The Importance of Source Loans
Over the past few years, I’ve had the unique opportunity of working for the Specialty Finance team at RDF. This experience has opened my eyes to the profound impact New Markets Tax Credits (“NMTC”) has provided to underserved communities across the country and also how vital Source Loans are to the NMTC Structure. For those of you that are unfamiliar with the NMTC Program, the NMTC Program “incentivizes community development and economic growth through the use of tax credits that attract private investment to distressed communities” (cdfifund.gov).
Instinctually, you may ask, what does this mean, what is a Source Loan, and how does RDF come into play? Since the inception of the NMTC Program, almost every year, the CDFI Fund establishes a specific amount of tax credits that Community Development Entities (“CDEs”) can use in which these tax credits are to be purchased by investors. This investment from the investor is then pooled together and then coincides with funds from the project sponsor.
For example, let us say a CDE is awarded allocation, and you are a non-profit that is building a community center, and you need $10 million to complete your project. In this graph to the left is a hypothetical NMTC structure that I created.
In this scenario, you have talked with a CDE who received an allocation and is interested in your project. You have also spoken with an investor willing to purchase the NMTC Allocation at $0.80/NMTC (This number typically varies). Moreover, per the NMTC Program, the tax credit value is 39% and is claimed over a seven-year period. As such, we multiply the $10,000,000 allocation by 39%, and then by $0.80 (the amount the Investor is willing to purchase the NMTC), which will end up amounting to the total equity that is being directed towards the Investment Fund ($3,120,000 in our example). The difference between the Equity from the Investor and the total project cost must be provided by the Sponsor (as Leverage Lender) to complete the NMTC transaction ($6,880,000).
The question becomes, what if the Sponsor has raised some capital but does not have sufficient funds in hand to begin the project? This is where a Source Loan comes into play! In our example, the Sponsor could only provide $3,880,000 in cash and $1,000,000 from a grant; this would leave a gap of $2,000,000. In our example, the Source Loan is bridging a Capital Campaign that the Sponsor may have in place where funds are scheduled to be received over several years. A Source Loan provides the gap funding needed to close the NMTC financing. Without a Source Loan in this scenario, the project would not be able to get started. Of course, there is an opportunity to delay the start of a project and raise more, but in some cases, the sponsor has time constraints in developing a project, and it can be prudent to receive a Source Loan and close on the NMTC Project before all the funds have been received.
How does RDF come into play? Not only does RDF function as a CDE and apply for NMTC Allocation, but RDF also provides Source Loans! As you can imagine, various organizations and non-profits may not have an enormous amount of capital at closing. It may need to receive a Source Loan to bridge funds expected to arrive further down the road. It could be from a Capital Campaign, but it could also be from grants not yet received, Affordable Housing Program (“AHP”) grants, a sale of a property, or some other revenue source. Additionally, traditional banks may not be comfortable with lending constraints as part of an NMTC structure, and finding a Lender can be difficult for many organizations. As such, NMTC and Source Loans have allowed us, at RDF, to further our mission of serving the poor in these underserved communities by providing this type of lending.
Highlighted below are a few NMTC projects that RDF has provided Source Loans in the last few years.
Merced County Rescue Mission – Merced, California
Since 1991, Merced County Rescue Mission (“Rescue Mission”) has provided shelter and improved the lives of those in Merced County who are homeless, have been incarcerated, or are imprisoned by their own addictions.
In January 2017, the Rescue Mission’s three-story building was deemed unsafe for residents and was subsequently closed. In 2018, the Rescue Mission purchased five-acres of land and embarked on a new campus. The new campus was referred to as the “Village of Hope.” This project was split into two different phases, as seen on the right. RDF, with the help of Central Valley NMTC, LLC (the NMTC Allocatee), Wells Fargo (the Investor), and Capital for Compassion, the consultant for the Rescue Mission on the project, the First Phase of the Project was closed in late 2020. The first phase of the Village of Hope Campus is expected to be completed by the end of 2021, with a hopeful opening in January of 2022. To learn more about the Rescue Mission and the Village of Hope Project, please visit their website: https://www.mercedcountyrescuemission.org/new-campus
RYSE Center – Richmond, California
In support of youth organizers, Kimberly Aceves (Co-Founder and Executive Director), along with co-founder Kanwarpal Dhaliwal and County Supervisor John Gioia (Current Capital Campaign Committee Chair), began to work to address the emotional, mental, and political health of local youth in Richmond, California. Their collective vision culminated in the RYSE Center opening in 2008. Since RYSE officially opened its doors, RYSE has served more than 3,700 youth in Richmond and West Contra Costa County.
RDF, with the help of Opportunity Fund (the NMTC Allocatee), Community Vision Capital and Consulting (Co-Participant Lender), and US Bank (the Investor), collectively were able to help close on the NMTC Project in June of 2019. The new RYSE Commons facilities will include the renovation of the existing facilities, 11,000-SF of new construction, with 24,000-SF of outdoor space including a basketball court, garden, and landscaped garden. RYSE was serving 3,700 members per month, and the expansion will allow for 3,000 additional members.
Please visit the RYSE website for more information: https://rysecenter.org/
Imperial Valley Food Bank – Imperial, California
Imperial Valley Food Bank (“IVFB”) was established in 1991 after a college professor, and his students identified the need for a food pantry in Imperial County. IVFB has flourished since its humble beginning. As of 2018, IVFB was consistently serving 20,000-individuals monthly.
In 2016, IVFB embarked on a fundraising capital campaign to open a new building in Imperial County that would help them keep in pace with the county’s growing food bank needs and new food safety regulations. IVFB operated from the same two 12,000-SF warehouses since 2000 with a staff of only 13 full-time employees and about 600 volunteers. In 2018, not only did RDF provide a source loan outside of the NMTC structure, but RDF also provided NMTC Allocation as well and acted as the CDE in the project. The NMTC Investor in the NMTC Project was Chase Bank.
As such, IVFB was able to construct a new 28,000-SF food bank and outreach facility that will ensure IVFB continues to serve a 100% low-income community and will allow the organization to expand its local outreach and education programs.
For more information, please visit their website: https://www.ivfoodbank.com/
What is the future of the NMTC Program?
The NMTC Program at this time is not a permanent program. However, the NMTC Program was recently extended for the next five years, with $5 billion in annual authority. The graph on the right provides a clearer picture of how much NMTC has been allocated since 2002.
This is only a brief introduction to New Market Tax Credits, Source Loans, and a select number of projects we have had the opportunity to work with. If you have any questions, please don’t hesitate to reach out to our Director in Specialty Finance at email@example.com.