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