Challenges of Using NMTCs for Operating Business Investments

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2 Challenges of Using NMTCs for Operating Business Investments PANELISTS Amanda Read Novogradac & Company LLP Kermit Billups Greenline Ventures Robert Labes Squire Patton Boggs LLP Nathan Ware BakerHostetler LLP

3 Why Invest in Operating Businesses

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10 NMTC in Baltimore Project Types Since 2003, the NMTC has delivered more than $2 billion in financing to 52 Baltimore businesses, community facilities, and service providers. Source: NMTC Coalition

11 Operating Business CDE Analysis Real Estate Overall Business Qualification Operating Business Operating business often capitalized through sweat equity and family/friends funding and market (bank) debt. Do we believe in the mission, impacts and outcomes related to the business? Quality and character of management team? Has the business exhausted options for additional market rate capital? Industry and Business Strategy Analysis: Do cash flow projections show stable growth or rapid increases in profitability? Is hiring a sales force sufficient to drive sales, especially in international markets? Does company need additional funding for consultants, regulatory approvals? Have they fully determined their need? How are other players in market performing and raising capital? Valuation: Recent equity rounds? What business events have impacted valuation since capital raise? Ability to raise additional funding. Many businesses actually underestimate the need for subsidy.

12 Define the Problem Real Estate Operating Business Since the recession, many banks have scaled back or eliminated small/medium business lending. BANKERS SEE RISK! excessive loan to value (LTV) insufficient owner equity inadequate collateral unstable cash flows lack of management operating experience unproven markets and technology poor industry structure (barriers to entry)

13 Greenline Investment Products Equity and hybrid capital investments of $50,000 - $500,000 Start-up and early stage growth companies; may be pre-bankable Often women and minority-owned Portfolio companies in environmentally sustainable health, clean tech, food/ag, fintech and consumer businesses Subordinate and flexible loans of $250,000 - $2,000,000, terms of 1 7 years Catalytic debt financing for established businesses needing to expand or establish banking relationships Deals sourced via responsible national bank and development partner network and online partner BodeTree Minimum Deal Size $5-7m for Operating Businesses and Real Estate Projects $547mm in direct NMTC allocations generated $700 mm in high distress LICs, creating: over 30,000 jobs $388 mm in businesses with environmentally sustainable features $168 mm in businesses focused on, or owned by women or minorities $207 mm in estimated new annual tax revenue EXISTING GROWTH FUND SBCF I and SBCF II EXISTING NMTC FUNDS Depository CDFI MDI Forum Innovative Deals and Financing Partnerships, Part II April 19, 2018 Page 13

14 Greenline Community Ventures Small Business Capital Fund Multi-asset, multi-investor blind fund is an effective structure for achieving impacts with small deals. Revolving funds are preferable enhanced impact, credit risk management, no 7-yr lockout requirement, etc). Requires experience, capabilities and personnel bandwidth to raise the capital for the fund in a fully discretionary manner. Greenline has first loss skin in the game Important to have investors that trust the manager and don t need substantive controls. Difficult to execute a small business loan fund if the manager needs to get any outside consent for the loans from the tax credit investor or fund lenders. Helps to perform the AUP in-house and just get sign off from accountants for documenting the QALICB status/reasonable expectations. 14

15 Greenline Community Ventures Small Business Capital Fund Maximum Community Impact! Allows Greenline to finance multiple qualified businesses over 7-yr compliance period Uses subsidy during project stabilization then enables traditional bank capital to invest in LIC Leverages more conventional, non-nmtc capital Maximize efficiency of NMTC subsidy o Jobs created/retained per tax credit o Tax revenue generated per tax credit 15

16 Rocky Mountain Instrument Co. Defining the Community Problem Community Problem: Shortage of venture capital, flexible debt and incubator services in support small businesses and emerging technology companies. Causes of the community problem: Venture capital providers and support services are concentrated regionally. Operate with limited geographic scope. Community need: Cost effective source of growth capital and management support for emerging technology companies. Reliable capital and support services will allow these businesses to remain in their communities of origin.

17 Rocky Mountain Instrument Co. Business Description Operating Business Investment Minority-owned manufacturer of optics, coatings & assemblies for laser and imaging applications. 100 employees over 50% minority, 90,000 sq. ft. facility in Lafayette, CO Defense, industrial, medical, semiconductor, scientific markets Seeking capital to expand into unique market segment involving Zinc Selenide.

18 Rocky Mountain Instrument Co. NMTC Solution NMTC Supported Solution: Operating business investment. Company exhausted traditional sources of funding Unable to secure growth capital Existing equipment financed at a 40% effective rate Common problem with small business equipment leasing Greenline funding is a fraction of RMIs market options Key impact considerations: $1.5 million 36 month financing with extension options 15 direct technology jobs will be created in expansion Available to minority, low income residents Agreed to subordinate to accounts receivable financings Strong local support.

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