Community Developments Investments (November 2013)

Executing High-Impact NMTC Deals in Rural Communities

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Tracy L. Burton, Vice President, Wells Fargo Community Lending and Investment
Sarah Bennett, Senior Vice President, Wells Fargo Community Lending and Investment

In recent years, Wells Fargo has invested in environmentally focused projects in rural areas, such as this wind farm in Grayland, Wash.

In recent years, Wells Fargo has invested in environmentally focused projects in rural areas, such as this wind farm in Grayland, Wash. (Wells Fargo)

When the New Markets Tax Credit Program (NMTC) was unveiled in 2000, Wells Fargo was intrigued by the role this program could play in investing in operating businesses and real estate projects located in low-income communities. Through extensive involvement in NMTCs over much of the past decade, we have found these credits to be a critical investment tool, especially in rural markets. Since 2000, Wells Fargo has made 28 NMTC investments, ranging from $1 million to $35.5 million, in rural markets.

Central to Wells Fargo's vision and values is a desire to be known by our communities, and we accomplish this goal by promoting the economic development of everyone, whether they reside in an urban center or in a community miles away from downtown. Wells Fargo, a large nationwide bank, is structured regionally. This regional structure helps us reach our customers where they live, work, and bank locally. Within the bank, there is no single lending group that focuses solely on rural initiatives and loans. Rather, rural lending is handled across a network of bank departments, branch locations, and specialty groups that include rural lending within their spheres.

Because we work hard to have a local focus, we understand that rural communities have unique needs. We also understand that nonprofit groups that support rural communities often have to support very large geographic areas, ranging from one county to a few states. At the same time, funding opportunities may be different for these rural organizations compared with their urban counterparts.

NMTC deals are regularly sourced through certified community development entities (CDE) or through partners within financial institutions, such as community development officers, business bankers, and real estate bankers. A bank's customer base often is the best way to source transactions. For rural projects, Wells Fargo has found long-term relationships with CDEs to be the primary source of deals. These relationships may not start with an NMTC deal. Instead, we look to groups with which we have a long history of banking, those to which we have provided grant support or board service.

For us, the core of any rural NMTC deal is our long-standing relationship with the CDE. If we are presenting to our Loan Supervision team and have an unexpected or tough credit issue with a rural NMTC deal, that long-term relationship and deep knowledge of the CDE and its management team can help our credit argument succeed. Equally important are trusting relationships with the developers or sponsors of such deals. We often partner with other areas of the bank that manage the overall banking relationships. With these partners, we are able to get a big-picture perspective of the banking relationship, history of the customer, and organizational strength of the borrower and business.

While the world of finding credits and the right deal is competitive, it is important to remember that some banks and CDEs must fund NMTC deals in "non-metropolitan areas" (all areas outside of metropolitan statistical areas, according to the Federal Deposit Insurance Corporation), as agreed to in the CDEs' allocation agreements. As a result, the deals are going to be there, so the real question is, how do you find the deal that will be successful for both your financial institution and the rural community itself? If you don't have an NMTC allocation yourself, a great place to start is to find out which CDEs have included rural communities as part of their allocation agreements.

Finding a Deal

One of the biggest factors in finding the right rural NMTC deal is deal size. To make an NMTC deal work financially, its value typically needs to be at least $5 million; otherwise, the fees, attorney costs, and other expenses will outweigh the benefits for both the borrower and the bank. While it can be difficult to find $5 million deals in rural markets, persistence is key.

In making a rural NMTC deal work, lenders face the same challenge they do in rural lending in general: The community and local infrastructure must be able to support a sizable transaction. Specifically, the community has to attract or maintain a workforce, and the economic environment needs to be sufficient to support a growing business or organization.

We have received inquiries about high-impact investments in rural areas that meet many of the parameters we look for in terms of community impact. When evaluating the prospective cash flows to meet debt service requirements, however, we sometimes need to conclude that the project cannot support the necessary debt levels. Often in these situations, the borrower will need to delay the project to raise the appropriate capital or downsize the project, which in turn might then make it too small to be a workable NMTC transaction. This leads back to the first and primary challenge with rural NMTC deals—finding the right size transaction. As time passes, many of us continue to ponder new structures that hopefully will lead to the ability to make smaller deals using NMTCs.

Despite these challenges, many banks and CDEs have agreed to include deals in rural areas as part of their allocation agreements. Those deals that meet the size requirements and match a community's capacity can be found. The extra effort that goes into making these deals happen can be well worth the effort.

For example, in 2011, Wells Fargo invested in a high-impact rural deal working with a long-standing, successful CDE, CEI Capital Management, a subsidiary of Coastal Enterprises Inc. With CEI Capital, public partner Midcoast Regional Redevelopment Authority, and a local regional bank, Bangor Savings Bank, Wells Fargo closed a $14.3 million NMTC deal that delivered the financing to build a manufacturing facility in Brunswick, Maine. The tenant, global medical supply company Mölnlycke Health Care, has equipped the state-of-the-art clean-tech manufacturing facility to produce advanced wound-care products. Mölnlycke was courted to locate the facility in several countries, but ultimately decided on Brunswick, largely because of the finances.

The project is the cornerstone of a public/private effort to spur the local economy in the wake of a military base closure. The federal government shut down Naval Air Station Brunswick and Topsham Annex in 2011, resulting in more than 5,000 jobs lost in the area, which has a population of about 25,000. The community provided much of the construction workforce to build the new manufacturing facility, and Mölnlycke is hiring about 50 skilled production workers from the region, with the goal of doubling that number in the future. As a result of this NMTC deal, Southern Maine Community College secured a $100,000 grant to train new Mölnlycke employees. High-wage, skilled jobs are being created at the manufacturing facility as part of the agreement to locate within the redevelopment zone. It is hoped that the trainees will qualify for the higher-wage jobs.

This project is being developed with environmentally sustainable concepts and is pursuing the International Organization for Standardization's environmental management standard as part of the overall base environmental cleanup plan. This project has brought momentum and energy to a community struggling with the effects of a military base closure and has become a game changer in Brunswick's efforts to reposition itself as a vibrant community.

Common Credit Issues With Rural NMTC Deals

With the Brunswick deal, Wells Fargo had fairly standard manufacturing credit risks and worked with a relatively large borrower (a large international company setting up a U.S. facility). It is important to note that many rural NMTC deals have unique credit challenges that banks may not face when working on an NMTC deal in a downtown urban center. There is a good chance you will be working with a smaller business that is taking on a large project (as mentioned earlier, the project has to be large enough to make financial sense). As a result, when we take rural NMTC deals to our Loan Supervision team, we regularly have to discuss staff capacity, high leverage, debt service ability, and other issues. For example, in our deal with the Coastal Community Action Program (a $15.3 million, four-turbine, six-megawatt wind farm located in the small rural town of Grayland, Wash.), the customer was a relatively small nonprofit group with a limited balance sheet. To mitigate the risks, we reviewed liquidity and cash flow covenants and made sure we had a strong relationship with the CDE partner.

In addition, because this project couldn't handle significant hard debt, we brought down the loan-to-value ratio by helping the nonprofit group layer other government sources (soft dollars). The capital stack for this deal ended up including not just NMTCs but also a $4.98 million grant from the state of Washington, which really kick-started the project. Next, the project needed both NMTCs and investment tax credits (alternative energy tax credits). Finally, an equity contribution of $280,000 from the borrower as well as a commercial loan of $475,000 were necessary to meet the total project costs.

This layering of sources is not uncommon in these types of projects, and interested lenders should be prepared to be heavily involved in the process to ensure that all the sources work well together and none of the regulations conflict. Many rural deals need these extra layers to make sense. Before Wells Fargo gets too involved in any deal, we complete a comprehensive analysis of the "waterfall" to make sure we know "who gets what first." Banks need to carefully study the NMTC structure in rural deals because those extra layers can make for an interesting conversation with the Loan Supervision team.

Many transactions of the right size for rural NMTC deals are in the manufacturing sector, so when doing these deals, it isn't surprising to face unique manufacturing issues that pose unusual risk qualities for a deal. For example, Wells Fargo recently closed a deal in the upper Midwest for a project constructing an integrated biorefinery in an economically challenged non-metropolitan area. In this case, we had to get the Loan Supervision team —and ourselves—comfortable with the risks of a manufacturing business. Producing cellulosic ethanol and aqueous potassium acetate from the raw material of an existing organic waste system stream is quite different from a vanilla real estate project.

To get comfortable with these atypical credit risks, we utilized the following:

  • Heightened management scrutiny: The first place we turn to mitigate risk is the management team. In cases where we are lending to an industry or in a location where we have not had substantial experience, it is crucial that we feel comfortable with management's expertise, track record, and competence. In the API example, the project was a biorefinery converting a cellulose by-product into ethanol, a special-purpose use. Our confidence in the management team was based on the sponsor's substantial experience in such activities since 1994.
  • Conservative capital structure: The capital structure is designed to partially protect ourselves from the unique manufacturing risk. The capital structure can also help make the case that the project is receiving funds through grants, sponsor equity, or other soft sources to demonstrate that appropriate funding is in place. In some cases, this might mean that soft dollars, such as government debt, are needed.
  • Acceptance of alternative collateral: In many lending situations, lenders rely on real estate collateral for security. In rural manufacturing transactions, the lender must get comfortable with alternative sources of collateral, such as equipment. This risk can be mitigated by appropriate loan-to-cost levels.
  • Strong relationships: In all situations and examples given, it was critical for us to have a strong relationship with the CDE and the sponsor or developer. Especially in rural NMTC investments, our CDE partners are vital for source transactions as well as to underwrite and monitor the projects. In the API deal, we worked with CEI Capital Management and Rural Development Partners, two well-regarded CDEs doing important NMTC investing in rural areas.

No 'One Size Fits All'

Rural investing is constantly changing, and there is never a "one size fits all" financing solution. Over the past several years, we have seen more environmentally focused transactions in rural areas. The Coastal Community Action Program wind farm project is a good example of how environmental issues are becoming a core value in rural NMTC deals. This $15.3 million project creates clean energy and also has resulted in net profits for the group's programs, which provide energy to local low-income residents from a renewable source. We also have received requests from customers with projects ranging from biorefineries to geothermal companies to organic grocery operators.

When we consider any new NMTC deal with "outside the box" credit risks, we always go back to the basics of relationships and thoroughly understanding the core credit issues. The process of investing in successful NMTC deals in our rural communities is never static. We are constantly challenged as an institution to balance our appetite for credit risk with the changing credit needs of the rural communities.

For more information, please visit You can also contact Tracy L. Burton at (415) 947-1352 or

This article reflects the opinions of the authors and not necessarily those of Wells Fargo.

Deal Highlight: Schulz Xtruded Products, Robinsonville, Miss.

Wells Fargo participated in a new markets tax credit project to build a steel pipe manufacturing facility in rural Mississippi.

Wells Fargo participated in a new markets tax credit project to build a steel pipe manufacturing facility in rural Mississippi. (Schulz Xtruded Products)

This $35.5 million new markets tax credit project for a steel pipe manufacturing facility sourced its tax allocation from National Community Fund I; SECDE Ventures; and Wells Fargo Community Development Enterprises Inc. The project is a public/private partnership between Schulz Xtruded Products LP (SXP) and Tunica County, Miss. The financing for this phase of the project was put together to induce SXP to locate its facility in Mississippi. The county is the fee simple owner of the construction property, located just north of the intersection of Kirby Road and Old Highway 304 on a 100-acre site in Robinsonville. The financing used proceeds from both the state of Mississippi and Tunica County to fund the initial construction. The 190,000-square-foot production facility and office complex, constructed in rural Mississippi to SXP's specifications, created about 500 construction jobs and 180 permanent jobs. The project is a high priority for various officials and agencies at the state and local levels.

For more information about Wells Fargo's work in rural markets or this project investment, please contact Tracy L. Burton at (415) 947-1352 or

This publication is part of:

Collection: Community Developments Investments

Deputy Comptroller
Barry Wides

Staff Writers
Ted Wartell
Bill Reeves
Letty Ann Shapiro
Dianne Davenport

For questions or comments, call (202) 649-6420 or email This and previous editions are available on the OCC's website at

Articles by non-OCC authors represent the authors' own views and not necessarily the views of the OCC.

Deputy Comptroller
Barry Wides

Editorial Staff
Ted Wartell
Bill Reeves
David Black
Dan Gibbard

Design Staff
Rick Shacklette
Cheryle Robison

For questions or comments, call (202) 649-6420 or email This and previous editions are available on the OCC's website at

Articles by non-OCC authors represent the authors' own views and not necessarily the views of the OCC.