overcomingfinancialhurdles

How Manufacturers Can Overcome Financing Hurdles

The federal New Markets Tax Credits program is attracting capital to hundreds of businesses, especially in rural pockets of America, to help them acquire property, build plants and retrofit out-of-date facilities with new technologies.

From building new plants to purchasing cutting edge equipment to introducing new product lines, there are hundreds of potential industrial projects across the country that are stalled as companies struggle with how to finance them in the midst of a challenging traditional financing environment.

But there is a way to get these projects moving.

For those companies that can provide a measurable, tangible benefit to economically distressed communities (e.g., job creation and environmental sustainability), there are a variety of local, state and federal programs that can help. One in particular, the federal New Markets Tax Credits program, is attracting capital to hundreds of businesses, especially in rural pockets of America, so they may acquire property, build plants and retrofit out-of-date facilities with new technologies.

In the process these manufacturers are not only growing their businesses, they are also contributing to empowering and revitalizing local communities. For that reason the U.S. Treasury, which administers the program, is on the record seeking more manufacturing projects for investment.

Take the example of Horsehead Holding Corp., one of the largest zinc producers in the United States and a manufacturer of value-added zinc products, including zinc oxide and zinc powder. Horsehead is both an integrated producer as well as a producer of zinc from recycled sources. Horsehead’s recycling facilities recover zinc from electric arc furnace (EAF) dust, generated by minimill steel producers. EAF dust is one of the largest solid waste streams produced by electric arc steel furnaces, and is labeled as hazardous by the Environmental Protection Agency. It is estimated that several million tons of EAF dust is produced worldwide.

In 2009, Horsehead’s management sought to build a plant to recycle EAF dust, at a cost of $87 million. This facility would provide them a competitive advantage, creating a green option for steel producers in lieu of land-filling or other expensive disposal methods. And commercial customers of one of the eventual end products – zinc oxide – particularly in the rubber and plastics industries, have a “greener” source point in their supply chains.

The Pittsburgh, Pa.-based company was attracted to building the facility at an industrial park in rural Barnwell County, S.C., a location that serves as the centerpiece of a local economic development plan. Since 2007, poverty rates there exceeded 20%, largely due to the closing of textile and apparel plants that had employed 10.5% of the local workforce. The State of South Carolina ranked Barnwell County as “distressed,” its most acute development tier.

Financial incentives from municipal, state and federal sources accelerated Horsehead’s original construction schedule. To raise capital for this project – from constructing the facility to the purchase and installation of two Waelz Kilns – Horsehead received $10 million in New Markets Tax Credit allocation from both CEI Capital Management and Bank of America, with Bank of America providing equity for the deal, while Horsehead self-funded the debt portion.

The facility began receiving EAF dust ahead of schedule in April 2010, and has the capacity to process up to 180,000 tons per year of EAF dust. The community benefit is significant too. Horsehead created over 50 new jobs with an average annual wage that exceeds the county per capita level by 62%.

Created by Congress to Spur Economic Development

Scenarios like Horsehead’s jibe with the findings of a new report from the New Markets Tax Credit Coalition, published in June 2013. It notes that 15% of program investments were made in manufacturing or industrial businesses, making it the third largest sector receiving funds, ranking behind community and healthcare projects. Last year, in 2012, industrial projects using New Markets Tax Credits created 2,684 full time jobs and 3,809 construction jobs.

The New Markets program is flexible for a wide range of projects – our firm alone has invested over $650 million of New Markets Tax Credit capacity in 23 states, into projects that have converted paper plants into bio-refineries, constructed medical device manufacturing facilities, built solar energy “farms,” restarted idle factories and purchased unique equipment like blow molding technology.

Congress first established New Markets Tax Credits in 2000 to stimulate investment and economic growth in low-income and under-served rural and urban communities that are often overlooked by conventional capital markets. Investors receive a seven-year, 39% federal tax credit as incentive to finance loans and investments in businesses and economic development projects in these distressed communities.

While the New Markets program has a track record of success and is currently in high demand, it is not a solution for all businesses. The program is complicated and requires significant effort and teamwork by all parties to make the transactions go smoothly.

Not all projects are eligible for the New Markets program, either. The ideal size for the credit is between $10 million and $30 million. In order to qualify, projects are required to pass a “but for” test, loosely meaning that the project could not be funded with conventional financing. Among the primary criteria, the business must be located in a defined low income community, derive at least 50% of its income in a low-income community or 50% of its employees must qualify as low-income individuals at the time of hire. Determining qualifications for these criteria should be an early step on any project planning process and include consultation with experienced tax counsel and NMTC practitioners.

Rural Industries for the 21st Century

By using forest resources to heat homes, power the electric grid, and provide natural sanctuaries for people and wildlife, the nation’s forests are often tied to rural economies and continue to play a fundamental role in fueling an innovation economy, evolved from one rooted for centuries in lumber, paper manufacturing and even ship building.

From Maine to Oregon, new forest-based enterprises are coming online with financial support from New Markets Tax Credits. The result is constant re-invention and job creation within an age-old industry, beginning with growing new forests, then harvesting and moving the timber, then processing it in 21st century ways, breaking down the trees into molecules with a variety of potential uses.

New Markets Tax Credits will fund construction of a new wood pellet manufacturing plant by Westervelt Company in rural Alabama, where nearly half the population lives in poverty and unemployment is greater than 10%. Westervelt is a land resource organization taking an environmentally responsible, socially aware “Highest and Best Use” (HBU) approach to its nearly 500,000 acres of timberland and natural resources.

The new plant is consistent with its mission as stewards of the land and will produce 280,000 metric tons of wood pellets for use as an alternative fuel source for customers globally. This endeavor is expected to create 34 permanent jobs while assuring demand for locally produced timber and the people that harvest and transport that wood.

Available to U.S. and Foreign-Owned Businesses

The New Markets Tax Credit has frequently been the catalyst for a foreign-owned manufacturer to expand in the U.S.

In Wisconsin, Emmi Roth USA (Emmi), the U.S.-based subsidiary of a Swiss milk processor, is utilizing New Market Tax Credits to build a 77,000 square foot cheese processing facility to support the growing demand for specialty cheese products. Their facility brings new cheese-making technology to the U.S. and will focus on the production of Grand Cru, a category of cheese not currently produced in the region.

This was Emmi’s first major investment to build and own a facility in the U.S. The New Markets program made it easier for the company to take such a risk.

The project has a ripple effect too: It will also help other, smaller cheese manufacturers by insuring there is a critical mass of support services. including large animal veterinarians; dairy, forage and manure handling equipment dealers; and transportation services.

In addition to these job-creating benefits, the Wisconsin facility strives to be LEED or Energy Star Certified, and the project sponsors have set aside an additional $435,000 fund to support the financing of local healthy food production and distribution or retailing to low-income people.

CEI Capital Management allocated $20 million in New Markets Tax Credit capacity to finance the project, with the Local Initiative Support Corporation (LISC) allocating $9 million in New Markets Tax Credit capacity in this rural/non-metro deal and Waveland Community Development providing additional New Markets allocation. Chase provided the equity, while an Emmi Roth USA affiliate provided the debt financing for the transaction, which closed in October 2012.

Getting Started

If you believe your company is a candidate for New Markets Tax Credits, your best first step is to speak with a professional who understands the program and can help you understand how you need to structure the financing, corporate ownership and other considerations necessary to qualify. There are a variety of banks that are experienced in this sort of community development, as well as the qualified Community Development Entities who administer the program.

Charlie Spies is CEO of CEI Capital Management, which creates and preserves jobs and improves quality of life in rural, low-income communities by providing access to project capital through New Markets Tax Credits. In the course of the last decade CEI Capital Management has placed more than $650 million in 74 different projects around the country. It is a wholly owned subsidiary of CEI, the Wiscasset, Maine-based nonprofit community development financial institution.

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