[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
JOINT HEARING ON CERTAIN ASPECTS OF THE NEW MARKETS TAX CREDIT (NMTC)
PROGRAM
=======================================================================
HEARING
before the
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
JUNE 18, 2009
__________
Serial Nos. 111-25, 111-47
__________
Printed for the use of the Committee on Ways and Means
----------
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COMMITTEE ON WAYS AND MEANS
CHARLES B. RANGEL, New York, Chairman
FORTNEY PETE STARK, California DAVE CAMP, Michigan
SANDER M. LEVIN, Michigan WALLY HERGER, California
JIM MCDERMOTT, Washington SAM JOHNSON, Texas
JOHN LEWIS, Georgia KEVIN BRADY, Texas
RICHARD E. NEAL, Massachusetts PAUL RYAN, Wisconsin
JOHN S. TANNER, Tennessee ERIC CANTOR, Virginia
XAVIER BECERRA, California JOHN LINDER, Georgia
LLOYD DOGGETT, Texas DEVIN NUNES, California
EARL POMEROY, North Dakota PATRICK J. TIBERI, Ohio
MIKE THOMPSON, California GINNY BROWN-WAITE, Florida
JOHN B. LARSON, Connecticut GEOFF DAVIS, Kentucky
EARL BLUMENAUER, Oregon DAVID G. REICHERT, Washington
RON KIND, Wisconsin CHARLES W. BOUSTANY, JR.,
BILL PASCRELL, JR., New Jersey Louisiana
SHELLEY BERKLEY, Nevada DEAN HELLER, Nevada
JOSEPH CROWLEY, New York PETER J. ROSKAM, Illinois
CHRIS VAN HOLLEN, Maryland
KENDRICK B. MEEK, Florida
ALLYSON Y. SCHWARTZ, Pennsylvania
ARTUR DAVIS, Alabama
DANNY K. DAVIS, Illinois
BOB ETHERIDGE, North Carolina
LINDA T. SANCHEZ, California
BRIAN HIGGINS, New York
JOHN A. YARMUTH, Kentucky
Janice Mays, Chief Counsel and Staff Director
Jon Traub, Minority Staff Director
COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON SELECT REVENUE
RICHARD E. NEAL, Massachusetts, Chairman
MIKE THOMPSON, California PATRICK J. TIBERI, Ohio, Ranking
JOHN B. LARSON, Connecticut Member
ALLYSON Y. SCHWARTZ, Pennsylvania JOHN LINDER, Georgia
EARL BLUMENAUER, Oregon DEAN HELLER, Nevada
JOSEPH CROWLEY, New York PETER J. ROSKAM, Illinois
KENDRICK B. MEEK, Florida GEOFF DAVIS, Kentucky
BRIAN HIGGINS, New York
JOHN A. YARMUTH, Kentucky
COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina RON PAUL, Texas
GARY L. ACKERMAN, New York DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California WALTER B. JONES, JR., North
GREGORY W. MEEKS, New York Carolina
DENNIS MOORE, Kansas JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts GARY G. MILLER, California
RUBEN HINOJOSA, Texas SHELLEY MOORE CAPITO, West
WM. LACY CLAY, Missouri Virginia
CAROLYN McCARTHY, New York JEB HENSARLING, Texas
JOE BACA, California SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia RANDY NEUGEBAUER, Texas
AL GREEN, Texas TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois JOHN CAMPBELL, California
GWEN MOORE, Wisconsin ADAM PUTMAN, Florida
PAUL W. HODES, New Hampshire MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota KENNY MARCHANT, Texas
RON KLEIN, Florida THADDEUS G. McCOTTER, Michigan
CHARLES A. WILSON, Ohio KEVIN McCARTHY, California
ED PERLMUTTER, Colorado BILL POSEY, Florida
JOE DONNELLY, Indiana LYNN JENKINS, Kansas
BILL FOSTER, Illinois CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana ERIK PAULSEN, Minnesota
JACKIE SPEIER, California LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York
Jeanne M. Roslanowick, Chief Counsel and Staff Director
Larry Lavender, Minority Staff Director
COMMITTEE ON FINANCIAL SERVICES
SUBCOMMITTEE ON DOMESTIC MONETARY
POLICY AND TECHNOLOGY
MELVIN L. WATT, North Carolina, Chairman
CAROLYN B. MALONEY, New York RON PAUL, Texas, Ranking Member
GREGORY W. MEEKS, New York MICHAEL N. CASTLE, Delaware
WM. LACY CLAY, Missouri FRANK D. LUCAS, Oklahoma
BRAD SHERMAN, California JIM GERLACH, Pennsylvania
AL GREEN, Texas TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri BILL POSEY, Florida
KEITH ELLISON, Minnesota LEONARD LANCE, New Jersey
JOHN ADLER, New Jersey
SUZANNE KOSMAS, Florida
C O N T E N T S
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Page
Advisory of June 11, 2009 announcing the hearing................. 2
WITNESSES
Donna J. Gambrell, Director, Community Development Financial
Institutions Fund, United States Department of the Treasury.... 6
Michael Brostek Director, Tax Issues, Strategic Issues Team,
United States Government Accountability Office................. 15
______
Ron Phillips, President, Coastal Enterprises, Inc., President,
New Markets Tax Credits Coalition, Wiscasset, Maine............ 33
Blondel A. Pinnock, President, Carver Community Development
Corporation, Senior Vice President, Carver Federal Savings
Bank, New York, New York....................................... 45
Joseph Haskins, Jr., Chairman, President and Chief Executive
Office, Harbor Bank of Maryland, Baltimore, Maryland........... 50
William Michael Cunningham, Social Investing Advisor, Creative
Investment Research, Inc....................................... 57
James R. Klein, Chief Executive Officer, Ohio Community
Development Finance Fund, Columbus, Ohio....................... 72
JOINT HEARING ON CERTAIN ASPECTS OF
THE NEW MARKETS TAX CREDITS (NMTC) PROGRAM
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Thursday, June 18, 2009
U.S. House of Representatives,
Committee on Ways and Means,
Subcommittee On Select Revenue Measures,
Joint with the
Subcommittee On Domestic Monetary Policy And Technology,
Committee on Financial Services,
Washington, D.C.
The subcommittees met, pursuant to notice, at 10:00 a.m. in
Room 1100, Longworth House Office Building; Hon. Richard E.
Neal, [chairman of the subcommittee on Select Revenue Measures]
presiding.
[The Advisory of the hearing follows:]
HEARING ADVISORY
FROM THE
COMMITTEE
ON WAYS
AND
MEANS
Neal Announces Joint Hearing on the
New Markets Tax Credit Program
June 11, 2009
By (202) 225-5522
House Ways and Means Select Revenue Measures Subcommittee Chairman
Richard E. Neal (D-MA) announced today that the Subcommittee on Select
Revenue Measures will hold a joint hearing with the Subcommittee on
Domestic Monetary Policy and Technology of the Financial Services
Committee on issues involving the New Markets Tax Credit program. The
hearing will take place on Thursday, June 18, 2009, in the main
Committee hearing room, 1100 Longworth House Office Building, beginning
at 10:00 a.m.
Oral testimony at this hearing will be limited to invited
witnesses. However, any individual or organization not scheduled for an
oral appearance may submit a written statement for consideration by the
Committee and for inclusion in the printed record of the hearing.
FOCUS OF THE HEARING:
The hearing will focus on issues relating to the New Markets Tax
Credit (NMTC) program and a recent GAO report showing that minority-
owned or controlled entities are less successful than non-minority
owned or controlled entities in the NMTC application process.
BACKGROUND:
The NMTC program was enacted as part of the Community Renewal Tax
Relief Act of 2000 (Pub. L. 106-554) to encourage investment in low-
income communities that traditionally lacked access to capital. The
program awards tax credits to organizations, named Community
Development Entities (CDEs), that provide capital to low-income
communities, including loans and investments. Investors who make an
equity investment in a CDE may claim a tax credit equal to a percentage
of their investment. CDEs must invest substantially all of that equity
investment into qualifying low-income communities. Through 2009, the
program has awarded $21 billion of the $26 billion authorized in
credits.
The Community Development Financial Institutions (CDFI) Fund, which
administers the NMTC program within the Treasury Department, relies on
application scores to determine which CDEs should receive an award and
how much to award each allocatee. This application process focuses on
four major categories: business strategy, community impact, management
capacity, and capitalization strategy. The GAO found that multiple
factors, including the CDEs' asset size, can influence the success rate
for NMTC applicants. However, the GAO found that when controlling for
CDEs' asset size, minority status was still associated with a lower
probability of receiving an allocation.
In announcing the hearing, Chairman Neal stated, ``As we continue
to move this economy forward, the New Markets Tax Credit program is an
invaluable tool to help encourage investments in the communities that
need them most. Fairness in the application process is vital to its
success. I look forward to hearing the recommendations from the CDFI
Director and experienced applicants as to how we might implement any
changes to improve the process.''
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Please Note: Any person(s) and/or organization(s) wishing to submit
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Chairman NEAL. Let me call this hearing of the Select
Revenue Measures Committee to order, and I hope everybody will
quickly take their seats. I want to inform our witnesses as
well as the interested attendees today that it looks as though
we're going to be called to the floor in short order for what
will be a very long day, as currently suggested up to 26 votes.
So, if we can, with the cooperation of the witnesses and the
members that are here try within the confines of that statement
to move things along.
Let me welcome to the committee our colleagues who are
joining us for this joint hearing today between the Select
Revenue Measures Subcommittee and the Domestic Policy
Subcommittee of the Financial Services Committee, especially my
friends Mr. Watt and Mr. Paul. Our hearing today is an
examination of the New Markets Tax Credit program of which both
Mr. Tiberi and I are supporters. We have seen first-hand the
differences that this program can make in our districts and
home states; and, as we will hear today, 88 percent of the
investors in this program say they would not have invested in a
low income community without the credit.
The risk of investing in a distressed community is often
too high for many investors. As a former mayor I know how
difficult it can be to pull together financing from every
corner imaginable in order to get new investment in a
neighborhood that perhaps some had given up on. And sometimes
that new investment is simply to get a new grocery store, a
restaurant or a retailer to locate in the heart of a blighted
neighborhood. Pope John Paul said, ``The community needs a soul
if it is to become a true home for human beings.''
I have seen many of these neighborhoods missing their
souls. Investments in jobs, businesses and people can really
turn these communities around and I have witnessed that as
well. I believe the New Markets Tax Credit is an efficient way
to target investment into the neediest communities around the
country. Of course, we also need to ensure that community
organizations, many which are smaller or minority owned have a
fair shot at competing for these tax credits. And today we will
hear from a number of experts on the subject who will share
their experiences and recommendations for improvement.
Let me at this time recognize Mr. Tiberi for his opening
statement.
Mr. TIBERI. Mr. Chairman, I know we are under some severe
time shortages, so I would just ask that my opening statement
be submitted for the record. And, thank you for this hearing
and your leadership, and yield back.
[The information follows:]
Chairman NEAL. Thank you. I'd like to call on Mr. Watt for
an opening statement.
Mr. WATT. Thank you, Mr. Chairman, and I would be tempted
to do the same thing, but I am kind of the culprit here who
started this process. So I wanted to kind of frame what we're
here about. Let me first thank Chairman Neal and Chairman
Rangel and the Ranking Member, both Ranking Members, for being
a part of this hearing today.
The purpose of today's hearing is to examine a recent GAO
report entitled, ``New Markets Tax Credit: Minority Entities
Are Less Successful On Obtaining Awards Than Non-minority
Entities.'' The request for the GAO report originated,
actually, in a hearing in the Financial Services Oversight and
Investigation Subcommittee that I chaired in the last term of
Congress on preserving and expanding minority banks.
During that hearing we learned that minority-owned banks
were having difficulty obtaining New Markets Tax Credits and as
a result Chairman Rangel, Chairman Neal, Chairman Barney Frank
of the Financial Services Committee and I requested the GAO to
investigate which firms have been receiving New Markets Tax
Credits and whether any barriers exist to minority-owned firms
competing fairly to obtain such allocations.
What we suspected back in the last term of Congress has now
been confirmed by the GAO report. The title of the report says
it all: ``Minority Firms Are Less Successful In Obtaining
Awards Under the New Markets Tax Credit Program.'' This has
major significance, because the CDFI Fund award roughly $5
billion in New Markets Tax Credits annually, but only a handful
of minority owned firms have received allocations in the eight-
year history of the program. And so we're trying to get to an
assessment of why that is the case.
I am certainly not here as a critic of the New Markets Tax
Credit program. To the contrary I recognize the important
contributions these credits have had on fostering economic
develop in traditionally underserved areas throughout the
nation. There are several of them which I won't describe in my
own congressional district, in fact, so I know firsthand the
importance of them. But our theoretical assumption, I think,
when this program was undertaken was that minority banking
institutions being based in minority communities' underserved
communities would be the logical recipients of at least part of
these tax credits and the GAO has gone into describing some of
the reasons why problems are encountered.
I won't go into those either in the interest of time, but I
do want to emphasize the third finding that the GAO made and
that that was that even after controlling for the factors that
could be influencing this asset size, proposed project
characteristics, minority status was still associated with a
lower probability of receiving an allocation and is the only
factor that rated a ``significant negative,'' and this simply
shouldn't be the case.
So we are here today to try to get to the bottom of what's
happening with this and I appreciate again the Chairman
convening the hearing. And I hope we get a chance to pursue it
without 26 votes on the floor.
[The prepared statement of Mr. Watt follows:]
[The prepared statement not available]
Chairman NEAL. Thank you, Mr. Watt.
Mr. Paul?
Mr. PAUL. Thank you, Mr. Chairman.
I thank you for calling this hearing on the topic of the
New Markets Tax Credit program. I have been a consistent
proponent of tax credits in a wide variety of areas. Tax
credits have a successful track record as with the New Markets
Tax Credit, which helps to revitalize low income areas in both
rural and urban communities.
Allegations that minority entities are discriminated
against are disturbing, but the solution is not to establish
quotas that favor some community development entities over
others. Instead, given the popularity of this program, perhaps
the size and/or scope of the program should be expanded. For
me, there is no such thing as too many tax credits.
Thank you, Mr. Chairman.
Chairman NEAL. Thank you very much, Mr. Paul.
Let me now introduce our witnesses. First, I want to
welcome Donna Gambrell, the Director of the Community
Development Financial Institutions Fund, the agency that
operates the New Markets Tax Credit Program for the Treasury
Department. I also want to welcome back to the committee,
Michael Brostek, the director of tax issues on the strategic
issues team at GAO who was always here to offer constructive
comments as well. And, our second panel, we will hear from Ron
Phillips, the president of Coastal Enterprises from Wiscasset,
Maine.
Let me also welcome Blondel Pinnock, the President of
Carver Community Development, and the Senior Vice President of
Carver Federal Savings Bank in New York City. We also want to
welcome from Baltimore, Maryland, Mr. Joseph Haskins, who
serves as Chairman, President and CEO of Harbor Bank; and, we
welcome William Michael Cunningham, a social investing advisor
at Creative Investment Research here in Washington.
And, finally, we welcome before the committee today, James
Klein, the CEO of the Ohio Community Development Finance Fund
in Columbus Ohio. We are very fortunate to have a panel of
experts from around the country to share their experiences with
the New Markets program. We look forward to their testimony
today.
I want to thank you for participation. And, without
objection, any other members wishing to insert statements as
part of the record may do so. All written statements written by
the witnesses will be inserted into the record as well. Let me
recognize director Gambrell for her opening statement.
Chairman WATT. Mr. Chairman, before you do that could I
make what I hope will be a constructive suggestion that maybe
one possibility, since we did just get handed this notice that
we're going to have 26 recorded votes on the floor, that we
might just take all of the witnesses' testimony, try to get
those in, and then do the questioning all as one group as
opposed to, you know, at least we could try to get the
testimony in; and, if necessary, then may be we could submit
our questions to them in writing subsequent to the hearing.
Chairman NEAL. I think that's a very good idea. Are there
any objections?
[No response.]
Chairman NEAL. Hearing none, I think that we'll accept a
suggestion that's been offered by Mr. Watt.
STATEMENT OF DONNA J. GAMBRELL, DIRECTOR, COMMUNITY DEVELOPMENT
FINANCIAL INSTITUTIONS FUND, UNITED STATES DEPARTMENT OF THE
TREASURY
Ms. GAMBRELL. Thank you. Good morning Chairman Watt,
Chairman Neal, Ranking Member Paul and distinguished members of
the committee on Financial Services and the Committee on Ways
and Means.
I am delighted to be here today to testify at this hearing
on the U.S. Government Accountabilities Office's recent report
that addresses the success rates of minority entities in the
New Markets Tax Credit Program. As Director of the U.S.
Department of the Treasury's Community Development and
Financial Institutions Fund or CDFI Fund, I want to assure
Congress that since I became director almost two years ago, I
have been committed to expanding participation in all of our
programs.
First, I'd like to thank Chairman Neal and Ranking Member
Tiberi for recently introducing H.R. 2628, the New Markets Tax
Credit Extension Act of 2009 that would extend the New Markets
Tax Credit Program through 2003 and allow New Markets Tax
Credit Investments to be used as an offset against alternative
minimum tax liabilities for awards made in 2009.
Last month, and just 100 days after the President signed
into law the recovery act I had the privilege of joining
Treasury Secretary Tim Geithner, Chairman Frank, Congressman
Capuano and Governor Deval Patrick in Roxbury, Massachusetts,
to announce that 32 organizations had been selected to receive
$1.5 billion in New Markets Tax Credit Allocation Authority
that was made available under the Recovery Act.
The event was held at the new headquarters of Project Hope,
a multi-service agency that provides low-income women with
children, access to education, jobs, housing and emergency
services. The building is located in a predominantly African-
American community and was financed with a $4.8 million
investment made possible through the New Markets Tax Credit
program. The new community center will significantly increase
the number of local residents that Project Hope can serve. This
is a great example of the type of story and community impact
that is often undetected among the statistics and data program
evaluations, but are the most important aspect of what we are
trying to accomplish with programs like the New Markets Tax
Credit Program.
Since 2002, the year of our first New Markets Tax Credit
Program round, the CDFI Fund has allocated $21 billion in tax
credit authority to community development entities or CDEs.
Since September of 2008, investors have invested close to $2
billion into CDEs, demonstrating the resiliency of the program
and even the most difficult of economic times. These
investments have financed a variety of products including
charter schools, healthcare facilities, performing arts
centers, manufacturing companies, alternative energy companies,
business incubators, grocery anchored shopping centers,
substance abuse treatment facilities and facilities for the
homeless.
The New Markets Tax Credit Program is highly competitive,
and any given application ran, only about one in four
applicants is selected to receive an award; and requests for
tax credit authority have been between six and nine times
greater than what's available to award. The CDFI Fund agrees
with the GAO's conclusion that within this highly competitive
application environment organizations that have identified
themselves as minority-owned CDEs have not received allocation
awards in proportion to their representation in the application
pool.
The CDFI Fund does not believe that this lower rate of
success for minority CDEs, or for that matter, the success rate
of any category of CDE is attributable to biases in the
application review or selection process. Despite the challenges
that are faced by minority CDEs in the application process, the
CDFI Fund believes that the New Markets Tax Credit Program has
been extremely successful at bringing benefits to communities
with large minority populations. Since the tracks for New
Markets Tax Credit Investments have been made minority
populations totaling 47 percent almost doubled the overall
national average of 26 percent.
Furthermore, over 45 percent of the dollars invested under
the New Markets Tax Credit Program have been invested in
communities where the majority of the population is comprised
of minorities. New Markets Tax Credit Projects are benefiting
minority communities all over the country, even in our own back
yard. Here in Washington, D.C., New Markets Tax Credit
Investments have been used to finance charter schools with
populations that are 100 percent minority. Minority-owned
businesses, a community and cultural center in a neighborhood
where 93 percent of the residents are African-American; and, in
that same neighborhood, a shopping center anchored by a Giant
Super Markets, the first grocery store located in that
community in over a decade.
Notwithstanding the great successes we've seen benefiting
minority communities, we do need to work together to increase
participation by minority-owned CDEs in the New Markets Tax
Credit Program. To this end the CDFI fund will focus on the
following initiatives: one, continued outreach to minority-
owned CDEs. The CDFI Fund will continue to vigorously pursue
outreach and training opportunities that will ensure minority-
owned institutions are aware of the benefits of the New Markets
Tax Credit Program; and, are given every opportunity to apply
for allocation rounds.
Two, solicitation of public comments: next month the CDFI
Fund will be soliciting comments pertaining to the New Markets
Tax Credit Application Procedures and will request comments on
how it can expand the participation of minority-owned and
controlled CDEs. And, three, continued dialogue with Congress:
the CDFI Fund has always been responsive to instructions from
Congress regarding the New Markets Tax Credit Program
priorities. The CDFI Fund very much looks forward to a
continued dialogue with Congress on these matters.
In closing, I hope that through these initiatives,
specifically, the new outreach efforts, the CDFI Fund will be
better able to reach a greater audience of potential awardees
and also encourage greater collaboration with organizations and
federal agencies that serve minority populations, the New
Markets Tax Credit Program has been a tremendous success and
low income and minority communities throughout the country. And
I am confident that it will continue to be so in the future.
Thank you for inviting me here today and I look forward to
answering your questions.
[The prepared statement of Ms. Gambrell follows:]
Chairman NEAL. Thank you.
Testimony By Donna J. Gambrell Director, Community Development
Financial Institutions Fund, United States Department of the Treasury
Good morning, Chairman Watt, Chairman Neal, and distinguished
Members of the Committee on Financial Services, and the Committee on
Ways and Means. I am delighted to be here today to testify at this
hearing on the U.S. Government Accountability Office's (GAO) recent
report that addresses the success rates of minority entities in the New
Markets Tax Credit (NMTC) Program.
My name is Donna J. Gambrell and I am the Director of the U.S.
Department of the Treasury's Community Development Financial
Institutions (CDFI) Fund. I want to assure Congress that since I became
Director of the CDFI Fund almost two years ago, I have been committed
to expanding participation in all of our programs.
First, I would like to thank Chairman Neal and Ranking Member
Tiberi for recently introducing H.R. 2628, ``The New Markets Tax Credit
Extension Act of 2009'' that would extend the NMTC Program through
2013, and allow NMTC investments to be used as an offset against
Alternative Minimum Tax liabilities for awards made in 2009.
Last month, and just 100 days after the President signed into law
the American Recovery and Reinvestment Act (Recovery Act), I had the
privilege of joining Treasury Secretary Tim Geithner, Chairman Frank,
Congressman Capuano, and Governor Deval Patrick in Roxbury,
Massachusetts to announce that 32 organizations had been selected to
receive $1.5 billion in NMTC allocation authority that was made
available under the Recovery Act. Three of these 32 awardees are
minority-owned or controlled entities, bringing to seven the total
number of minority-owned or controlled entities that received awards
under the 2008 allocation round. These seven awardees received NMTC
awards totaling $489 million.
The event was held at the headquarters of Project Hope, a multi-
service agency that provides low-income women with children access to
education, jobs, housing, and emergency services. This new building was
financed with a $4.8 million investment made possible through the NMTC
Program.
Joining the Secretary for this announcement event allowed me to
witness firsthand how the NMTC Program has enabled Project Hope to
enrich its community and improve the lives of the local residents.
Their new Community Building is a ``green'' building, the first one in
Roxbury, and will enable Project Hope to provide services to a number
of additional women and families.
At the announcement event, I also had the opportunity to visit with
Shaniqua Choice, a young woman who will soon graduate from the Match
School, a public charter school that prepares inner-city Boston
students for higher education, including many who have no family
history of college attendance. Ninety-six percent of the students at
the Match Charter School are minorities. The Match School received a
NMTC investment which it used, in part, to set up a tutoring program
with 45 recent college graduates who were hired to live in dormitories
at the high school and tutor the students.
Shaniqua lives in Dorchester in a single-parent home with a mother
who, while she was growing up, only had a GED. She would get up at 4:30
am every day, traveling an hour and half on the train to make it to
school on time. She entered Match High School as a freshman in
September 2005 performing at a 5th grade math level. Now, four years
later, she will soon become the first in her family to go to college,
attending Massachusetts College of Liberal Arts in North Adams in the
fall. Shaniqua says the tutoring program is essential to the Match
School's success and to her success.
These are the stories and community impacts that are often
undetected among the statistics and data of program evaluations but are
the most important aspect of what we are trying to accomplish with
programs like the New Markets Tax Credit Program.
The CDFI Fund
In 1994, Congress enacted the Riegle Community Development and
Regulatory Improvement Act (P.L. 103-325) to create the CDFI Fund.
Congress found that many of the Nation's distressed urban, rural, and
Native American communities faced critical social and economic problems
arising in part from the lack of economic growth, people living in
poverty, and the lack of employment and other opportunities. The CDFI
Fund's mission is to expand the capacity of financial institutions to
provide credit, capital, and financial services to underserved
populations and economically distressed communities across the United
States.
The CDFI Fund achieves its mission through five distinct
competitive programs:
CDFI Program: Provides Financial Assistance awards to
institutions that are certified as CDFIs, which in turn provide loans,
investments, financial services (including financial education) and
technical assistance to underserved populations and low-income
communities; the CDFI Fund also provides Technical Assistance grants to
certified CDFIs and entities that will become certified as CDFIs within
three years.
Native Initiatives: Provides Financial Assistance
awards, Technical Assistance grants, and training to Native CDFIs and
other Native entities proposing to become or create Native CDFIs.
Bank Enterprise Award Program: Provides monetary awards
to FDIC-insured banks to increase their investment in low-income
communities and/or in CDFIs.
New Markets Tax Credit Program: Provides tax allocation
authority to certified CDEs, enabling investors to claim tax credits
against their Federal income taxes; the CDEs, in turn, use the capital
raised to make investments in low-income communities.
Capital Magnet Fund: Authorized under the Housing and
Economic Recovery Act of 2008 but not yet funded, the Capital Magnet
Fund will provide a source of funding for CDFIs and other non-profits
to finance the development, rehabilitation and purchase of affordable
housing for low-income persons. The Administration has requested $80
million for this new initiative in FY 2010.
Among the beneficiaries of the CDFI Fund's programs are low-income
people and/or economically distressed communities, which include, among
others, populations that otherwise lack adequate access to capital and
financial services. Since its creation in 1994, the CDFI Fund has made
more than $949.3 million in awards to CDFIs, community development
organizations and financial institutions through the CDFI Program, the
Bank Enterprise Award Program, and the Native American Initiatives CDFI
Assistance Program. Since 2002, the year of our first New Markets Tax
Credit Program round, the CDFI Fund has allocated $21 billion in tax
credit authority to CDEs, including the $1.5 billion that was awarded
in May of 2009 under the Recovery Act authority.
New Markets Tax Credit Program Overview
The NMTC Program was initially authorized through the Community
Renewal Tax Relief Act of 2000.\1\ This unique tax credit program
facilitates investment in low-income communities by permitting
taxpayers to receive a credit against Federal income taxes for making
Qualified Equity Investments (QEIs) in designated Community Development
Entities (CDEs). Substantially all of these QEI dollars must in turn be
used by the CDE to provide investments in businesses and real estate
developments in low-income communities.
---------------------------------------------------------------------------
\1\ The original legislation that authorized the program allowed
for $15 billion in tax credit authority for the NMTC program through
2007. Pub. L. No. 106-554, App. G, Sec. 121, 114 Stat. 2763A-587, 608
(``There is a new markets tax credit limitation for each calendar year.
Such limitation is--(A) $1,000,000,000 for 2001, (B) $1,500,000,000 for
2002 and 2003, (C) $2,000,000,000 for 2004 and 2005, and (D)
$3,500,000,000 for 2006 and 2007.''). However, the Gulf Opportunity
Zone Act of 2005 authorized an additional $1 billion of NMTC equity for
qualified areas affected by Hurricane Katrina over a period of 3 years:
$300 million in 2005, $300 million in 2006, and $400 million in 2007.
Pub. L. No. 109-135, Sec. 101, 119 Stat. 2577, 2592. The Tax Relief and
Health Care Act of 2006 and the Emergency Economic Stabilization Act of
2008 extended the amount of NMTC authority available by $3.5 billion
for 2008 and 2009, respectively. Pub. L. No. 109-432, Sec. 102, 120
Stat. 2922, 2934 (2006); Pub. L. No. 110-343, div. A, Sec. 302, 122
Stat. 3765, 3866 (2008). The American Recovery and Reinvestment Act of
2009 provided an additional $3 billion of NMTC allocation authority to
be split equally between the 2008 (retroactively) and 2009 allocation
rounds. Pub. L. No. 111-5, div. A, Sec. 1403(a).
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The credit provided to the investor totals 39 percent of the amount
of the investment and is claimed over a seven-year credit allowance
period. In each of the first three years, the investor receives a
credit equal to five percent of the total amount paid for the stock or
capital interest at the time of purchase. For the final four years, the
value of the credit is six percent annually. Investors may not redeem
their investments in CDEs prior to the conclusion of the seven-year
period.
A CDE is a domestic corporation or partnership that serves as an
intermediary vehicle for the provision of loans, investments, or
financial counseling to low-income communities. To qualify as a CDE, an
entity must: 1) have a mission of serving, or providing investment
capital for, low-income communities or low-income persons; 2) maintain
accountability to residents of low-income communities through their
representation on a governing board of or an advisory board to the
entity; and 3) be certified by the CDFI Fund as a CDE. Applicants may
submit CDE certification applications throughout the year and are
approved by the CDFI Fund on a rolling basis.
The CDFI Fund is responsible for administering the competitive
allocation of tax credit authority to CDEs, which it does through
annual allocation rounds. To date, the CDFI Fund has made 386 NMTC
allocation awards totaling $21 billion, through six different
allocation rounds. The CDFI Fund will award an additional $5 billion of
allocation authority, including $1.5 billion of allocation authority
that was made available under the Recovery Act, under the 2009
allocation round. The CDFI Fund anticipates making these award
announcements in October of 2009.
To date, investors have invested $13.7 billion into CDEs, or over
70 percent of the NMTC allocation authority that was awarded to CDEs
through 2008. In fact, since September of 2008, investors have invested
close to $2 billion into CDEs, demonstrating the resiliency of this
program in even the most difficult of economic times.
Through FY 2007, the most recent year for which the CDFI Fund has
complete data, CDEs invested $8.96 billion of NMTC proceeds into 1,981
businesses and real estate projects in low-income communities,
supporting over $30 billion in total project costs. These investments
have financed a wide variety of projects, including charter schools,
health care facilities, performing arts centers, manufacturing
companies, alternative energy companies, business incubators, grocery-
anchored shopping centers, substance abuse treatment facilities, and
facilities for the homeless. NMTC awardees reported that, through 2007,
their investments have helped to develop or rehabilitate 63 million
square feet of real estate, create 240,000 temporary construction jobs,
and create or maintain 45,000 jobs at businesses in low-income
communities.
Success of the New Markets Tax Credit Program
One of the greatest innovations of the NMTC Program is that it
combines the features of a competitive grant program with the
advantages of private sector investment and decision-making. Most
Federal tax credits are simply claimed by taxpayers rather than
competitively allocated, and most community development programs of
comparable size to the NMTC Program are administered through formula-
funding mechanisms. Through competition under the NMTC Program, the
CDFI Fund selects only the most qualified CDEs, and requires them to
meet higher standards and achieve greater results than would otherwise
be minimally required under Internal Revenue Service program rules.
For example, while all awardees are required to invest
substantially all (generally 85 percent) of the qualified equity
investments they receive in low-income communities, most applicants
commit to making investments in areas characterized by ``severe''
economic distress--and are held to these commitments as part of their
award agreements with the CDFI Fund. As a result, over 75 percent of
NMTC transactions financed through 2007 were located in census tracts
with a poverty rate of at least 30 percent, a median family income at
or below 60 percent of the applicable area median family income, and/or
an unemployment rate at least 1.5 times the national average.
Similarly, IRS regulations do not specify that CDEs must offer
beneficial rates and terms to the borrowers and investees in low-income
communities. However, as part of the application materials, CDEs
generally commit to providing flexible and non-traditional product
offerings, and are held to these commitments as part of their award
agreements with the CDFI Fund. Through 2007, over 98 percent of the
transactions offered preferential rates and terms to the borrowers. The
most common features are below market interest rates (83 percent of
transactions), lower origination fees (59 percent of transactions), and
longer than standard periods of interest-only payments (54 percent of
transactions).
CDEs are also committing to increasing their investments in low-
income communities. NMTC Program regulations generally require that at
least 85 percent of QEI proceeds be invested in qualified, low-income
community investments. However, as part of the application materials,
CDEs generally commit to investing significantly more of these funds
into low-income communities. In fact, all 32 awardees recently selected
to receive $1.5 billion in Recovery Act awards indicated that they
would invest at least 94 percent of their NMTC proceeds into low-income
communities, and 24 of the 32 awardees indicated that at least 97
percent of their QEI dollars would be invested into low-income
communities.
These and other program successes were highlighted in a 2007
evaluation of the NMTC Program conducted by the GAO. As part of this
evaluation, officials from the GAO met several times with officials
from the IRS and the CDFI Fund. GAO officials collected documents on
program status and efforts to monitor NMTC compliance; analyzed
transactional data reported by CDEs to the CDFI Fund; analyzed tax
return data reported by NMTC investors to the IRS; surveyed investors
in the NTMC program; and compared NMTC investors with a stratified
random sample of investors that did not make NMTC investments. This
extensive research led to several findings pointing to the
effectiveness of the NTMC Program, including:
An estimated 88 percent of investors said that they
would not have made the same investment without the NMTC.
Of these investors who would not have made the same
investment without the NMTC, 75 percent of investors also indicated
that in the absence of the NMTC, they would not have made a similar
investment in the same community.
Sixty-nine percent (69 percent) of the investors making
investments in CDEs in 2006 had not previously made investments in
those entities.
An estimated 64 percent of NMTC investors reported that
they increased the share of their investment budget for low-income
communities because of the credit.
Communities receiving NMTC investments tend to be more
highly distressed than minimally required under program rules.
These findings, among others, led the GAO to ultimately conclude
that ``the results of our survey and statistical analysis are
consistent with the NMTC program increasing investment in eligible low-
income communities by the investors who participate in the program and
with investment coming primarily from funds shifted from other uses.''
NMTC Application Review Process
The successes that we've seen to date under the NMTC Program are a
result of the high demand for credits, coupled with a rigorous
application process. In any given application round, only about one in
four applicants is selected to receive an award, and requests for tax
credit authority have been between six and nine times greater than what
is available to award.
Table 1
Allocation History since Program Inception (Dollars in Billions)
----------------------------------------------------------------------------------------------------------------
Applications Awards
----------------------------------------------------------------------------------------------------------------
Round Number Amount Requested Number Amount
----------------------------------------------------------------------------------------------------------------
1 (2001/2) 345 $25.8 66 $2.5
----------------------------------------------------------------------------------------------------------------
2 (2003/4) 265 $29.6 63 $3.5
----------------------------------------------------------------------------------------------------------------
3 (2005) 203 $22.5 41 $2.0
----------------------------------------------------------------------------------------------------------------
4 (2006) 239 $27.2 63 $4.1
----------------------------------------------------------------------------------------------------------------
5 (2007) 252 $27.4 61 $3.9
----------------------------------------------------------------------------------------------------------------
6 (2008) 239 $21.3 102 $5.0
----------------------------------------------------------------------------------------------------------------
All Rounds............ 1,543 $153.8 396 $21.0
----------------------------------------------------------------------------------------------------------------
As part of the selection process, all CDEs are required to prepare
and submit a uniform application form, which includes four key sections
(Business Strategy; Community Impact; Management Capacity;
Capitalization Strategy). During the first phase of the review process,
each application is rated and scored independently by three different
Readers, who are typically external to the CDFI Fund. Readers are
selected on the basis of their knowledge of community and economic
development finance and experience in business or real estate finance,
business counseling, secondary market transactions, or financing of
community-based organizations.
In order to maintain the integrity of the review process, all
potential readers are screened for any potential or real conflicts of
interest. They are brought to Washington, DC for a two-day orientation
and training session. The Readers then work remotely, submitting on-
line review forms, which include detailed notes and instructions
pertaining to how the application must be scored. Each application
write-up is reviewed by a CDFI Fund staff person to ensure that the
reviewer has: (1) provided clear and substantive comments; (2) adhered
to the scoring guidelines; and (3) provided scores that are consistent
with their ratings.
In scoring each application, reviewers rate each of the four
evaluation sections as follows: Weak (0-5 points); Limited (6-10
points); Average (11-15 points); Good (16-20 points); and Excellent
(21-25 points). Applications can be awarded up to ten additional
``priority'' points for demonstrating a track record of serving
disadvantaged businesses and communities and/or for committing to make
investments in projects owned by unrelated parties. Readers are not
permitted to discuss their application ratings or scores with one
another. If one or more of the three Readers provides an anomalous
score, and it is determined that such an anomaly would affect the
outcome of the final awardee pool, then a fourth reviewer will score
the application, and the anomalous score would likely be dropped.
Once all of the scores have been finalized, including anomaly score
adjustments, those applications that meet minimum aggregate scoring
thresholds in each of the four major review sections (as well as a
minimum overall scoring threshold) are eligible to be considered for an
allocation. They are reviewed by an internal CDFI Fund panel, with the
Panel Manager making an award recommendation to the Selecting Official
(generally the NMTC Program Manager). If the Selecting Official's award
recommendation amount varies significantly from the recommendation of
the Panel Manager, then the Reviewing Official (generally the Deputy
Director for Policies and Programs) makes the final award
determination. Awards are made, in descending order of the final rank
score, until the available allocation authority for a given round is
fully expended.
In any given allocation round, there are many CDEs that meet the
minimum requisite scoring thresholds, but which do not receive an award
because the CDFI Fund runs out of allocation authority. Each applicant
that is not selected to receive an NMTC allocation award is provided
with a written debriefing document. This document provides to the
applicant the strengths and weaknesses that were identified by the
application reviewers. The debriefing documents are very useful tools
for applicants wishing to reapply in future rounds.
Application Success Rates of Minority-Owned CDEs
The CDFI Fund agrees with the GAO's conclusions that, within this
highly competitive application environment, organizations that have
identified themselves as minority-owned CDEs have not received
allocation awards in proportion to their representation in the
application pool. The CDFI Fund does not believe that this lower rate
of success for minority CDEs, or for that matter the success rate of
any other category of CDE, is attributable to biases in the application
review or selection process. Rather, the CDFI Fund believes that it is
the relative capacity of each applicant, reviewed under its own merits
without regard to its ownership structure, which determines the award
outcomes. As the GAO noted in its evaluation:
``The analysis does not exclude the possibility the minority status
is associated with other characteristics of the CDE, such as management
capacity for which we do not have independent data, which account for
the lower probability. In that case, it would not be minority status
per se that lowers the probability of success but its association with
other factors not included in the analysis.'' (page 38).
Without discounting the importance of GAO's findings, it is also
worth noting that the GAO relied on information self-reported by the
applicants at the time of application submission, which may have
resulted in an undercounting of awardees that are minority-owned CDEs.
Each applicant CDE is required to ``check a box'' indicating
whether it, or its parent company, is minority-owned or controlled.
This check-box appears alongside several other check-boxes that address
the ownership structure/purpose of the CDE. It is quite likely that, in
any given application round, a number of organizations that would
otherwise qualify as minority-owned CDEs fail to check the box. This
failure may result from simply overlooking the check-box, or it may
occur because an organization did not thoroughly review the definition
of a minority-owned entity that is provided in the glossary that
accompanies the application.
It could be the case that many non-profit organizations which have
significant minority executive control fall within the CDFI Fund's
definition of a minority-owned entity, but perhaps have not been
checking the box. It does not appear as though the GAO attempted to
adjust for this potential under-reporting by reaching out to a sample
of non-minority CDEs to determine whether they may have failed to
identify themselves as minority CDEs. This type of analysis would have
probably had an impact on their findings, and perhaps led them to
determine that a larger number of minority-owned or controlled CDEs
have received allocation awards than were initially self-identified.
Again, this observation is being raised simply to add a little more
context to the GAO's findings. It should not be construed in any way as
a criticism of GAO's analysis, which we believe was thorough and
accurate with respect to information that was self-reported by the
CDEs.
Investments in Minority Communities
Despite the application challenges that are faced by minority-owned
CDEs, the CDFI Fund believes that the NMTC Program has been extremely
successful at bringing benefits to communities with large minority
populations. As noted in the GAO report, a 2008 study that was jointly
sponsored by the CDFI Fund and the Federal Reserve Board of San
Francisco found that census tracts that receive NMTC investments have,
on average, non-white populations totaling 47 percent--compared with an
average of 26 percent for all census tracts nationwide. Further
analysis by the CDFI Fund has revealed that, through 2007, over $4.1
billion (or over 45 percent of the $8.96 billion invested by CDEs
through 2007) was invested in census tracts where non-white populations
exceeded 50 percent of the total population. In 2007, the most recent
year for which the CDFI Fund has transaction-level data, over 51
percent of the dollars invested by CDEs were invested in census tracts
with majority non-white populations.
My point here is that many non-minority CDEs are extremely
successful at working with minority communities. One such example is
Stonehenge Community Development LLC, which has received three NMTC
awards totaling $287.5 million. Stonehenge has formed strategic
alliances with groups such as the National Urban League, the National
Association of Black Hotel Owners, and the National Minority
Development Council to target minority-owned businesses and other high-
impact projects in minority communities. Stonehenge has used its NMTC
allocation to finance an African-American owned car dealership in Lake
Charles, Louisiana that suffered severe damage in the wake of Hurricane
Rita; a social service center in San Antonio Texas; a health center in
Kansas City Missouri; and an African-American led social service agency
in New Jersey. All of these projects serve severely distressed
communities with majority minority populations.
One project that really interested me, due to its historical
significance, is the International Civil Rights Center and Museum in
downtown Greensboro, North Carolina, which is in Congressman Watt's
district. Stonehenge helped finance this $23 million dollar project,
which included the conversion of the 1929 Woolworth store that was the
site of the historic 1960 sit-in that helped launch the national civil
rights movement. Stonehenge's role in the construction of this museum
is significant, as there was a shortfall between what was raised
through fundraising and the actual cost of the project. NMTCs were
identified as the only source of funding that could keep the project on
schedule while retaining the confidence of the investors and other
supporters.
Stonehenge is of course just one of many CDEs that have
significantly contributed to the economic wellbeing of distressed
minority communities. The Massachusetts Housing Investment Corporation,
a certified CDFI that has received four awards totaling $435 million,
made a NMTC investment in the Holyoke Health Center in Chicopee,
Massachusetts, in Congressman Neal's district. Holyoke Health Center
serves over 16,000 patients annually, the majority of whom are
Hispanic. More than 80 percent of the health center's patients live at
or below the Federal Poverty Level and all of the health center's
patients live below 200 percent of the Federal Poverty Level. The NMTC
financing helped the lender to finance the health center at below
market rates, saving the borrower $88,000 in interest expense annually.
This savings allows the health center to devote more of its cash flow
to direct care of its patients.
Rockland Trust CDE, a community bank headquartered in Rockland,
Massachusetts, has received two NMTC awards totaling $75 million, and
has made several investments benefiting minority populations in
Congressman Frank's district. Most notable amongst these were a loan to
support a minority-owned beauty supply business headquartered in
Brockton, Massachusetts; a loan to support a minority-owned medical
practice in Taunton, Massachusetts; and a real estate loan that
supports a Latino health clinic in Brockton, Massachusetts.
In Columbus, Ohio, ESIC New Markets Partners, partnered with the
Columbus Housing Partnership to construct and rehabilitate up to 700
affordable housing units. The entire project used $9.5 million in NMTCs
and has leveraged $19 million in project related costs. The homes are
targeted for households earning less than 80 percent of the area median
income and are located in communities throughout Columbus.
I point out these specific projects not only for the Members of
this Committee, but to demonstrate that NMTC projects and high-impact
community benefits are occurring all over the country, even in our own
backyards. For example, here in Washington, DC, NMTC investments have
been used to finance charter schools with populations that are 100
percent minority; minority-owned businesses; a community and cultural
center in a neighborhood where 93 percent of the residents are African-
American; and, in that same neighborhood, a shopping center anchored by
a Giant supermarket.
The construction of this grocery store is notable because for
almost ten years, residents of this neighborhood had been without a
supermarket. Those who did not have cars would either have to carpool
to the closest supermarket with friends, find a bus, or rely on the
neighborhood convenience stores for food. This project has had several
positive community impacts, including the addition of 375 construction
and 175 permanent jobs. Finally, the new supermarket is one of
Washington, DC's largest Giants, providing residents with ready access
to affordable fresh food.
Next Steps
I would now like to turn to the ways we can work together to
increase participation by minority-owned CDEs in the NMTC Program. The
CDFI Fund is committed to ensuring that the pool of CDE awardees
represents a diversity of institutional types, and that minority CDEs
are assured fair access to these scarce resources. To this end, the
CDFI Fund will focus on the following initiatives:
1. Continued outreach to minority-owned CDEs. The CDFI Fund has
been actively seeking to promote participation by minority-owned CDEs
since the program's inception. Most notably, we have conducted multiple
outreach sessions with the National Banker's Association (NBA), a trade
association of minority-owned financial institutions, and with the
Federal Deposit Insurance Corporation's Minority Depository Institution
Program, and participated at the Native American Finance Officers
Association conference.
Upon release of the 2009 NMTC application materials, we reached out
to the NBA, the Minority Business Roundtable, and the National Black
Chamber of Commerce and offered to set up conference calls with their
members. Just last month, the CDFI Fund presented information about the
NMTC Program at a national conference sponsored by the Department of
Commerce's Minority Business Development Agency. The CDFI Fund intends
to continue to vigorously pursue these outreach and training
opportunities, to ensure that minority institutions are aware of the
benefits of the NMTC Program, and are given every opportunity to apply
for allocation awards.
2. Solicitation of public comments. Another component that is
connected to our outreach efforts is incorporating public feedback into
our work. Later this summer, the CDFI Fund will be soliciting comments
pertaining to the NMTC allocation application and related
implementation matters. As part of this solicitation of public
comments, the CDFI Fund will ask for comments specifically pertaining
to how it can expand the participation of minority-owned and controlled
CDEs in the NMTC allocation process.
3. Continued dialogue with Congress. The CDFI Fund has always been
responsive to instructions from Congress regarding the NMTC program
priorities. The authorizing statute indicated that a preference was to
be given to organizations with a track record of working in
disadvantaged communities, and a preference as well to organizations
that would invest in ``unrelated entities''--entities that they would
not control through ownership. Congress later instructed the CDFI Fund
to ensure that a proportionate amount of investments are made in rural
communities. In response to direction from Congress on these three
issues, the CDFI Fund included specific protocols within its
application process to ensure that Congressional intent was being
satisfied. The CDFI Fund very much looks forward to continued dialogue
with Congress to improve the effectiveness of the NMTC Program.
Conclusion
The CDFI Fund is committed to giving support to communities and
financial institutions. We have a wide variety of programs that reach
America's most underserved and underinvested communities. Our mission
is not only to ensure that we serve these communities, but that we also
maintain the integrity and competitiveness of these programs. I hope
that through our current and new outreach efforts we will be better
able to reach a greater audience of potential awardees and also
encourage greater collaboration with organizations and federal agencies
that serve minority populations. The NMTC Program has been a tremendous
success in low-income and minority communities throughout the country,
and I am confident that it will continue to be so in the future.
Never before in the history of the CDFI Fund have we been in such a
strong position to be able to support and serve minority communities.
Thank you for inviting me here today.
Mr. BROSTEK, will you proceed?
STATEMENT OF MICHAEL BROSTEK, DIRECTOR, TAX ISSUES, STRATEGIC
ISSUES TEAM, UNITED STATES GOVERNMENT ACCOUNTABILITY OFFICE
Mr. BROSTEK. Mr. Chairman, Ranking Members and other
Subcommittee Members. Thank you for inviting me today to
discuss our work done at your request on minority community
development entities' participation in the New Markets Tax
Credit.
During the period we reviewed, allocation rounds from 2005
to 2008, Minority CDEs were successful with about nine percent
of their applications and received about four percent of the
allocation dollars they applied for. Non-minority CDEs were at
least three times as successful with their applications and in
obtaining allocation dollars.
Each New Markets Tax Credit application is scored by three
external reviewers based on business strategy, community
impact, management capacity and capitalization strategy. Each
of these sections includes several subcategories. Minority CDEs
generally receive lower application scores overall and in each
of the four application sections. Overall, minority CDEs scored
about 11 points lower than non-minority CDEs on applications.
On average from 2005 to 2008, minority CDE application
scores did not meet the minimum threshold for advancing past
the application round in order to be eligible for allocations.
After applications are scored those that meet the threshold
pass on to be considered by CDFI Fund staff for award of credit
allocations. CDFI's staff generally award allocation amounts in
the order of CDEs' final ranking scores. When recommending
allocation amounts, staff are to consider the amount of equity
investment the CDE can expect to raise within two years, the
amount of investment in low income communities that can be
deployed within three years, the quality of the financial
products being offered and the projected impact on low income
communities or low income persons.
Some CDEs that exceed the allocation threshold do not
receive allocations because the amount of allocation authority
is insufficient to fund everyone. Minority CDEs' receipt of
only four percent of the allocation dollars they applied for is
a function both of the number of minority CDEs that failed to
make the application threshold and that those exceeding the
threshold tended to have lower scores than other applicants and
thus tended not to be funded.
Based on interviews we had with minority and non-minority
CDE representatives, we identified characteristics like CDE
size that are likely to affect applicant's success. To test
whether minority CDEs' relative lack of success in applying for
and receiving credit applications was due to their minority
status or these other characteristics, we performed statistical
analysis to control for those characteristics other than
minority status that might be affecting outcomes.
We found that when controlling characteristics like asset
size, proposed project characteristics and CDE type, minority
status still was associated with a lower probability of
success. Our analysis does not show why minority CDE status is
associated with lower probability of receiving allocations or
whether any actions taken or not taken by Treasury or the CDFI
Fund contributed to this statistical relationship.
Factors we could not control for or measure, such as
applicant's loan loss reserves and operating costs, may affect
CDEs' success. We previously had found minority owned banks,
many of which are minority CDEs, have higher loan loss reserves
and operating costs than non-minority-owned banks, and this
might contribute to their lack of success. Some believe that
minority CDEs are better positioned to serve the communities in
which they are located than other CDEs would be. If so,
minority CDEs may have advantages that are not being fully
utilized in the New Markets Program.
The legislative history of the credit does not indicate
whether Congress intended for minority CDEs to participate at
any particular level in the program. GAO is not making any
recommendations for action. However, if Congress intends for
minority CDE applicants to succeed at a greater rate than what
we have found, it may want to consider legislative changes if
the program is extended for future years. Such changes could
include requiring that a certain portion of the overall amount
of allocation authority be designated for minority CDEs,
exploring the potential for creating a pool of New Markets Tax
Credit allocation authority to be dedicated specifically for
community banks to compete for it, offering priority points to
minority CDEs in the application process and requiring Treasury
and the CDFI Fund to explore options to provide technical
assistance and training to minority CDE applicants. This
concludes my statement.
I'd be happy to answer questions.
[The prepared statement of Mr. Brostek follows:]
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Chairman NEAL. Thank you very much, Mr. Brostek.
What we would like to do now is to have the other witnesses
join us, if we could, and have an opportunity to hear from them
as well.
The Chair will recognize Mr. Phillips for his testimony.
STATEMENT OF RON PHILLIPS, PRESIDENT, COASTAL ENTERPRISES,
INC.; PRESIDENT, NEW MARKETS TAX CREDIT CO-ALITION
Mr. PHILLIPS. Thank you, Representative Neal,
Representative Tiberi, Representative Watt and members of the
subcommittee on Select Revenue Measures.
My name is Ron Phillips. I am the current chair of the New
Markets Tax Credit Coalition, 150-member, Washington, D.C.
based group that advocated for the passage of the New Markets
Tax Credit Program in the late 1990s and I have the honor of
having been right at the get-go of this program. So I'm very
glad to be here and express our point of view.
Since our passage of the legislation in 2000, our coalition
has advocated successfully to extend this program in the
initial seven years and increase the amount of credits that
could be raised. As a result of our advocacy, even in the
stimulus bill, we got an additional $5 billion. So we've got a
lot of capital to access out there and very excited about it.
I am here today to respond to the GAO report on the lack of
an already-owned and controlled participation in the program. I
want to say right off that this report is being taken very
seriously by our coalition. We discussed it earlier this week
at our annual policy conference here in D.C. and at our board
meeting. Many of our members and board members are also
representatives of minority communities, so we are in good
company to sort through how to increase participation.
What's more, I want to point out right off that we're very
excited about getting to the heart of the matter, reaching out
through various minority trade groups, including the National
Banker's Association, Latino Organizations, Native American
Groups such as Oweesta and others. Even the American Banking
Association, which attended our conference, is looking for ways
to engage their members. So we are in a good spot here. The
reason is this credit program, which we sincerely love to be
made permanent by the way, has such tremendous potential to
redirect capital to worthy investments in this country, but
that the more participation in it the better.
Now, I am also President of Coastal Enterprises. It's a
501(c)(3) non-profit organization based in Wiscasset, Maine;
and, our primary Markets is Maine and rural communities, but we
also work throughout New England and other parts of the United
States. We have had five rounds of allocation valued at $481
million, and have to-date invested half those funds in
primarily rural New England.
Half of these funds are already invested in 30 projects,
mainly as I said in Maine and rural New England, Western
Massachusetts and upstate New York. We have invested in
community facilities such as an historic paper mill and
timberland of Katahdin Forest management in the Millinocket
region, a Gulf of Maine research facility supporting the 400-
year-old fishing industry, the River Valley Markets in
Northhampton, Massachusetts, an up and running new facility
supplying area residents with naturally and locally grown foods
of some 50 farmers and healthcare clinics such as the Plymouth
Community Health Center, New Hampshire, connected to the Speare
Memorial Hospital. These funds are creating and sustaining some
7,800 jobs, over two million acres of sustainably managed
forestland and spurring private capital, a ratio of $3 for
every $1 of allocation investment in low-income communities.
CDFI's story is, however, only the tip of the iceberg, as
stories from our field abound all across the U.S. in both rural
and urban areas. As our recent report, ``50 Projects, 50
States,'' and I hope we can get you a copy of that, notes they
could be charter schools in Los Angeles, educating young kids
and minorities, a LEEDs standards community service center
constructed on vacant ground fill in Chicago, an ethanol plant
in Minnesota owned by a group of farmers. The list is of
exciting and inspiring projects is endless.
And even the story more convincing as one gets into the
power of the New Markets Tax Credit to bringing together the
best of community social goals and the best of private capital
and investment to help make the dreams of millions of people on
the margins of our society come true is because of the
flexibility of the New Markets Program that we can achieve
these multiple objectives. The program has been successful
beyond anyone's expectations in attracting investment capital
to distressed communities including many minority communities.
Each year of the program so far the competitive processes
require those winning allocations to agree to target their
investments to area of higher distress than minimally required
by the Program's statute.
Now, coming to a close here I wanted to contribute my main
points here to this session this morning. One item in the GAO
report that was of great concern to us and we should emphasize
is that according to the CDFI Fund data the census tracks that
have received New Market investments have on average non-white
populations of 47 percent. So I want to note that the benefit
of this program has been flowing much more largely to
minorities we could presume than would meet the eye. On the
other hand, that does not make up the difference in terms of
the emphasis one should bring to supporting minority-owned and
controlled CDEs. So that is still a challenge ahead.
The credit has made a significant contribution to improving
many communities across the country, and that success should
not be confused with the attributes of the CDEs that compete
for and are awarded credits. A second point I want to make is
that according to our analysis from the coalition, there are
actually 17 CDEs that have achieved an allocation of over $1
billion, far more than what the GAO report said. So we have
made some progress in that regard.
In conclusion what I want to offer are two recommendations.
The central recommendation of the New Markets Coalition is that
Congress establish a technical assistance program and capacity
building program aimed at helping minority CDEs better prepare
themselves participate in the New Markets Tax Credit Program.
We believe that the best way to build a more diverse set of new
markets allocatees is to provide assistance to organizations,
to build the capacity of those that have not been successful in
applying for the credits, rather than through any sort of set-
aside or priorities for any particular class of CDE or business
sector. And the second recommendation we want to make is that
H.R. 2628 be supported in terms of the extension that is
critically important going forward to ensure that the tax
credit becomes in the future a permanent credit. And, also,
attached to the tax credit is the AMT relief, which will allow
us to open up more investment, and particularly among
independent and community banks at the regional level, a sorely
needed new capital flow for this program.
Thank you very much. And I'm sorry I went over my time.
[The prepared statement of Mr. Phillips follows:]
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Chairman NEAL. Thank you, Mr. Phillips.
Ms. Pinnock.
STATEMENT OF BLONDEL A. PINNOCK, PRESIDENT, CARVER COMMUNITY
DEVELOPMENT CORPORATION, SENIOR VICE PRESIDENT, CARVER FEDERAL
SAVINGS BANK
Ms. PINNOCK. Thank you.
Good morning Chairman Watt, Chairman Neal and other
distinguished committee members.
My name is Blondel Pinnock and I am the President of Carver
Community Development Corporation, a minority, for-profit,
community development entity. I also serve as the senior vice
president for Carver Federal Savings Bank, the largest
minority-owned thrift in the United States, headquartered in
Central Harlem in the 15th Congressional District, with nine
branches throughout New York City. Deborah C. Wright, Chairman
and CEO, extends her regards.
Carver is very supportive of the CDFI Fund and the New
Markets Tax Credit Program. LMI communities need our
investment. We are delighted to participate in the program and
Carver has been successful. Carver's experience in applying for
New Markets Tax Credits coincide with the findings of the April
2009 GAO report. Carver's CDE applied consecutively for New
Markets Tax Credits from 2005 through 2008.
We have been successful, however, in receiving two
allocations from the CDFI Fund: round 4 allocation in 2006 for
$59 million, and the most recent Recovery Act allocation in
2009 for $65 million. Our $59 million allocation has allowed
Carver's CDE to invest in 10 projects within low income and
distressed communities throughout New York City and to develop
partnerships in economic projects with more flexible terms that
the bank would otherwise not be able to offer.
For example, one of our New Markets Tax Credit loans was to
finance the renovation of the first state of the art privately-
owned, free-standing healthcare facility in Central Harlem
known as Citicare. The loan also helped preserve one of
Harlem's architectural landmarks, the Jazzmobile Building.
Carver provided six million in below-Markets financing for a
project that serviced over 20,000 patients in the last fiscal
year and is located in a census track that had over a 19
percent unemployment rate, and where nearly 50 percent of the
residents lived below the poverty line.
Another project financed through our New Markets Tax Credit
allocation was a $5.3 million below Markets-rate, pre-
development loan to Abyssinian Development Corporation, a
strong, committed community development corporation in Harlem.
The loan was used for the renovation and redevelopment of their
legendary Renaissance Ballroom. The building had been vacant,
boarded up and a community eyesore for over 30 years.
Abyssinian, with the aid of Carver's New Markets Tax Credit
loan will be able to bring this historic building back into
service offering community, cultural space, and up to 150 units
of affordable for sale housing. The project will create
hundreds of construction and permanent jobs providing economic
viability and much needed services for a highly distressed
area.
Through our New Markets Tax Credits we've been able to
partner with a large, money-centered bank, who has invested 19
million in our allocation to finance a six-story commercial and
office facility, known as Harlem Gateway. Given Carver's asset
size of 800 million and a loan limit of 10 million, Carver
would never have been able to put a $19 million on our balance
sheet. But with our partners at J.P. Morgan Chase we helped in
providing the financing for a project that created as many as
100 construction jobs and over 90 permanent jobs in addition to
providing vital community and retail services in an LMI census
track.
Carver agrees with the recommendations outlined in the GAO
report for positioning minority CDEs to maximize New Markets
Tax Credits; however, we would also suggest one giving
preference to or targeting institutions who are either
headquartered or have significant facilities in distressed
communities, or who served as communities in an operating or
programmatic basis--in other words, CDFIs and CDEs that are on
the front line of LMI communities every single day--as the
report recommends, providing more meaningful technical
assistance in the preparation and completion of the
application, specifically in the area of data collection and
impact analysis required for the CDFI funds.
Three, provide treatment to major financial institutions
with favorable treatment that partner with minority CDEs and/or
community banks to assist with application readiness and
encourage mutually beneficial collaboration. Minority CDEs like
Carver are well suited to identify and finance New Markets Tax
Credit projects that enhance and address local, underserved
communities, and would otherwise fly under the radar of larger
commercial banks and financial institutions.
Thank you very much for allowing me the opportunity to
testify and I would gladly answer any questions you may have.
[The prepared statement of Ms. Pinnock follows:]
Testimony By Blondel A. Pinnock
President, Carver Community Development Corporation,
Senior Vice President, Carver Federal Savings Bank, New York, New York
Good Morning. My name is Blondel Pinnock, and I am President of
Carver Community Development Corporation (``Carver CDE'') & a Senior
Vice President of Carver Federal Savings Bank (``Carver''), a leading
community development financial institution which recently celebrated
its 60th anniversary. Deborah Wright, Chairman and Chief Executive
Officer of Carver extends her regards.
We are very appreciative and supportive of the CDFI Fund and the
New Markets Tax Credit (NMTC) program. Low and moderate income
communities need investment and we are very happy to participate in the
NMTC program and have been successful.
Carver is the only African-and-Caribbean American managed thrift in
the state of New York and, with assets of $812 million, we are the
largest in America. Nevertheless, Carver is a very small institution in
the context of money-center financial institutions.
Summary of GAO Report
Carver's experience with applying for New Markets Tax Credits
coincides exactly with the 2005-2008 period studied and the Bank's
success rate is 33%. The success rate of all minority CDEs relative to
all applicants was 9% according to the report.
- Applied in 2005 for the first time--awarded $59 million in 2006
- Applied in 2007 for the second time - no award received in 2007
- Applied in 2008 for the third time - no award received in 2008
- 2008 application reconsidered in 2009 based on ARR Act - awarded
$65 million in 2009
Our $59 million NMTC allocation in 2006 allowed Carver, through its
CDE affiliate (Carver CDE) the ability to expand and offer financing
products and services that the bank, as a regulated financial
institution, might not be able to offer directly. The NMTC award
enabled Carver CDE to invest with community and development partners in
economic projects with attractive terms including below market interest
rates. These projects provide economic revitalization to the
communities that Carver serves and attracts additional capital to these
underserved communities.
One of Carver CDE's NMTC loans was used to consolidate, expand and
upgrade an existing health care clinic and at the same time preserve
one of Harlem's architectural landmarks. Jazzmobile, a non-profit
founded in 1964 as a pioneer organization committed to the preservation
of Jazz musical genre, was housed in a historic building in Harlem.
Jazzmobile was at risk of losing its historic headquarters building.
Citicare, a health care provider that has been serving residents of New
York since 1982, approached Jazzmobile about acquiring the property and
converting it to a community health facility. With the help of Carver
CDE's NMTC financing, Citicare was able to purchase and preserve the
historic structure and develop it as the first state of the art
privately owned health facility in central Harlem. In addition,
Citicare is allowing Jazzmobile to maintain occupancy of the building
until they find a new and affordable home.
Through this project, Carver Bank and the NMTC Program have helped
provide quality affordable medical services to a historically
underserved, low-income community. Citicare handled more than 20,000
patient visits last fiscal year in a census tract that has an
unemployment rate of over 19% and in which nearly half (49%) of all
residents live below the poverty line.
The total cost of the Citicare renovation project was just under $8
million and Carver provided $6 million in the form of a NMTC loan. The
debt was structured as interest only loan with a below-market interest
rate of 5%.
Citicare Before and After Photos
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Abyssinian Renaissance Ballroom--Before and After Photos
Carver CDE also provided a $5.3 million pre-development loan to
Abyssinian Development Corporation for the pre-development related to
the renovation of the legendary Renaissance Ballroom in Harlem which
has been boarded up and vacant for over 30 years. Carver's NMTC loan
will enable Abyssinian Development Corporation to bring the historic
building back into service offering community and cultural space as
well as up to 150 affordable condominium units. The project expects to
create hundreds of construction and permanent jobs providing economic
viability for a distressed area.
Carver provided $19 million of its 2006 NMTC allocation to finance
a loan to Harlem Gateway Ventures, a New York based real estate
developer who is developing a six story commercial facility in Harlem
that will provide quality retail for the community and office space for
two providers of vital community services and a third floor showroom
for a national furniture retailer. The office spaces, which are in
short supply in Harlem, will be occupied by Independence Care Systems,
a non-profit home care patient services provider and the Association
for Help for Retarded Children, a non-profit that serves more than
10,000 individuals with mental retardation and other developmental
disabilities and their families. Utilizing NMTC allowed Carver to offer
the developer a rate concession and other benefits that made the
project possible and created as many as 100 construction jobs and 90
permanent jobs. The project is located in a low-income census tract
that will benefit greatly from the services and job creation.
In addition, Carver has provided a $2 million loan to the Community
Partnership Development Corporation to capitalize a revolving loan fund
that provides no-interest pre-development loans and equity stakes to
small minority-and-women owned housing builders and developers in New
York City. The loans will promote the business growth of builders,
including small, minority-owned contractors who need assistance with
equity contributions and predevelopment costs. It is expected that the
loans will contribute to the development of more than 800 homes or
1,000 new affordable and workforce housing units in New York City
neighborhoods. These projects are expected to leverage millions of
dollars in public and private sector resources and also create hundreds
of construction jobs.
In just three years, Carver CDE has placed all of its initial $59
million NMTC allocation and financed 10 businesses, all of which are
located in highly distressed census tracts within Carver's service
area. While the average deal size of all ten projects financed with our
2006 allocation was $6 million, the impact to the community has been
measurable and lasting. Smaller deals in this size range are no less
impactful to our neighborhoods by way of jobs, resources and services
provided.
According to the GAO report, officials from minority CDEs
identified the following as challenges that CDEs may face in applying
for NMTC allocations:
- Lack sufficient pipeline to justify NMTC capital applied for
- No track record for both investing in LMI communities and in
large projects that would generate significant impacts
- No capacity to complete high impact projects
- Complexity of NTMC transactions translates to higher transaction
costs which is favorable to larger CDEs (minority CDEs tend to be
smaller in size)
- High application costs (consulting fees, staff time, etc.) are a
deterrent
Carver CDE responds to these challenges in the following way:
- High application costs: costs are much higher than estimated in
report; from our experience and in speaking to fellow community banks,
costs for outside consultants can run as high as $200,000.
We also would like to point out that whether outside
consultants are engaged or not, there is a very significant cost of
staff time; for minority CDEs which as the report notes, tend to be
small in size completing an application often means significant
disruption to the Lending or Loan Operations departments to compile the
necessary data for an effective application.
The time commitment is largely related to gathering the
historical data on existing loan portfolios as well as demographic
information regarding the applicant's assessment area.
- Lack of sufficient pipeline:
Comments from reviewers of our 2008 NMTC application
stated that ``The applicant is lacking in detail regarding specifics of
pipeline deals'' I think this gets back to the issue of size and staff
time. There is significant time involved in sourcing deals and
beginning the due diligence process. For a small staff, this means that
everyone is involved or as we say at Carver ``all hands on deck''. We
believe that there is a clear advantage to larger CDEs with staff
dedicated to completing the NMTC application.
Diversification of pipeline has also been an issue for
Carver. We are limited to debt deals because that is our traditional
track record; equity deals are preferred by many non-profit
participants, however, they require a specific skill set and focus;
further the financial risks are too great for a bank the size of Carver
or smaller to absorb, we simply could not afford the loss of an equity
investment.
- No capacity to complete high impact projects: At $812 million in
assets, Carver is the largest minority CDE and community bank in the
country and our deal size as a percentage of assets is capped at $10
million. This speaks to the limitations of smaller community banks as
deal size is proportional to impact as qualified by the CDFI, e.g.
number of housing units, number of jobs, amount of community space,
etc. These financial metrics do not always correlate to impact on a
neighborhood by neighborhood bases whereas a new grocery store, charter
school or development of a blighted vacant lot can have a meaningful
and visible impact.
The reported noted that multiple factors appear to be associated
with a CDE receiving an allocation:
- larger CDEs, as measured by asset size, appear to be more likely
to receive NMTC awards while smaller CDEs are less likely to receive
awards
- We agree with this assessment whole heartedly and can attest to
the fact that for a small/minority CDE to complete an application as
stated earlier takes up every available resource with our without a
consultant. Invariably a small team stretched beyond limitations
produces a different result than would be produced by a dedicated team
or set of individuals focused on completing an application.
- after controlling for characteristics such as CDE type, asset
size, and proposed projects, minority status is associated with a lower
probability of receiving an allocation
There is a direct correlation between size and minority status;
minority CDEs are smaller in terms of asset size, number of employees,
etc. As a result, their ability to access larger high impact projects
is limited by many factors including equity capital, track record and
the resources to develop a diversified pipeline. Their ability to
access the capital markets and invest in their own CDEs is limited by
their size and capitalization levels. However, this does not mean
smaller deals have any less impact as stated earlier and can be noted
from deals highlighted from our 2006 NMTC allocation.
Other key findings from the report:
- according to industry association representatives, minority-owned
banks have traditionally had a more difficult time accessing capital
markets than their non-minority peers
- Carver has had more success in accessing the capital markets
given our publicly traded status. Yet raising more capital is always
harder than it is for our larger competitors.
- It was inconclusive whether it is the tendency of minority CDEs
to be smaller that lowers their success rate or their minority status.
- Again, minority CDEs are by nature smaller so it is not their
minority status that lowers their success rate. This is obvious in our
opinion given there are no large minority CDEs to use as a basis for
comparison. Minority CDEs are smaller as measured by asset size than
their counterparts. This means they are starting from behind in all the
categories reviewed on the NMTC application both quantitative and
qualitative.
- legislative history for NMTC does not address whether Congress
intended for minority CDEs to benefit directly from the NMTC program
- Agree that the intention was for low-and-moderate individuals and
communities to benefit directly from the NMTC program so one would
presume that the institutions in these communities who know these
communities best would certainly have been given greater tools to
succeed.
- However, if Congress intends for minority CDEs participation in
the NMTC program to exceed the current levels and Congress believes
that minority CDEs have unique characteristics that position them to
target the NMTC to its most effective use, Congress may want to
consider legislative changes to the program should the New Markets Tax
Credit be extended beyond 2009. Potential changes that could be
considered include, but would not be limited to the following:
similar to provisions for certain federal grant
programs, requiring that a certain port of the overall amount of
allocation authority be designated for minority CDEs
pool of NMTC capital dedicated specifically for
community banks (minority banks in most cases)
offer priority points to minority CDES that apply for
NMTC allocations
Carver agrees with these recommendations but offers the following
suggested solutions to make the CDFI capital programs more accessible
to minority CDEs and community banks:
1. Make small CDFI banks a priority for CDFI Fund financing
This goal could be achieved by targeting institutions that are
predominantly headquartered or have significant facilities in
distressed communities or who serve this population in an operating and
programmatic basis, rather than a project to project basis. There is
ample precedent for such a practice. Most CDFI NOFA's now have built in
preferences (in the form of extra credit points). Recent examples
include targeting geographic areas of higher distress, such as FEMA
Disaster Areas, after Hurricane Katrina.
Today the lion's share of dollars granted in the New Markets Tax
Credit Program, for example, is awarded to large real estate
developers, money center banks/investment banks and large national non-
profits. In some cases the same recipients have been awarded
significant ($100 million) allocations annually for five or more years.
2. Streamline the application process (or provide more meaningful
technical assistance in completing it)
Smaller community banks and non-profits generally do not have the
infrastructure to collect the extensive data and analysis required for
CDFI applications and follow up monitoring. This results in lower
scores and missed financial and revenue generating opportunities.
Remedies include:
-- providing funding/grants for hands on assistance during the
``ramp-up'' period prior to application process (i.e., grant to become
CARS rated (CDFI assessment and rating system operated by the
Opportunity Finance Fund recognized by the CDFI, foundations and other
investors); provide technical support and financial assistance for
compliance reporting and data mining).
-- providing favorable treatment to major financial institutions
that partner with community banks to improve application readiness,
thereby leveling the playing field.
-- providing better training for readers; more hands on training
Chairman NEAL. Thank you Ms. Pinnock.
Mr. Haskins, the bells that you heard mean that we have
about 15 minutes, probably closer to 13 minutes, but we'll try
it from there. Thank you, Mr. Haskins.
STATEMENT OF JOSEPH HASKINS, JR., CHAIRMAN, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, HARBOR BANK OF MARYLAND
Mr. HASKINS. Thank you, Chairman Neal. I will try to speak
quickly.
Good morning Chairman Watt, Chairman Neal, again, and
members of this distinguished committee. I am delighted to say
to you that I am the chairman, president and CEO of Harbor
Bankshares Corporation, which is a bank holding company in
Maryland that currently oversees a $300 million commercial
bank.
Although the scope of the GAO is very broad, I have decided
to focus my attention almost exclusively as it relates to
Harbor Bank and Harbor Bankshares Corporation. However, I do
have a couple of recommendations that I will share at the end
of my comments. I do want to be on record to state that I
believe that the New Markets Tax Credits Program under the CDFI
Fund is a very important and vital tool for stimulating
economic growth and development, especially as it relates to
the minority or low-income communities.
The four points that I would like to make are as follows:
first, that Harbor Bank has a long and distinguished record of
success servicing low income people and communities. When we
look back at the past five years, the period of this analysis,
we find that we have deployed over $140 million in loans to the
communities that we focus on, which is the low income
community. The specific item that I'd like to lift here for
your information is the fact that our first award, which was in
round 2 of $50 million in New Markets Tax Credits, $25 million
of that was allocated to one project. And one might say, why so
much to one project?
This one project represented 88 acres of an urban
community, a city that is among one of the highest in crime as
you've heard in reports, highest in unemployment, highest in
drug addiction, and so forth and so on; and, while the city is
high in regards to these numbers, this community that we focus
on doubles those statistics, deplorable, not to say the least.
This effort of 88 acres was designed to focus on creating a new
science and biotech park, building out two million square feet
of science and technology park space and to create 2,000 new
and renovated homes for this low income community.
Our $25 million in this project resulted in $5 million
going to a not-for-profit that focused on establishing drug
rehabilitation programs, job training programs, and educational
housing programs. So when we look at the impact we were
significant. The other part of this is that we initiated the
first building of that science park, a 300,000 square-foot
building that employed in excess of 200 residents of that
community through its various different phases of development.
But moving quickly I want you to know that we think that our
efforts have also been successful in being a stimulus as well
as being an identifier of future opportunities, because we were
the stimulant in a second science park on the West side tied to
the University of Maryland, two very great and outstanding
institutions.
I want to quickly tell you that while we were successful in
the second round we applied it every single round, and of the
eight different allocation periods, we received two
allocations; and, that last allocation came at the end of this
'08 award, which is a part of the stimulus package. Our concern
here is that we have a proven track record of being able to put
our money out. We have evidenced that by having our money on
the street in 14 months, what is interesting, that of the
allocation I received already, the $50 million that I received
under the 2009 period I already have applications in excess of
three times that amount, all for very relevant products and
services.
I know that my colleagues have already spoke to some of the
recommendations that they see as possible. I agree with some of
the observations made by the GAO. What I would say to you is if
you focus on lenders who have history in the communities that
they've served and add that as a part of the criteria, I think
we go a long ways in helping to up the number of minority
applicants in this process. And, ladies and gentlemen, or
gentlemen as I see sitting before you, I am available to have
you witness firsthand the developments of our money and the
outcomes; and, I'm available to answer any questions that you
might have.
Thank you very much for the opportunity.
[The prepared statement of Mr. Haskins follows:]
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Chairman NEAL. Thank you, Mr. Haskins.
Mr. Cunningham.
STATEMENT OF WILLIAM MICHAEL CUNNINGHAM, SOCIAL INVESTING
ADVISOR, CREATIVE INVESTMENT RESEARCH, INC.
Mr. CUNNINGHAM. Thank you, Chairman Neal, Chairman Watt,
Ranking Member Tiberi.
I really appreciate you inviting me here. I am going to
make this very quick. Before I get started, I would like to
introduce a member of my staff, Marie Cunningham Brown. She is
also my mother. She worked for 30 years on Capitol Hill. In her
last posting she was an assistant to Congressman Claude Pepper.
If I say anything intelligent, you have her to thank. If I say
anything stupid, and I will, you can blame me.
Now, one of the things I want to point out is that the
misallocation of economic resources kills people. Not two days
ago a homeless woman, not 1.14 miles away from where we sit
today was waiting for shelter at a homeless shelter close to
here, and she died, basically because the economic resources
weren't available to help her out. These are the kinds of
people that the New Markets Tax Credits Program was designed to
assist.
In our 2008 application we created a financial instrument
designed to help and address the problem of homelessness. That
application was not funded. So that's part of the problem that
we have with the program. We just think that, again, the
misallocation of economic resources based on racial prejudice
is wrong. It kills people, markets, firms and economies, and we
pointed this out in numerous comments to the Securities and
Exchange Commission and to other bodies. Now, with respect to
kind of what our problem is with the program, we've applied in
virtually every round of the New Markets Tax Credits Program.
I actually gave a speech in 1994 in San Francisco,
California, where I called for the creation of New Market type
vehicles to get venture capital into underserved communities.
So we take great pride and credit in being one of the
intellectual forefathers of this program. You know, but we just
have not had a lot of success in accessing those resources for
a number of reasons. Now, we concur with the statistical
findings of the GAO report that's included in Appendix A in our
testimony, a statistical analysis that was conducted by two
interns that worked for us.
I do want to point out our 2004 New Markets Tax Credit
Application in particular because we partnered with the City of
Minneapolis to apply for $120 million in New Markets Tax
Credits. We had a letter of commitment from Piper Jaffray,
letter of commitment and a partnership with a city, and we were
not funded. So, obviously, from our perspective there is a
problem with this program. In our last application we partnered
with an African-American individual with a net worth of $150
million, who basically supported our application to create a
$50 million pool of New Markets Tax Credits that we were going
to allocate to minority-owned banks.
In the review of our application, the reviewer said ``We're
not sure that minority-owned banks either want or can use New
Markets Tax Credits.'' They turned around and then they gave
two minority-owned banks New Markets Tax Credits when we
applied to do exactly the same thing a year earlier. Again,
from our perspective there is a problem with this program. Now,
what we suggest you do is we suggest you look at the
transaction record for the New Markets Tax Credits allocations.
When I say the transaction record, what I mean is we suggest
you look at the commissions paid to investment banks,
consultants, lawyers and accountants.
Basically, we want to outline. We want to put some sunlight
on this allocation process and determine who is benefiting up
front from these New Markets Tax Credits allocations. According
to the data that we have, because the spreads are so large and
because this is one of the most generous Federal Government
programs in the Federal Government community development
inventory, the fees that we've seen go to some of the
investment banks can get as high as 10 percent of the
allocation. So 10 percent of the allocation goes to an
investment bank before a dollar goes to the community to repay
that investment bank for bringing investors into the pool. We
think that's unfair.
We think that's unfortunate. In Appendix C of our testimony
we have outlined further suggestions for enhancing this
program. Basically, we suggest that you increase the New
Markets Tax Credits for equity investments in low income
businesses located in some of the more distressed areas of the
country. That's the core of our recommendation.
Again, I understand the time pressure you are under. I
appreciate you inviting me here to testify today. I am
available to answer any questions that you have.
Thank you.
[The prepared statement of Mr. Cunningham follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman NEAL. Thank you, Mr. Cunningham.
We have two minutes on the floor. Mr. Klein, if you want to
give this a quick go, we'll accept your testimony in part
verbally and part written testimony, if we could.
Mr. KLEIN. I will go as fast as I can.
Chairman NEAL. You're on.
STATEMENT OF JAMES R. KLEIN, CHIEF EXECUTIVE OFFICER, OHIO
COMMUNITY DEVELOPMENT FINANCE FUND
Mr. KLEIN. Thank you for the opportunity to testify
specifically. Thank you to Congressman Tiberi for your
invitation.
Finance Fund is a statewide non-profit in Ohio that
provides services to low-income communities around the state.
We work exclusively in these low-income urban and world
communities, doing a number of different kinds of projects,
affordable housing, childcare, learning facilities, small
business community facilities and so forth.
We work with for-profit and non-profit clients around the
state. We've been doing this for 22 years. We've got 15,000
units of affordable housing, 9,000 jobs, 8 million square feet
of revitalized, commercial space. New Markets Tax Credits fits
pretty much dead center into our mission and product mix. We
provide a lot of products and services to small businesses,
minority businesses, and we use a non-leveraged model. A non-
leveraged model is a model which is not as complex as the
primary used model in this product in this program which is the
leveraged model.
The non-leveraged model allows us to do blind pools, which
are investment commitments that are made without actually
identifying a specific project. Now, we've gotten four
allocations out of this program; 30 projects have resulted.
We've got deals as small as 86,000, our largest investment has
been five million.
Let me talk very briefly about the report. In my
perspective the outcomes of this report are somewhat
predictable. We are talking about highly distressed communities
here. Highly distressed communities have specific kinds of
characteristics. They have limited assets. They have limited
capacity to do these kinds of complex deals that go through
many public programs. We have businesses that operate in a
market that is limited, depressed asset values, and so forth.
It is my opinion that the complexity of the finance model
becomes a systemic barrier to minority and small CDE
participation in this program because of its complexity and its
cost.
[The prepared statement of Mr. Klein follows:]
Chairman NEAL. I apologize. The clock has run to zero on
the House floor. I am going to recognize a suggestion from my
friend Mr. Watt.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. WATT. Thank you, Mr. Chairman.
I reluctantly move that we not try to come back and hold
these witnesses here. It will be two hours before we get
through the votes and I think it would be more productive for
us to just submit our questions in writing to the panelists. It
would be probably more productive for them and for us, so I
move that we follow the rules. I mean, they would have to
answer written questions any way, that we do all of the
questioning by written question.
Chairman NEAL. Let me thank the panelists and apologize for
the floor schedule today. This was not to be the case as of
yesterday, but I do want to let you know that there will be
some follow-up questions; and, if there are no further
comments, then the hearing is adjourned.
Thank you.
[Whereupon, at 10:55 a.m., the subcommittees were
adjourned.]