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November 01, 2018 | Tom Ballard

Three Roots Capital continuing to explore ways to bring more capital to region

By Tom Ballard, Chief Alliance Officer, PYA

Grady Vanderhoofven has a history with something called the “New Market Tax Credit” (NMTC).

The program, established by the U.S. Congress in December 2000, permits individual and corporate taxpayers to receive a non-refundable tax credit against federal income taxes for making equity investments in vehicles known as Community Development Entities (CDEs).

The Southern Appalachian Fund, for which Vanderhoofven is Executive Vice President, was an early recipient of NMTCs, receiving an allocation of NMTCs as part of the very first allocation after the program was approved by Congress. Now, as President and Chief Executive Officer of Three Roots Capital, he and his team have submitted an application to be part of the next allocation of the program that, on a national basis, amounts to $3.5 billion annually.

“You have to be certified as a Community Development Entity to be awarded the tax credits,” Vanderhoofven said, noting that Three Roots meets that requirement. “The likelihood of winning an allocation as a first-time applicant is small because the process is extremely competitive on a nationwide basis.”

Yet, he thinks the time-consuming process that was completed over the summer was worth it if Three Roots can expand or attract capital available to one of its target markets – low-income urban and rural communities.

“If you look at the program from a policy and economic development perspective, the NMTCs were invented as a mechanism to drive equity into low and moderate income rural and urban areas, especially areas classified as distressed,” Vanderhoofven says. “We are pursuing the NMTCs because we are seeing a lot of good projects and companies that satisfy those criteria.”

Securing these tax credits that it could then monetize would add another tool to Three Roots’ mix of debt, loans, and venture capital to help spur more economic development and wealth creation across East Tennessee as well as other areas of central and southern Appalachia.

“The equity investors in projects and companies financed with NMTCs have access to a 39 percent federal tax credit over seven years,” Vanderhoofven explains. There’s a five percent credit each of the first three years followed by a six percent credit for each of the next four years.

Applications for the highly competitive tax credits like the one Three Roots Capital submitted are reviewed to assess the skills and capability of the applicants to deploy credits in a way that has impact. That assessment involves not only the firm that is applying, but the proposed use of the credits.

In spite of the odds, Vanderhoofven sees the program, which is almost 18 years old, as an important way to fund projects in distressed areas, rural and urban, that would not otherwise be viable. Securing the tax credit allocation would also help address a void.

“Tennessee is one of five states that are underrepresented in the NMTC program,” Vanderhoofven says. “Historically, Tennessee has not received its proportional share of NMTCs, which is unfortunate because these tax credits can help attract capital to companies and projects that likely would not otherwise be financed. NMTCs can be a part of a structured financing solution that enables risk-taking, equity investors, as well as debt providers, to get more comfortable with the risk profile and economics of a company or project that can make a significant impact in a low-income area.”

In Three Roots Capital’s case, the firm currently has four specific projects in what he calls a “focused” pipeline and 14 in a more general group that could be financed through the NMTC approach.

“There are high-visibility, super-high impact projects in terms of job creation and attracting third party investment,” Vanderhoofven says. “The impact is enduring and might even grow over time.”

Potential uses of NMTCs include attracting a company to an industrial park; redeveloping an old brownfield site like University Commons adjacent to the University of Tennessee; redeveloping an historic site; expanding a manufacturing operation, and bringing a business – retail, hospitality, healthcare, etc. – to a distressed and underserved area.

“Because of the complexity of the process (overhead and administrative reporting), it really isn’t practical to use NMTCs in a financing less than $10 million,” Vanderhoofven adds.  Despite the competitiveness of the application process and the complexity of monetizing the tax credits, Vanderhoofven says success in this endeavor has the potential to help unlock financing for more than $100 million of projects in this region in the next 12 – 24 months, “so it’s a worthy endeavor.”

Recently, Three Roots was recertified as a Community Development Financial Institution (CDFI) for the second time and also was awarded another $125,000 technical assistance grant under the federal CDFI Program. Vanderhoofven says the funding will allow the organization to continue to scale its business.

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