The Challenges of NMTC: Expansion of DC Food Bank Addresses Tricky Technical Issues

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Structuring a new markets tax credit transaction for the expansion of the Capital Area Food Bank (CAFB) in Washington, D.C offers lessons for others in the NMTC industry.

The project involved the construction by CAFB of a large new warehouse building to enable the nonprofit to serve more low-income households and expand its office and program space. CAFB relocated to the new building on July 31, 2012 from its old, smaller building nearby.

“This is an example of a project that is helping to support the community,” said Washington, D.C. attorney Kristin DeKuiper, a partner at Holland & Knight LLP who was involved in structuring the new markets transaction. She described the transaction at a recent conference of the National Housing & Rehabilitation Association.

Long Record of Service

The Capital Area Food Bank currently distributes more than 30 million pounds of food and fresh produce annually to serve nearly 500,000 low-income people in the Washington, D.C. metropolitan area. Established in 1980, the organization collects the food at its warehouse storage and distribution facility. Each day its trucks deliver the food to 700 nonprofit partners, which in turn provide the food to low-income families and individuals. These partners, located throughout the District, two Maryland counties, and Northern Virginia, include food pantries, soup kitchens, senior centers, shelters, and other organizations. Food is donated to CAFB by grocery stores, restaurants, farmers, individuals, and corporations, and collected and sorted at – and distributed from – the warehouse facility. The building also houses CAFB’s offices, a teaching kitchen, and program space for activities targeted to low-income households, including classes in nutrition and wellness.

The new facility:

  • Substantially boosted the Food Bank’s annual distribution capacity;
  • Increased the warehouse space from 40,000 to 100,000 square feet;
  • Increased the amount of refrigeration space from 20,000 to 250,000 cubic feet; and,
  • Increased office space from 6,000 to 25,000 square feet.

Affiliates of City First Bank of Washington, D.C. and Enhanced Capital of New Orleans provided new markets tax credit allocations for the project.

Technical Issues

DeKuiper said the new markets tax credit was key to enabling CAFB to finance the larger new warehouse and distribution facility. However, she noted there were several challenging “technical issues” that had to be addressed to verify that the proposed project would qualify for new markets tax credits. These issues stemmed in part because the proposed project was an operating business with some unusual features.

One issue was whether the proposed facility would be considered to be located in a low-income community, a requirement for a project to be classified under the NMTC program as a Qualified Active Low-Income Community Business.

“Here we have a food bank that’s operating throughout metropolitan DC and is going out to 700 locations on a daily basis with trucks,” said DeKuiper. “So where is it located really?

She said a three-pronged test applied. This requires that (1) at least 50% of the business’s gross income comes from a census tract that qualifies as a low-income community (“gross income test”); (2) 40% or more of the business’s services are performed in a low-income community (“services test”); and (3) 40% or more of the business’s tangible property is in a low-income community (“tangible property test”). However, if the 50% gross income test can’t be met, it will be deemed to be satisfied by meeting either the services test or the tangible property test at 50% instead of 40%.

“We had to have the accountants do what is called an agreed upon procedures report,” said DeKuiper. “They were able to determine that, even if you took away all of the trucks…and one other outlying property that they had, a warehouse in a non-qualified census tract, that would still leave 50% of their tangible property within that low-income community.”

“Similarly,” said DeKuiper, “they had employees going out and performing services. They had to do that test and determine that at least 40% of the services were performed in the community…And in this case it worked,” even if one excluded all of the employees engaged in off-site activity.

Ability to Repay Loans

The second technical challenge, according to DeKuiper, was to be able to demonstrate, in underwriting the proposed project, that CAFB should be able to repay the new markets tax credit loans originated for the transaction.

“When dealing with a nonprofit like this particular one,” she said, “you don’t have a source of revenue that is coming out of the business; you have an organization whose sole source of revenue is grants and public support through charitable donations.”

DeKuiper indicated that the key factor that provided comfort was that CAFB already had a very long and successful track record in obtaining grants and raising charitable donations. “We were then able to project, because of their track record, that they were likely to be able to get the same level of support in the future over the term of the loan,” said DeKuiper. “So it was reasonable to think that they could repay it.”

“This could be a lot harder when you’re dealing with a newer nonprofit that doesn’t have a track record of that type,” she said.

DeKuiper said CAFB’s new markets tax credit project has had considerable community impact. It created 172 construction jobs, created or retained 73 jobs at closing, and has created 58 new jobs since closing. And annual client visits increased from 383,000 to 478,000 within a year after closing. So they made great inroads in serving the community.