How small communities are being reenergized
In a landscape of reduced local funding and persistent economic challenges, there can be a ray of hope for redevelopment professionals who understand how to access creative financing instruments. From Maine to Hawaii, investment capital is being infused into communities through the little-known New Markets Tax Credit Program (NMTC Program) to revitalize industrial parks, preserve sustainably harvested forests, and attract manufacturing back to rural America.
Public service professionals and local leaders are at the forefront of identifying and supporting public-private partnerships and recognizing how the NMTC Program can provide an incentive to invest in projects that might have otherwise been overlooked. These projects demonstrate the ingenuity that managers, redevelopment authorities, elected officials, and state legislators are expending to seed growth and opportunity in their communities. This task is made even more challenging in the shadow of lost tax revenue as once thriving manufacturers, military bases, and other enterprises shutter their operations.
Perhaps the biggest hurdles are understanding the complexities of the NMTC Program and determining how to get started.
Understanding the Program
Congress designed the NMTC Program in 2000 to stimulate private investment and economic growth in low-income communities that lack access to the capital needed to support and grow businesses, create jobs, and sustain healthy local economies. The program-supported investments in any one project provide a seven-year period of support, during which time the economics of the investment are continuously monitored and subject to capital market rigors and discipline.
The program offers debt and equity investors a major federal income tax credit for projects in eligible areas, including census tracks with a poverty rate of at least 20 percent or with median family income of 80 percent or less of that area’s median family income (http://www.cdfifund.gov/what_we_do/programs_id.asp?programID=5#).
The Program in Action
The U.S. Treasury Department oversees the tax credit program but does not directly distribute the credits. Instead, it uses a rigorous and competitive application to award NMTC Program allocations to qualified community development entities (CDEs), which determine the projects that are eligible for the credits as well as the amount of tax credit capacity. These eligible projects are known as qualified active low-income community businesses (QALICB).
A typical NMTC Program funding request made to a qualified entity is between $8 and $50 million, though the total project size may be larger. Project investors receive a tax credit in exchange for making equity investments in a low-income business. The credit equals 39 percent of the original investment amount and is claimed over a period of seven years.
According to the New Markets Tax Credit Coalition in Washington, D.C. (http://nmtccoalition.org/), $27 billion in direct investments were made in businesses between 2003 and 2011. These NMTC Program investments created some 350,000 jobs at a cost to the federal government of $19,500 per job. They leveraged $55 billion in total capital investment in businesses located in communities with high rates of poverty and unemployment.
Take a look at rural Barnwell County, South Carolina. Since 2007, poverty rates in this community have exceeded 20 percent, largely due to the closing of textile and apparel plants that had employed 10.5 percent of the local workforce. The situation led South Carolina to rank Barnwell County as “distressed,” its most acute development tier.
Community leaders stepped up and have been working hard to turn the economic situation around. Public-private partnerships have led to investing more than $10 million in NMTC Program capacity to finance the development of an industrial park as the centerpiece of Barnwell County’s economic development plan.
Its competitive efforts attracted Horsehead Corporation to site a new plant at the park that is converting electric arc furnace (EAF) dust—hazardous waste produced by electric arc steel furnaces—into such usable materials as zinc and zinc oxide. In the transaction, the Horsehead plant is the QALICB.
Horsehead Corporation has created more than 50 new jobs at the plant to date, with an average annual wage of some $37,000. This wage exceeds the state per-capita income level by 15 percent and the county per-capita level by 62 percent.
It is estimated that the project will result in an additional $500,000 to $1.5 million in local tax revenue annually. Bank of America provided equity for the deal, while the Horsehead Corporation self-funded the debt.
Reawakening a Community with Cutting-edge Jobs
It’s a similar scene in Bainbridge, Georgia, where the local poverty rate reached past 23 percent after some 800 payroll jobs were lost during the economic downturn of 2008. Today, thanks to efforts by local government management, a local industrial park is retooling and reawakening as a new manufacturing plant is starting to produce cutting-edge products on-site.
DaniMer Scientific located its headquarters in Bainbridge with a focus on the production of biopolymer materials, which are marketed to brand owners and consumers seeking environmentally responsible packaging alternatives to petroleum-based plastics.
The NMTC Program was a critical financing component, providing $20 million in tax credit capacity to finance the project. U.S. Bancorp Community Development Corporation provided the equity, while DaniMer Scientific provided the debt financing for the transaction.
As a result, DaniMer will be able to create up to 36 new skilled manufacturing jobs, all with career-ladder potential. Further, these jobs have excellent benefits, including a 401(k) plan with matching contributions, and pay well above the living wage for the area. Deepening its commitment to the community, DaniMer has committed $500,000 to support scholarships and tuition reimbursement at local colleges for its employees.
Green Energy Infrastructure
Beyond industrial projects, local governments are also turning to the NTMC Program to build renewable energy infrastructure.
Take Greenfield, Massachusetts, a former mill town that now calls Greenfield Community College its primary employer. A rural small town with less than 18,000 residents, Greenfield has made an effort to live up to the “green” in its name by actively pursuing a number of sustainability projects.
The city sought to place a two megawatt solar-panel facility on its capped landfill. At capacity, the solar energy will supply nearly half of the electricity for city buildings, and save the city approximately $175,000 in annual electricity costs. The outcomes will ripple back to the community through reduced property taxes.
But how to finance it? Local leaders in Greenfield worked with a number of private partners to create a funding package that would appeal to renewable energy developers Sun Edison and Greenleaf-TNX to build the solar park.
A $10.8 million allocation of NMTC Program capacity was integral to financing the project, with U.S. Bancorp Community Development Corporation providing the equity, while Berkshire Bank provided the debt financing for the transaction. Common Capital was the local working partner in the project.
Greenfield also magnified the impact of the financial package. In addition to the project’s direct environmental and fiscal benefit to the local government, investors donated $100,000 to Greenfield Community College for worker training in the solar energy sector and also earmarked a percent of electricity sale profits to the college.
“The Greenfield Solar Farm is a low-profile, but highly impactful project,” says Common Capital CEO Christopher Sikes. “It is hidden away at the old town dump. It’s quiet and doesn’t pollute and because the sun did indeed shine, it has produced the electricity for the town. Plus, Greenfield Community College got its worker training in solar energy classes started.Â Sometimes the most successful projects are invisible in plain sight.”
Conservation and Sustainability
Beyond manufacturing, local governments are also using the New Markets Tax Credit Program for sustainable land use. The town of Errol, New Hampshire (population 291), joined the ranks of the burgeoning community-owned forestry movement with the purchase of Thirteen Mile Woods.
This area of 5,269 acres of woodlands borders the Lake Umbagog National Wildlife Refuge and much of the Androscoggin River, making the Thirteen Mile Woods important as both a recreational and watershed area.
A local businessman conceived the idea for the conservation effort. The rural community of nearly 300 year-round residents rallied around the idea, voting in support of the project on a six-to-one margin. The residents of the town conscripted the Trust for Public Land, a major national land conservation organization, to help make this deal possible.
The project sustains traditional uses of the property for forestry and recreational opportunities, creating and preserving logging and ecotourism jobs while protecting wildlife habitats and the watershed. Some of the forest’s attractions include hiking, hunting, fishing, snowmobiling, and bird/wildlife watching.
Plans are currently under way to develop new snowmobile and hiking trails. In 2013, the ownership of the forest was officially turned over to the town at the conclusion of the NMTC Program phase.
In 2008, the U.S. Postal Service honored the Thirteen Mile Woods with an international rate postage stamp as part of the Scenic American Landscapes series. In August 2009, Errol added 1,700 acres to the property, bringing the total size of the community forest to nearly 7,000 acres.
This project received $2.39 million in NMTC Program financing. The First Colebrook Bank, a locally based bank, provided the debt and equity. The Trust for Public Land and The Northern Forest Center served as vital partners in bringing this project to fruition. It successfully secured take-out financing in 2012.
Similarly, the NMTC Program supported Lyme Timber Company’s purchase of 21,949 acres surrounding the municipality of Grand Lake Stream, Maine (municipal population 109). This transaction not only promotes sustainable forestry in the region, it preserves a way of life for the local residents who support themselves as registered Maine guides, loggers, and truckers, and also by running lodges and sporting camps.
This project provides for the purchase of working forest conservation easements to permanently protect the land from private residential development. It also creates the option for the acquisition of the underlying fee interest in the property by the local Downeast Lakes Land Trust, enabling the area to become a community-owned forest.
The transaction is more than a straight land purchase. Lyme Timber agreed to manage the woodlands as a sustainable natural resource and use innovative, low-impact timber harvesting practices as a result of a previous NMTC Program arrangement.
Lyme Timber also agreed to donate 132 acres of land to the town of Grand Lake Stream in Washington County, Maine (county population 32,800), for the development of light industry and low-income housing, and it will sell 50 acres at a favorable price for future mixed-use development.
The support of Grand Lake Stream residents and local leadership for this project can’t be understated. Town leaders hoped residents would donate $10,000 toward the $2 million option payment for the easements, and took the request to a vote at a special town meeting. The residents surprised everyone, voting to increase that donation to $40,000, asserting the future of the community was at stake and there could be no better use of the town’s savings.
This project received an allocation of $19.8 million in NMTC Program capacity to finance the project. Bangor Savings Bank provided both debt and equity for this deal, while U.S. Bancorp Community Development Corporation provided equity and Lyme Timber Company provided additional debt for it.
Understanding the New Markets Tax Credit Program makes the task of re-energizing downtowns and rural communities a brighter prospect. Public service professionals are committed to making a positive difference where they live. Who better to recognize which projects will amplify those things that make their communities special?
Busy managers and elected officials will be well served by collaborating with both private and public sources of expertise who understand the financial landscape. That may be your local government’s banker, a local development corporation, or community development finance institution.