HB 120-AIDEA: NEW MARKETS TAX CREDIT PROGRAM  10:59:30 AM CHAIR HERRON announced that the final order of business would be HOUSE BILL NO. 120, "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." 10:59:59 AM TED LEONARD, Executive Director, Alaska Industrial Development & Export Authority (AIDEA) and Alaska Energy Authority (AEA), Department of Commerce, Community & Economic Development (DCCED), informed the committee that in the last two years AIDEA has been searching for tools to use in the efforts to promote more economic development in the state, to diversify Alaska's economy, and to increase investment in rural areas. He relayed that during discussions with other economic development agencies it was noticed that AIDEA does not participate in an U.S. Department of the Treasury, Internal Revenue Service (IRS) program called the New Markets Tax Credit (NMTC) program. This program is available in Alaska through a company called Alaska Growth Capital (AGC), and he indicated that more information on AGC would be provided during later testimony. Mr. Leonard stated that HB 120 is another tool AIDEA can use to increase investments in areas with low incomes and smaller populations. In addition, the bill solves a problem that arose last year. Mr. Leonard recalled that last year AIDEA was authorized to issue American Recovery and Reinvestment Act (ARRA) Recovery Zone Facility Bonds (RZFBs), which are a type of bond that could be utilized by businesses to get tax-exempt financing. However, often projects in rural areas such as Bethel did not have the initial cash flow to qualify for the bonds. Mr. Leonard expressed AIDEA's belief that the program would help give tax credits, lower the cost of debt, and give "patient capital" to projects for a period of seven years, after which the project would qualify for conventional financing. 11:03:42 AM MARK DAVIS, Economic Development Officer, Alaska Industrial Development & Export Authority (AIDEA) and Alaska Energy Authority (AEA), Department of Commerce, Community & Economic Development (DCCED), responded to questions that were previously submitted to AIDEA. The first question asked when AIDEA would require an economic benefit analysis prepared by a person acceptable to the authority. Mr. Davis said that as part of the analysis of a NMTC project, AIDEA would want to ensure that the project could pay for itself, and probably would require an economic benefit analysis. In response to the second question, he explained that AIDEA has already determined which Alaska communities meet the criteria and are eligible to use the tax credit program. However, Mr. Davis cautioned that eligibility can be complicated by a 2004 amendment to the original IRS legislation regarding "targeted populations [that] can include for example, an Indian Tribe or Native Americans, additionally census areas with less than 2,000 people in the census." 11:06:00 AM REPRESENTATIVE TUCK referred to the IRS amendment and asked whether targeted populations are "and/or" census areas with less than 2,000 people. 11:06:26 AM MR. DAVIS indicated "and/or." He stated the next question asked for further information on NMTC loans made by the New Jersey Economic Development Authority (NJEDA). First, Mr. Davis confirmed that NJEDA is the only known state agency offering NMTC loans. Second, he noted that as AIDEA surveyed other states, it found that other states are operating as the "middleman," or the community development entity (CDE) arm, which accepts the funds from equity investors and bank loans. In Alaska, AGC is available to fill this role and he opined AIDEA does not need to act as a CDE. He referred to advice from Vincent Ravaschiere, New Markets Capital Company, New York, New York, who concluded that although there are equity investors available, it is difficult for NMTC projects to obtain leveraged loans from private financial institutions, and the problem with the program is a general lack of available credit. Mr. Davis reported that Mr. Ravaschiere further advised that guaranteeing or providing leveraged loans should help alleviate the "bottleneck." Thus, AIDEA is proposing to start the program by providing a guarantee to the bank that will increase the bank's interest in a proposed project. He pointed out that banks are restricted to interest-only loans for the first seven years and cannot have a secured interest in the project. By guaranteeing the loan, AIDEA will make this type of loan more attractive to a bank. Essentially, AIDEA's involvement will help the program work by providing leveraged lending and thereby reducing the cost of a project by about 20-25 percent; allowing the project to pay only interest for seven years; allowing re-financing at the end of seven years of only a portion of the project, because the equity provision is exhausted with the tax credit. Mr. Davis stated possible projects for NMTCs may be wind farms in rural Alaska, or renovations of old buildings. Furthermore, other federal credits such as tax credits for renewable energy projects, or historical buildings, can be used in conjunction with the NMTC program. He concluded that the program is 10 years old, has a good track record, and will not require funds from the general fund. 11:10:54 AM MR. LEONARD added that this program would be a new tool for AIDEA with the following cap: The total amount at any point in time that AIDEA could have outstanding in its portfolio would be $50 million in leveraged loans and leveraged guarantees. 11:11:45 AM HUGH SHORT, President/Chief Executive Officer, Alaska Growth Capital (AGC), informed the committee his company is the only state-chartered Business and Industrial Development Corporation (BIDCO) in Alaska. In addition, his company can participate in NMTC projects because it is an U.S. Department of the Treasury (DOTRES), Community Development Financial Institutions (CDFI) Fund certified organization, and thereby is allowed to compete for NMTCs. In fact, during the past 10 years, Alaska Growth Capital BIDCO Inc. has received $90 million in NMTCs. The company is also the only CDE in Alaska, and coordinates with CDEs across the country on projects in Alaska. The company is owned by Arctic Slope Regional Corporation (ASRC) and has used public, private, and federal sources to create over 2,000 jobs since its inception. 11:13:47 AM MR. SHORT, in response to Representative Gardner, relayed that the Business and Industry Development Corporation Act was enacted in the late '90s to allow the state to regulate and create lending companies that are not banks, but are capitalized by private capital. Alaska Growth Capital was capitalized by ASRC and by initial loans and grants from the state for $3 million. The BIDCO designation is important to AGC and it provides annual reports to the state on the number of jobs that are created. In addition, AGC is examined by DCCED, Division of Banking and Securities. The Department of the Treasury created the CDFI Fund under the Clinton Administration to encourage investment into low-income communities, whether rural or urban, and it is a designation that allows a company access to federal programs including NMTCs, grants, and other programs. 11:15:57 AM MR. SHORT continued to explain that AGC is actively involved with NMTCs and believes HB 120 would be a "very large incentive" for equity investors across the country to invest in Alaska. The biggest hurdle to projects is the requirement to forebear seven years after default and, due to the uncertainty in today's regulatory atmosphere, many banks are cautious and conservative. Other issues such as interest-only payments for seven years, and the indirect lien, may be overcome. Mr. Short opined the proposed legislation would allow AIDEA to make prudent investment decisions and could result in Alaska becoming one of the most successful NMTC states. Furthermore, enactment of HB 120 will encourage many projects in distressed areas of rural Alaska, Anchorage, Fairbanks, off the road system, or in Southeast because it will add 15-20 percent of capital to the project to offset the cost of doing business, and allow the entrepreneur or the nonprofit to build infrastructure. He described two examples: the fish processing plant in Platinum, and the purchase of $18 million in tax credits for an elder care facility in Kotzebue. Mr. Short concluded that HB 120 is a key to creating jobs in rural and urban Alaska. 11:21:06 AM REPRESENTATIVE FOSTER expressed his support of federal tax credits programs but asked whether there is risk to the state. He encouraged partnering with the Coastal Village Region Fund, and agreed with taking advantage of programs targeting rural, economically devastated areas. 11:22:32 AM REPRESENTATIVE TUCK also supported programs for rural areas. He asked for elaboration on how the proposed legislation will offset 15-20 percent of capital costs. 11:22:52 AM MR. SHORT explained that a tax credit allows for equity investment by a tax credit investor. For example, a $10 million project has $3.9 million available for a tax credit. An investor could be U. S. Bank, Wells Fargo Bank, or New York Community Bank. The investors buy at a discount and receive a 10-15 percent annual return over the seven-year compliance period. In the example, the $3.9 million available might be purchased for $2.7 million and after subtracting costs, the remaining equity is funds available to the investment, interest- only for seven years, and often at a below-market interest rate. After seven years, the project can purchase the debt without paying back the principal. Therefore, for a $10 million project, the project receives about $1.5-2 million upfront - which can be purchased after seven years for a nominal fee - and the debt is forgiven. Mr. Short concluded there is a mutual benefit to all parties as the tax credit investor receives a return with little risk, and the project receives about a 15-20 percent return of capital. 11:26:03 AM REPRESENTATIVE TUCK understood why projects would be given a seven-year timeframe before assets are collected, but noted that debt can also become a hurdle. He asked Mr. Leonard or Mr. Davis to explain how the proposed legislation "bridges that gap, how that we're able to overcome that seven-year hurdle." 11:27:10 AM MR. DAVIS acknowledged that the problem with the program is that two parts are needed for a project: the qualified, equity investors who are going to get the tax credit; a lender to supply the rest of the capital, and then refinance to a conventional loan. However, the lender is asked to wait seven years and not foreclose in the case of default. House Bill 120 allows AIDEA to provide a guarantee to the lender during the seven-year period that in the event of a default, AIDEA will take the lender's place and wait to foreclose until the end of the compliance period. He said, "This is just an idea to free it up because right now, there are no, as I understand it, there are very few leverage lenders willing to operate in Alaska." 11:28:58 AM MR. LEONARD assured the committee that AIDEA has a large net- asset balance of approximately $1 billion and can invest in long-term projects. For example, AIDEA can extend loans for 25 years because of the mixture of its asset base and its strong portfolio. 11:30:00 AM MR. DAVIS added that IRS regulations provide that if a project does not continue for the full seven-year period, a tax- recapture applies to the investors. He opined this is another reason why NMTC projects have succeeded. 11:30:47 AM REPRESENTATIVE THOMPSON noted the proposed bill indicates the loans in this program can be for a term not to exceed 10 years. 11:31:14 AM MR. DAVIS stated that the proposed language on page 3, paragraph (4), line 21, of the bill conforms to commercial practices. 11:32:39 AM REPRESENTATIVE FOSTER asked how Alaskans will be made aware of the program. 11:32:56 AM MR. DAVIS envisioned that AGC is a very effective economic development company. In addition, AIDEA will work with AGC, consultants, and other NMTC funds that have expressed interest in using the allocations available for Alaska. 11:34:03 AM MR. LEONARD opined that if the proposed legislation is enacted, AIDEA would partner with AGC, and would also utilize other state agencies to distribute information throughout the state. 11:34:42 AM CHAIR HERRON requested that the AIDEA board of directors consider working with the House Special Committee on Economic Development, International Trade and Tourism to identify and tour projects during interim. [HB 120 was heard and held.]