Industrial Manufacturing: Building a Competitive Recovery - Part IV: Leveraging New Market Tax Credits in Your Growth Strategy

HOST: MATT BRADY: Welcome to Cherry Bekaert's Industrial Manufacturing Podcast. We are excited to continue our latest series titled Building a Competitive Recovery, where we will discuss the challenges of the COVID recovery landscape and provide strategies to position your business for future success.

HOST: MATT BRADY: I'm Matt Brady, leader of the firm's Industrial Manufacturing Industry Group. Today I'm joined by Peter Byford, a director in our Tax Advantage Group here at Cherry Bekaert.

HOST: MATT BRADY: Peter joins me to discuss part four of our series on how manufacturers can leverage New Markets Tax Credits to accelerate their growth strategy.


PETER BYFORD: Thanks, Matt. Looking forward to our conversation.


HOST: MATT BRADY: Let's dive right in. Peter, I know we've got a lot to cover, so let's start with the basics. What are New Markets Tax Credits, and how can they be used?


PETER BYFORD: The New Markets Tax Credit is a federal tax subsidy administered by the Community Development Financial Institutions Fund, or CDFI Fund, part of the U.S. Department of the Treasury.

PETER BYFORD: It is conceptually similar to the Low-Income Housing Tax Credit and is designed to spur investment in communities with high poverty rates or low median family incomes.

PETER BYFORD: The program can generate a benefit to an investor of up to 15 to 20 percent of total capital project costs.

PETER BYFORD: In general, New Markets Tax Credits can be used for many types of capital projects, whether that is a 501(c)(3) health care system, a YMCA, or an industrial manufacturer putting a new plant in, adding equipment, or buying and expanding an existing plant in a low-income community.

PETER BYFORD: There is about $5 billion worth of transactional volume annually, and about 40 percent of that is industrial, so it is a very powerful tool for industrial manufacturers.


HOST: MATT BRADY: It sounds like, if my math is right, about $2 billion of that allocation is used by industrials. I didn't realize industrials made up such a large percentage.

HOST: MATT BRADY: The credit seems to be a win-win for the low-income community and an effective way for businesses to bridge financial gaps.

HOST: MATT BRADY: Specifically, what kinds of industrial projects can you finance with New Markets Tax Credits?


PETER BYFORD: It is definitely a win-win for communities and projects, and that is exactly what the program was intended to incentivize: job creation in typically disinvested communities.

PETER BYFORD: These can be rural areas or major cities. The key is that the census tract meets the high poverty or low median family income threshold.

PETER BYFORD: For industry, we often think of capital projects as buying land and building a building, but you can do much more than that.

PETER BYFORD: You certainly can buy land and build a building. For example, we helped a client, Swiss Krono, in South Carolina build an entirely new high-density fiberboard facility to supplement an existing co-located engineered hardwood flooring facility.

PETER BYFORD: They built about a $300 million plant and used New Markets Tax Credits to provide a significant subsidy. In that case, they were able to hire about 150 additional employees at that location, which moved the county unemployment rate. That was a substantial impact.

PETER BYFORD: Similarly, we helped a client, Amo Industries in Memphis, Tennessee, that was capacity constrained. They installed a new bottling line with new HVAC systems, new mixing equipment, and new manufacturing lines without adding roofed space to the facility.

PETER BYFORD: That project increased manufacturing capacity by about 30 percent.

PETER BYFORD: A less common but valuable use is assisting businesses in acquiring strategic targets. New Markets Tax Credit equity can reduce the capital the acquiring company needs to buy another business, often preserving jobs in a distressed seller's community.


HOST: MATT BRADY: So the credits are applicable to funding a number of different avenues. That should be encouraging for companies seeking growth and financing solutions.

HOST: MATT BRADY: Is there a minimum or maximum, or a general sweet spot, for New Markets Tax Credits?


PETER BYFORD: Everything starts with the geographic census tract qualification.

PETER BYFORD: From a dollar standpoint, this is a complicated financing tool that provides a great benefit but comes with complexities around closing. It is typically a seven-year transaction with reporting obligations.

PETER BYFORD: To make the benefit worthwhile, we generally view the minimum capital project size as about $5 million.

PETER BYFORD: There is no technical maximum, but the program is administered through Community Development Entities, or CDEs, that participate in a competitive application process to the CDFI Fund and receive a certain number of credits to sell.

PETER BYFORD: Practically, a New Markets transaction closing size is often in the $30 million to $40 million range of New Markets allocation.

PETER BYFORD: In the Swiss Krono example, the $300 million total transaction had about $30 million to $40 million flow through a New Markets financing vehicle to generate the tax credit equity.

PETER BYFORD: There is also a common sweet spot where a single CDE and investor structure provides the most benefit with the least complication, roughly $1 million to $4 million of New Markets allocation.

PETER BYFORD: For example, we worked with a family-owned manufacturer, Vestal Manufacturing, to build an expanded logistics and distribution facility next to their manufacturing site.

PETER BYFORD: It was about a $14 million deal with one CDE and an investor buying the tax credits, which highlights the high end of that sweet spot.


HOST: MATT BRADY: We could go a lot deeper into the technicalities, but I appreciate you scratching the surface and educating us on what New Markets Tax Credits are, how they can be used, and where the sweet spot generally lies.

HOST: MATT BRADY: For some listeners, this will be familiar. For others, it might be their first exposure to the concept.

HOST: MATT BRADY: Additional guidance, including details on the case studies Peter mentioned, can be found in the related guidance section of this podcast web page and at cbh.com.

HOST: MATT BRADY: We hope you will tune in for the final part of our series on Building a Competitive Recovery.

HOST: MATT BRADY: In part five, we will review tax strategies available to offset some of those expansion costs.

HOST: MATT BRADY: For listeners joining us for the first time, we previously released three other podcasts in this series covering digital strategies to optimize your supply chain, the impacts international tax legislation will have on supply chain efficiency, and the challenges of utilizing vertical integration to ease supply chain issues.

HOST: MATT BRADY: You can go back and listen to all three, and we hope you tune in for part five.

HOST: MATT BRADY: Thank you all for listening, and thank you again for your time today, Peter.


PETER BYFORD: Thanks so much.