Partners (Fall 2001)

Investments in America’s New Markets

by Ana Cruz-Taura

Ana Cruz-Taura, Community Investment Advisor, is in the Miami branch and serves South Florida.

Economic vitality is the cornerstone of a healthy community. More specifically, community development professionals often emphasize the importance of a community being able to sustain itself economically in order to ensure long-term growth and stability.

Despite the fact that there is a plethora of economic development programs available on a local, state, and federal level, the greatest challenge lies in securing an adequate capital infusion to support a prolonged revitalization cycle. In some cases, there is limited funding available that can provide a handful of small businesses with small loans. Too often the available funding cannot satisfactorily meet the credit needs of existing businesses or attract larger employers to the community.

Two new federally enacted economic development programs are intended to be a catalyst to spur capital investment into the economic core of our most challenged communities. The New Markets Venture Capital Program and New Market Tax Credit Program are in final stages of implementation to begin complementing ongoing revitalization initiatives in target areas next year.

These programs draw on a market-based approach to attract investment into long-neglected urban and rural geographies. The goal of both programs is to bring these isolated, under-served areas back into the macro-economic framework of the local, and potentially global, economy by re-establishing commercial channels and developing the assets unique to each community.

The New Markets Venture Capital Program and New Markets Tax Credit Program target a well-capitalized and sustained flow of investment into lower-income communities to support a long-term business development cycle.

New Markets Venture Capital

The New Markets Venture Capital Program (NMVC) Act of 2000 focuses on economic development in low-income areas. The U.S. Small Business Administration (SBA) has been charged with administering the program by selecting NMVC companies that will serve as the conduits for capital infusion and technical assistance in growing and strengthening small businesses.

As described by SBA, a NMVC company is a privately managed, newly formed, for-profit investment company established for the purpose of providing capital and operational assistance to smaller businesses located in specific rural and urban areas. These companies may have a variety of structures — partnership, limited liability company, or corporation — but must have been formed after December 21, 2000.

Several conditionally approved NMVC companies already exist, with their formal approval contingent on their ability to raise required amounts of regulatory capital and grant matching resources, as well as meeting other technical requirements for participation. Following formal designation of NMVC companies and funding commitments, the NMVC Program will provide up to $50 million in economic development funding in the coming year.

The program is a derivation of the SBA’s Small Business Investment Company (SBIC) Program that has attained considerable success in establishing and growing small businesses through equity-type investments. While the SBIC Program is focused on providing capital to businesses owned by socially or economically disadvantaged individuals, the NMVC Program uses a geographic approach, targeting entire low-income communities to create general entrepreneurial opportunities, strengthen the commercial infrastructure, and increase employment opportunities.

For additional information, visit the SBA website at www.sba.gov.

New Markets Tax Credit

As part of the Community Renewal Tax Relief Act of 2000, $15 million in tax credits will become available over seven years for additional private investment into the economic development of low-and moderate-income communities following final implementation of the program parameters (expected in late 2001).

New Markets Tax Credits (NMTCs) are aimed to spur new investment into privately managed investment programs that make loans and equity investments in eligible businesses in distressed urban, rural, and Native American communities.

The Department of the Treasury’s Community Development Financial Institutions (CDFI) Fund has been designated to administer the NMTC Program. The CDFI Fund is accepting applications from nonprofit and for-profit entities for certification as a Community Development Entity (CDE) through which the tax credits will be distributed. A CDE must have as its primary mission serving, or providing investment capital for, low-income communities or low-income persons. Private investors making qualified investments into CDEs will be eligible to receive tax credits allocated to the particular CDE. The allocation process will be competitive, with priority given to organizations with successful track records.

The CDE may distribute the tax credits to its investors. The tax credits will be claimed by investors over a seven-year period. Investors will receive 5 percent of the investment for each of the first three years and 6 percent for each of the remaining four years. The accumulated stream of tax credits will total 39 percent, with a present value of approximately 30 percent. Expectations are that the program will mirror the success of the Low Income Housing Tax Credit Program, which has spurred substantial growth in the development of affordable housing since its inception.

For additional information, visit www.treas.gov/cdfi/ programs/newmarkets/ index.html.

New Markets Venture Capital Company Spotlight

The aim of this initiative is to assist smaller businesses, but the endeavor is no small business itself. One conditionally approved NMVC company, The Southern Appalachian Fund, L.P., is attracting $5 million in capital to be matched according to NMVC Program parameters at 150 percent through SBA-issued debentures to create a $12.5 million venture capital fund. Another $1.5 million is being raised to be matched dollar-for-dollar by the SBA to fund operational assistance to the Fund’s portfolio companies and market the program to the target geography.

The Fund is an equal general partnership between the Kentucky Highlands Investment Corporation and Technology 2020 Finance Corporation, both experienced small business development entities with established performance in the targeted geography. As a community development venture capital fund, The Southern Appalachian Fund will promote economic development and the creation of wealth and job opportunities in low-income and under-served geographic areas in southern Appalachia by providing access to capital through equity for seed, early-stage, and growth companies.

Hank Helton, Assistant Fund Manager, says that initial funding for portfolio companies is projected to range from $250,000 to $750,000. The Fund has coordinated an assessment team that will review potential business investment opportunities for viability and eligibility for funding. Helton expects the majority of business growth supported by The Southern Appalachian Fund to be in the telecommunications, information technology, and manufacturing industries. He says that the Fund will meet an identified venture capital gap in the target markets, particularly in low-income geographies.

Investment in The Southern Appalachian Fund, L.P. will be attracted from various industries and individuals, including financial institutions for which these will be qualified community development investments under the Community Reinvestment Act. Investments also stand to qualify for New Markets Tax Credits if such credits are allocated to the Fund as a Community Development Entity under that program. The minimum subscription from investor-limited partners is $100,000 with 10 percent nt of the capital commitment to be delivered at the closing of the Fund, with subsequent draw-downs by the Fund on an as-needed basis.

For more information, call Technology 2020 at 865/220-2020.

 


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