Legislature(2011 - 2012)SENATE FINANCE 532
03/30/2011 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB19 | |
| SB92 | |
| SB66 | |
| SB97 | |
| SB90 | |
| SB94 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 19 | TELECONFERENCED | |
| + | SB 92 | TELECONFERENCED | |
| + | SB 66 | TELECONFERENCED | |
| + | SB 90 | TELECONFERENCED | |
| + | SB 94 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | SB 97 | TELECONFERENCED | |
SENATE BILL NO. 66
"An Act creating a new markets tax credit assistance
guarantee and loan program within the Alaska
Industrial Development and Export Authority; and
providing for an effective date."
9:37:56 AM
MARK DAVIS, ALASKA INDUSTRIAL DEVELOPMENT AND EXPORT
AUTHORITY (AIDEA) testified on SB 66. He stated that the
bill allows AIDEA's participation and support in a federal
tax credit program known as the New Markets Tax Credit
(NMTC). The bill is part of AIDEA's plan to add tools to
further economic development in the state. The NMTC program
was run by the Internal Revenue Service (IRS) and was
started in 2000 as a unique equity leveraging program. He
explained that the program works by encouraging people to
compete with IRS tax credits available through the United
States Department of Treasury. The credits are awarded as
Community Development Entities (CDE). Those entities then
seek investors.
Mr. Davis mentioned two sets of investors in the program:
equity investors and leverage lenders. The equity investors
receive a 39 percent credit on their federal taxes over a 7
year period. The tax credits are available to low income
areas, certain rural areas, or to targeted populations such
as Indian tribes. The program is also available to targeted
populations lacking access to loans.
Mr. Davis explained that once a CDE has a tax credit it
finds investors and a bank to make the leverage loan. He
noted that the Platinum Fish Processing Plant and the elder
care facility in Kotzebue both utilized the credits as
well. Unfortunately, the program has lacked vigor due to
the national credit crunch. The leverage lenders must agree
to two restrictions. The first restriction is to take
interest only on the leverage loan portion of the
investment for seven years and must agree not to foreclose.
The project can use the equity capital by the qualified tax
driven investors and pay interest only for seven years. At
the end of the seven years, the equity investors forgive
the investment and the loan is refinanced. The program
provides instant equity to the refinancing at the end of
the 7 year period and lowers the cost of a project by
approximately 20 to 25 percent.
Co-Chair Stedman asked about the forgiveness of the equity.
Mr. Davis responded that the tax equity investors are
driven by the 39 percent tax credit.
Co-Chair Stedman asked how many years the investors have to
utilize the 39 percent tax credit. Mr. Davis responded that
they utilize the credit at different percentages over seven
years.
Co-Chair Stedman asked if the percentage is taken directly
from the tax bill. He asked if the investors walk away from
their equity position. Mr. Davis responded yes. He added
that approximately 99 percent of cases follow the described
format.
Co-Chair Stedman asked about the issue of the debt
incurred. Mr. Davis explained that the leverage lenders
place 70 percent of funds into the project. At the end of
seven years, the residual amount of the loan is used for
refinancing. The original equity can be used as a portion
of the debt equity calculation to qualify for the
refinancing.
9:43:34 AM
Senator Thomas asked about the equity provision. He
wondered if the federal tax credits offset the equity in
the seven year period of time. Mr. Davis responded that
investors with tax liabilities seek tax credits or
consortiums of investors hire employees to seek out those
looking for NMTC opportunities. Usually the 39 percent tax
credit provides the motive. The transaction is leveraged
and works well for low income communities because of the
equity position gained after seven years. The difficulty
with the program is due to the bank's unwillingness to lend
at interest only, or without the ability to foreclose. Many
states operate as a community development entity. He noted
that AIDEA made a different choice as Alaska has a CDE
known as Alaska Growth Capital, which is already active in
the state. The approach taken by AIDEA is to guarantee the
leveraged part of the loan for the seven year period. He
stated that AIDEA canvassed banks and talked to Alaska
Growth Capital and hired a consultant with the consensus
that an AIDEA guarantee would be sufficient to revive the
program in Alaska.
9:45:59 AM
Co-Chair Stedman supposed that the loan sounded like a zero
money down, 100 percent leveraged proposition. He wondered
about the lender's recourse when dealing with the project
assets. Mr. Davis responded that a bank must agree to
interest only and cannot foreclose during the seven year
period during which the credit exists. The code insists
that if the project fails and payments are not made, then a
recapture event occurs. A recapture event means that the
investor must repay all credits received with interest at
the interest repayment rate from the first date of the
filing of the first return claiming the credit.
Co-Chair Stedman understood that the equity investor covers
the debt if the project implodes. Mr. Davis corrected that
the equity investor repays the credits with interest. The
interest in a tax bill can often exceed the principal.
9:48:08 AM
Co-Chair Hoffman understood that the bill targets
economically disadvantaged and rural areas. He noted that
program was reauthorized by congress for an additional two
years beginning in January. He asked about the anticipated
success of the program in rural areas of the state. Mr.
Davis responded that AIDEA could provide one or two new
market tax credit projects each year. He added that the
projects are complex and require ample time to assemble.
The projects are available in areas that conventional
lending is unavailable and can be used to leverage lending
to provide a project that would not cash flow for seven
years. He stated that the project would work for a platinum
fish plant or a processing plant in rural Alaska. Another
advantage of the program is its few restrictions for the
types of projects eligible for funding. Most federal
programs are restrictive. The list of restricted projects
is limited to golf courses, massage parlors, hot tubs and
alcoholic dispensaries.
Co-Chair Stedman asked about the fish plant in Ketchikan.
Mr. Davis clarified that the mentioned fish plant was in
Platinum Alaska.
Co-Chair Stedman asked if the fish plant was used for cold
storage or waste reduction plant. Mr. Davis answered that
the program has been used for a fish processing plant,
elder care facilities, industrial plants, office buildings
and renovation of buildings in low income areas.
9:50:51 AM
Co-Chair Stedman asked about the population cap of 2000.
Mr. Davis responded that three triggers exist: a census
track for poverty, a census track for population less than
2000 or a census track with a large targeted population.
9:51:27 AM
Co-Chair Stedman mentioned one zero fiscal note. He asked
about the cap of $40 million. Mr. Davis answered that the
original cap was $50 million. In the hearing before the
Senate Community and Economic Development committee Senator
Menard suggested reducing the cap to $40 million and AIDEA
agreed to the reduction. He thought that the cap would
provide the ability to provide two projects per year.
9:52:17 AM
TED LEONARD, EXECUTIVE DIRECTOR, AIDEA (via
teleconference), echoed the testimony of Mr. Davis. He
added that AIDEA is seeking another tool for the promotion
of economic development in rural areas or areas of the
state suffering poverty.
CHRIS KOLEROK, CONSULTANT ALASKA GROSS CAPITAL (via
teleconference), testified in support of the legislation.
He stated that Alaska Gross Capital is the only entity with
an allocation from NMTC and has received $90 million. He
stated that "the NMTC program is a powerful tool to bring
Wall Street capital to main street Alaska." He mentioned
that his company's goal was to bring another elder care
facility, a domestic violence shelter, and a village health
clinic online.
9:55:55 AM
SB 66 was HEARD and HELD in Committee for further
consideration.
9:56:32 AM
AT EASE
10:03:01 AM
RECONVENED