Using New Markets Tax Credits and Collateral Support Programs for Community

Development

Presentation to the National Association of Counties

Rural Action Caucus Steering Committee Meeting

October 11, 2013 Santa Fe, NM

FLEXIBLE SOURCES OF PRIVATE CAPITAL FOR ECONOMIC AND COMMUNITY

DEVELOPMENT

New Markets Tax Credits

NMTC Overview

Created in 2000, the NMTC program is a “shallow” tax credit focused on economic and community development in low-income communities nationwide The NMTC program is administered through the Community

Development Financial Institutions Fund, an arm of Treasury, and credits awarded through an annual competitive process. Award-winning Community Development Entities (“CDEs”) invest

the NMTC credit into qualifying projects such as business creation/expansion to community facilities to commercial real estate

What Are New Markets Tax Credits?

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NMTCs are an income tax credit, not cash. The credit provides a 39% earned over 7 years, 5% in each of the first 3 years and 6% in the remaining years. Credits are sold to investors at a discount and the cash is invested

into qualifying projects in low-income census tracts. In general allocation is typically placed in areas considered to be

“highly distressed,” which includes areas with at least 30% of the population living in poverty and “non-metro” counties with at least 20% of population living in poverty.

What Are New Markets Tax Credits?

4

Most NMTCs are financed using a “leverage” model which runs capital secured by the borrower through a series of special purpose entities. In today’s market, NMTCs fill financing gaps of about 25%.

NMTCs are flexible in that the source of the leverage loan can come from banks, investors, cities, counties, Pueblos and even self-leveraged.

Finance New Mexico, the for-profit limited liability company created by the New Mexico Finance Authority for its NMTC program, financed two community projects on the Pueblo of Laguna using innovative structures

What Are New Markets Tax Credits?

5

Sample NMTC Leveraged Transaction Diagram

Community Development Entity (CDE)

Legal, Modeling &

Structure

NMTC Investor / Fund

Manager

Investment Fund (Makes QEI in CDE)

100% owned by CDC

Leverage Lender

Sub - Community Development Entity Retains $1,000 of Cash

99.99% Investment Fund .01% CDE

Qualified Active Low-Income Community Business (QALICB)

$2.925 MM Capital Contribution

100% of Cash Flow, Profits & Losses

100% of NMTC $3.9 MM

$7. 075 MM Loan

Interest and Balloon Payments

NMTC Allocation

Investment ($1k)

CDE Placement Fee ($300k)

Annual CDE Manager Fee

Success Fee at Exit

($500k)

Legal, Modeling & Structuring

Debt Service

$2.725 MM NMTC Note

$7.075 MM

Senior Note

$10,000,000 QEI funded

at closing

100% of NMTC 99.99% of Cash Flow, Profits & Losses

$200k - $300k

Note: Assumes credits purchased at $0.75 per $1.00 of NMTC received

$10 million example

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Where: Pueblo of Laguna

Project: Grocery Store

Source of Leverage: Laguna Pueblo Development Corporation

Project Description: This new grocery store replaces an antiquated store that was unable to provide a full range of healthy foods to Pueblo members and nearby communities. The project cost $5,000,000 to demolish the old store, construct and equip the new store. The new store has amenities such as, larger refrigeration and freezer storage areas, a deli and essential items that are found in most modern grocery stores.

Laguna Development Corp. – Grocery Store

Community Benefit: The desperately needed improvements will provide its residents with a variety of healthier foods to choose from along with a greater selection of fresh produce, frozen foods, and fresh deli items. This project created 150 construction jobs and replace a store that is 30 years old and outdated.

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Where: Pueblo of Laguna

Project: Water & Wastewater

Source of Leverage: USDA funding was leveraged by the Pueblo of Laguna

Project Description: 4Points Laguna project will repair, replacement and construction of new water and wastewater lines, wastewater lagoons and collection systems within all six villages; rebuild and expand the three current water sources on the Pueblo to allow for 60% additional capacity; and provide additional pressure into the lines in order to provide fire flow and an appropriate fire protection system throughout the Pueblo.

Laguna Water & Wastewater Project

Community Benefit: The improvements to the water and wastewater

system are necessary and vital to maintain a good quality of life for the

members of the Pueblo. The system had line breaks which has been a

major issue for the past several years which in some cases the Pueblo was without water for 12 days. This project resolves these issues.

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TO HELP STIMULATE ECONOMIC DEVELOPMENT BY PROVIDING GREATER

ACCESS TO CAPITAL IN RURAL AND UNDERSERVED AREAS OF THE STATE

Collateral Support Participation Program

Small Business Jobs Act of 2010 provided each State with federal funds (based upon population). The funding was not competitive, but each state had to demonstrate ability to deliver and leverage the federal funds. It was created to help provide direct support to states for use in programs

designed increase credit availability for small businesses. The program is overseen by the US Department of Treasury and allows

funds to be used for “Capital Access Programs” and “Other Collateral Support Programs,” such as loan participations, state-sponsored venture capital programs and loan guarantees. The program requires that by 2016 each state leverage $10 of private capital

for each dollar of federal funds provided.

State Small Business Credit Initiative – SSBCI 10

Finance Authority and the New Mexico Economic Development Department conducted a focus group with some New Mexico banks and the Community Development Financial Institution (CDFI) – Division in the US Treasury

Outcomes from that focus group included:

More collateral support programs

Ability for subordinated positions

Getting rural business more access

Examine Revolving Lines of Credits

Not more competition but more support for your

Finance Authority and NMEDD put together its application based upon these ideas

Determining New Mexico’s SSBCI Program 11

Collateral Support Loan Participation Program

Why a Loan Participation Program?

In addition to filling a significant need, the Collateral Support Loan Participation

Program can be quickly implemented, providing benefit sooner

No fees and single point of application reduces the paperwork and burden for both the participating bank and the benefiting borrower

This tool will enhance and complement New Mexico’s efforts to encourage new private sector investment

This will ensure that the $13,168,350 in SSBCI funding will leverage at least $132 million, thereby achieving the 10:1 private capital leverage required by December 31, 2016.

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Finance Authority’s Loan Participation Programs

Program SSBCI Smart Money

Location Rural Urban Statewide

Terms pari-passu subordinate pari-passu subordinate pari-passu

Application and Closing Fees $ - $ - $ - $ - $ -

Max Term for Eligible Proceeds

Building 25 years 25 years 25 years 20 years 25 years

Equipment 10 years 10 years 10 years 10 years 15 years

Working Capital Term Note 4 years 4 years 4 years 4 years 3 years

Working Capital RLOC (1 year) 5 years 5 years 5 years 5 years 5 years

Max Borrower Size <500 <500 <500 <500 none

Max Total Bank/NMFA Loan Size $7.5 million $7.5 million $5 million $5 million none

Max SSBCI Participation $3 million $2.5 million $ 2 million $2 million $5 million

1 year Revolving Line of Credit 40% 30% 40% 30% 49%

3-5 year term note 30% 25% 25% 20% 49%

6-15 year term 25% 20% 20% 15% 49%

More than 15 years 20% 15% 15% 10% 49%

Average NMFA Portion of Loan $850,000 $850,000 $1.45 million $1.2 million $1.2 million

Average Total Bank/NMFA Loan Size $2.75 million $2.75 million $4.75 million $3.75 million $3.75 million

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Our goal is partner with Banks to help those with need. There is no additional cost or paperwork for the

borrower. We look to reduce the Bank’s exposure if possible. Simple application process. We minimize the costs of borrowing money by:

Covering the cost of issuance.

Having our legal team draft all of the closing documents.

We pay you to maintain a good relationship with your borrower.

Why NMFA? 14

Bank is able to do a deal that otherwise may not be possible

NMFA will pay a 25bp as a loan servicing fee

Unlike other government programs, limited amount of paperwork and NO FEES for your client

Bank is able to build a relationship with client for other bank services such a wealth services and other banking products

Incentives to Local Lenders 15

N E W M E X I C O F I N A N C E A U T H O R I T Y 2 0 7 S H E L B Y S T R E E T

S A N TA F E , N M 8 7 5 0 1

( 5 0 5 ) 9 8 4 - 1 4 5 4 T O L L F R E E 1 - 8 7 7 A S K N M FA FA C S I M I L E ( 5 0 5 ) 9 9 2 - 9 6 3 5

W W W. N M FA . N E T

¡Believing in New Mexico!