgiveness not guaranteed, lots of education • Eligibility issues – creation of LLC / Special
Purpose Entity