Increasing Deal Flow of Large-Scale Community Investments The Role of Investment Intermediaries and Community Based Organizations Anna Steiger Federal Reserve Bank of Boston Tessa Hebb Lisa Hagerman Public Pension Funds and Urban Revitalization Initiative
Institutional investor does not have the time or expertise to actively manage these investments
Investment vehicle intervenes by pooling investments, spreading risk across investors, and pricing transaction up to the risk
Channel funds into 3 asset classes: fixed-income, equity real estate, private equity
4 Operational models: contractual, ownership, legislative, and fund manager
Link between Institutional Investor and Investment Vehicle
Investment Vehicle Operational Models Source: Daniels (2004) American Ventures, CA Urban Investment Partners, Canyon Johnson Urban Fund, Paradigm Properties, USA Fund, Yucaipa Fund, SJF Ventures Who is monitoring Second Bottom line? Investors like returns, fund managers, and Double Bottom line concept Fund manager operates without a not-for-profit Fund Sponsor Fund Manager Model MA Life Initiative, MA Property & Casualty Initiative Not an option with an unsympathetic legislature Good option with a sympathetic legislature Fund criteria and tax deal codified in state legislation Legislative Model Community Preservation Corporation/CPC Resources Coastal Enterprises/CEI Ventures MA Housing Investment/ MHIC Equity LLC Institutional investors may not have confidence in the not-for-profit manager Not-for-profit Community Fund Sponsor has control over Fund Manager Not-for-profit Community Fund Sponsor owns for- profit Fund Manager Ownership Model Genesis LA Funds, Bay Area Family of Funds, San Diego & Sacramento Fund Manager can run off with the idea with no accountability to not-for-profit sponsor, if on-going Funds are not built into the contract Proven outside Fund Manager Fund Sponsor contracts with a proven fund manager to serve as fund manager, and the Fund is then structured either as an LLC or Limited Partnership Contractual Model Examples Weaknesses Strengths Structure Legal Model
Parcel 24 – In Partnership with the Asian CDC (Chinatown section of Boston)
70 affordable rentals and 85 affordable and 160 market-rate condominiums
Also features parking, an urban park, and retail and community space
Will create 700 construction jobs and up to 40 permanent jobs in retail, community organizations, and property management
Olmstead Green – In Partnership with Lena Park CDC (Mattapan section of Boston)
287 workforce housing condominiums and 153 affordable rental units
400 jobs in construction and 400 permanent positions
Energy-efficient green development, green spaces
83 units of senior housing, a nursing care facility, an urban farm, a Heritage House mental health center, a job training center, fitness facility, and CDC Community Center
CEI Capital Management CEI’s New Markets Tax Credit Subsidiary
New Markets Tax Credit Program
Awarded $249m investment capacity under Rounds I,II and IV, Utilized over $153m (1/07)
Works with multiple community partners including:
The Nature Conservancy (Washington, DC)
Western Mass Enterprise Fund (Greenfield, MA)
Capital Regional Development Corporation (Concord, NH)
Rural Opportunities, Inc. (Rochester, NY)
Some Structural Elements of a NMTC Transaction
In an NMTC deal, the capital flows through a special-purpose financing LLC, known as a Certified Development Entity (CDE). The 39% tax credit on the amount invested is realized over seven years. The investor(s) can get cash flow (return on capital), but no return of capital. (Any principal repayments must be held in reserve at the CDE level). The business gets the capital on favorable terms and the investor(s) gets the tax credits.
A bank, private equity investor, or other NMTC capital source can invest directly in the CDE (direct investment model) or through an upper tier "conduit" LLC as a means of leveraging the equity capital and bifurcating the tax credits (leveraged investment model).
In a leveraged transaction, investors can provide the debt, equity, or both. The equity provider would most likely receive its return using the available tax credits calculated on the basis of the combined total investment amount (debt & equity), thereby assuming nominal project risk. Any debt financing in such a leveraged NMTC model could be at market rates if the available tax credits are mostly allocated to the equity investors. Alternatively, some tax credits could be allocated to the debt provider as incentive to make the capital available at more attractive financing rates and terms.
Source: Coastal Enterprises, Inc.
Equity Investor (Owns 99.99% of Investment LLC) Investment Pooling Conduit LLC (Owns 99.99% of CDE) CDE (99.99%) Borrower (QALICB) Lender CDE Sponsor & NMTC Mgr (0.01%) CDE Sponsor & NMTC Mgr (0.01%) CEI’s NMTC Leveraged Investment Model In Direct Investment Model, investors place investments directly into the CDE