Rockland Trust has formed a community development entity to help meet its Community Reinvestment Act requirements and tap into the New Markets Tax Credit program. Pictured is Rockland Trust’s main office in Rockland.
A government program that allows banks to receive tax credits is beginning to take hold in Massachusetts. The New Markets Tax Credit program not only gives a bank a break on its taxes, but also helps financial institutions comply with Community Reinvestment Act requirements. Rockland Trust is one local institution taking advantage of the program.
According to the overview from the U.S. Department of the Treasury’s Community Development Financial Institutions Fund Web site, the NMTC program allows taxpayers – in this case, banks – to receive a credit against their federal income taxes for making “qualified equity investments” in designated community development entities, or CDEs.
“Substantially all of the qualified equity investment must in turn be used by the CDE to provide investments in low-income communities,” according to the Treasury Department Web site. “The credit provided to the investor totals 39 percent of the cost of the investment and is claimed over a seven-year credit allowance period.”
In each of the first three years, the investor receives a credit equal to 5 percent of the total capital invested in the CDE. For the final four years, the value of the credit is 6 percent annually. Investors can’t redeem their investments in CDEs prior to the conclusion of the seven-year period.
Each year, the tax credits are allocated to CDEs under an application process. Once awarded the tax credits, CDEs can offer the credits to investors.
Rockland Trust applied to create a CDE in the fall of 2003, said Ed Seksay, general counsel to the bank.
“It’s a competitive application process,” he said.
CDE status was awarded in 2004 to Rockland Trust. According to Seksay, the CDE is a subsidiary of the bank. Once a CDE is established, it can apply to the Treasury Department each year for tax credits, which it can sell to investors. In this situation, the bank is the investor. Rockland Trust’s CDE received authorization to make targeted loans of up to $30 million which would result in $11.7 million in tax credits for the bank over seven years.
The Treasury Dept. lays out specific guidelines stating what entities can qualify as a CDE. CDEs must be a domestic corporation or partnership that has a mission of serving, or providing investment capital for, low-income communities or low-income persons; maintains accountability to residents of low-income communities through their representation on a governing board or advisory board to the entity; and has been certified as a CDE by the CDFI Fund.
Seksay said the program was suggested to the bank by outside attorneys and accountants. The bank has contributed a lot of funding to low-income areas within its market area, such as Brockton and New Bedford, and realized the program was a good fit.
“We looked at where our footprint is,” Seksay said, adding the bank does a lot of lending in areas that the NMTC program touches.
‘Benefit to Borrowers’
With the program, Rockland Trust has closed 13 loans with an average loan size of $1.3 million. Out of the total $30 million awarded, Seksay said the bank has been able to make between $18 and $20 million in loans in the first year.
Seksay said the bank has been able to help a new business move into a vacant New Bedford building, bringing between 30 to 40 employees into the area. In Brockton, the bank provided a loan to finance a roof repair for a small business that otherwise would have had to close, preserving jobs.
“You’re bringing new business into a low-income community or helping a business stay there,” Seksay said.
Fall River, New Bedford, Brockton and areas of Plymouth are the main recipients of Rockland Trust’s NMTC program. While the investor receives tax credits, the borrowers are also reaping some benefits. Seksay said the bank is required to give more flexible terms and conditions with the loans.
“You’re giving borrowers more leeway,” he said.
Some of that leeway includes below-market rates, longer-than-usual amortization periods and higher collateral ratios.
“We pass the benefit to borrowers by virtue of the tax credits,” Seksay said.
The bank actively seeks deals that could fit into the NMTC program. Being involved in the community, becoming aware of new deals and making the bank visible to developers has been important in arranging the loans, Seksay said.
There are a handful of other institutions in Massachusetts that have formed CDEs in order to participate in the NMTC program. PeoplesBank in Holyoke formed a CDE in 2003 applied for funding, but has not received an allocation, said Sue Wilson, vice president of marketing for PeoplesBank. However, the bank hopes eventually to receive an award because the program supports the bank’s mission.
“We got involved [because] it is a great way of investing in the community,” said Wilson.
Capital Crossing Bank and OneUnited Bank, both in Boston, have formed CDEs in recent years, according to the Department of the Treasury.
Unlike other Community Reinvestment Act initiatives where a loan may be made for a risky endeavor, Seksay said the NMTC program is less speculative in nature.
“There is a direct investment and direct results to the community,” he said.
Wilson said the difference between other CRA initiatives and the NMTC program is that the tax credit program focuses on neighborhoods instead of people.
Rockland Trust is promoting the program and Seksay said other banks should consider applying.
“This is a program that banks should participate in quite fully,” he said. “This is not a program just designed for banks, but it is well suited for banks.”
Rockland Trust currently is preparing its application for the fourth round of competition for the allocation of up to $3.5 billion in tax credits nationally under the New Markets Tax Credit Program. The application deadline is Sept. 21.
