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NMTC Market Liquidity and Efficiency: Where Does Pricing Go From Here?


By Ira Weinstein, CohnReznick  
 
This article originally appeared in the December 2016 issue of Tax Credit Advisor.
 
Market liquidity exists when the environment is ripe for assets to be bought and sold at stable prices. Market efficiency is the availability of information, thereby allowing everyone the chance to transact opportunities. The current New Markets Tax Credits (NMTC) industry is experiencing both market liquidity and efficiency. 
 
Supply of allocation detail is publicly available, and investors are aware of the transaction pipeline before allocation awards are made. Industry participants are attuned to pricing data as they either compete for deal flow, or through the web of consultants, attorneys, accountants, and Community Development Entities (CDEs), all who share information to ensure maximum benefit to communities. Demand for allocation has always outstripped supply, putting upward pressure on pricing. As program awareness and variation in underlying asset classes (QALICB level) have grown, investor demand has steadily driven prices higher. 
 
Potential for a secondary market is another sign of market liquidity and efficiency. NMTC investment is certainly an asset that can trade after the initial offering – and there has been a fair amount of such activity. However, no sustained effort exists among a cross section of originators. Banks comprise a significant portion of the investor base due to their obligations from the Community Reinvestment Act (CRA). However, once the investment is made to create an NMTC platform – and given the duration of the credit stream – there would have to be considerable wide price spread to make secondary trading worthwhile.
 
Wide pricing spread has existed from time to time, but those windows have been brief. That would leave trading to groups that were merely there to facilitate brokerage and no such platform has been developed. Interestingly, one option is to facilitate investment by individuals. This is technically possible, however, for a host of reasons, has never been practical. 
 
NMTC investment is transacted in what resembles a competitive bid, where more than one offer is chosen. However, oftentimes, negotiated financing occurs, whereby an investor is selected so long as the price they offer to purchase the partnership interest is deemed to be within the range of the market. Rarely does an investment result in more than one investor sharing the investment proportionally, as happens in many other markets.
 
Liquidity and efficiency is not new. In the early days of the program, there were a variety of opinions about how to price risk associated with the “cliff-test” recapture provisions. Investors quickly became comfortable with assessing and managing risk, and as they jockeyed for market share, the asset pricing moved higher quickly. During the Great Recession, pricing was variable, but deal flow buoyed the market. As the economy improved, more allocation was awarded and pricing continued to climb. We recently arrived at what many thought was maximum pricing as a multi-year extension of the NMTC was secured.    
 
NMTC pricing climbed more quickly than did Low Income Housing Tax Credit (LIHTC) because of the nuances of the respective compliance regimes and the way the platform was constructed. The NMTC is shallow credit and benefits from sources of debt that perfect the QEI. The debt side of QEI capitalization is also liquid and efficient, and in theory, capable of secondary market activity whereby lenders can be “taken out” as conditions warrant. This is a product that has not been widely available given the complexity of supplanting a leverage lender and the requirements of the NMTC investor.
 
Once a long-term extension was secured and talk of permanence became pervasive, potential existed for further hikes. Certainty of program duration could bring entrants to the market, placing upward pressure on pricing. Also, industry participants felt comfortable discussing changes to the program that could provide simplification and create value, namely, removing the basis adjustment that makes the credit taxable. Elimination of this provision makes it possible for investors to pay a higher price to earn the same yield. 
 
The wrinkle in this ointment has always been tax reform. Prior to the presidential election, there was a quiet confidence that if tax reform happened, it would happen with the NMTC program intact. With an administration that has not tipped its hand about the longevity of the NMTC, pricing is totally in flux and many may look at a reset. The days of the steady climb could be over – at the expense of additional investment in communities.

 

Ira Weinstein is co-managing principal of CohnReznick's Baltimore office and leader of the NMTC Transaction Group. To learn more about our services on behalf of the NMTC Program, visit NMTC Resource Center or contact Ira Weinstein at ira.weinstein@cohnreznick.com or 410-783-4900.

 
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