DRAFT& & & & & & Applying&New&Market&Tax&Credits&&& Direct&Public&Offerings&to&Woody& Biomass&Projects&in&California& & & & Prepared&by&Cutting&Edge&Capital&and& Northern&California&Community&Loan&Fund& For& The&Watershed&Research&and&Training&Center& & & & & April&2016& & & & Principal&authors:&& E.&Seth&Wilson,&Cutting&Edge&Capital,&and&& David&Wilkinson,&Northern&California&Community&Loan&Fund& & DRAFT& DRAFT& & Table&of&Contents& & Executive&Summary&…...…(1)& & 1. Introduction&and&Overview&…...…(4)& & 2. New&Market&Tax&Credits&…...…(6)& 2.1. What&are&NMTCs&…...…(6)& 2.2. Where&can&NMTCs&be&used&…...…(7)& 2.3. How&can&NMTCs&be&used&…...…(8)& 2.4. Who&are&the&NMTC&actors&…...…(8)& 2.5. Description&of&the&leveraged&NMTC&structure&…...…(9)& 2.6. Key&metrics&to&evaluating&value&…...…(10)& 2.7. Managing&exits&and&transitions&after&Year&7&…...…(11)& 2.8. Community&Benefits&…...…(12)& & 3. Direct&Public&Offerings&…...…(13)& 3.1. What&is&a&DPO?&…...…(13)& 3.2. Who&can&raise&capital&with&DPOs&…...…(14)& 3.3. Who&can&invest&in&DPOs&…...…(15)& 3.4. What&is&involved&in&the&DPO&application&process&…...…(17)& 3.5. How&do&investors&invest&in&DPOs&…...…(18)& 3.6. Advertising&a&DPO&…...…(19)& 3.7. Impounding&DPO&raised&funds&for&large&capital&items&&…...…(20)& 3.8. How&DPOs&can&be&used&to&support&a&NMTC&structure&…...…(20)& 3.9. Loan&Fund&DPOs&and&the&Opportunity&for&Institutional&Investing&…...…(21)& 3.10. DPOs&Supporting&Year_7&Transitions…...…(22)& & 4. Applications&for&Woody&Biomass&Projects&…...…(22)& 4.1. Sources&of&Funding&…...…(23)& 4.1.1. New&Markets&Tax&Credits&(NMTC)&…...…(23)& 4.1.2. CDFI&Lenders&…...…(25)& 4.1.3. Renewable&Energy&Tax&Credits&(RETC)&…...…(28)& 4.1.4. California&Energy&Commission&Electric&Program&Investment&Charge& (EPIC)&Grant&Program&…...…(29)& 4.1.5. Federal&Economic&Development&Administration&(EDA)&…...…(30)& 4.1.6. Rural&Energy&for&America&Program&(REAP)&Loan&Guarantee&and& Grant.........(31)& 4.1.7. State&of&California&Economic&Development&Block&Grant&(EDBG)& Program&…...…(31)& 4.1.8. &California&Infrastructure&and&Economic&Development&Bank&…...…(32)& 4.2. Conclusions&and&Recommendations&…...…(33)& &&&&&& & & DRAFT& DRAFT& & Figures&and&Tables& & Figure&1& Simplified&Example&of&New&Markets&Tax&Credit&(NMTC)&Investment& Leveraged&with&Private&Funds& & Figure&2& Relationship&Between&NMTC&Credit&Prices,&Investor&Returns&and& QALICB&Equity& & Figure&3& Historical&NMTC&Prices&(amount&invested&per&$&of&tax&credit&received)& & Table&1& Typical&Fees&Charged&by&CDEs& & Table&2& Household&Wealth&in&California&and&Noted&Regions& & Table&3& CalPERS&Investment&Fund&Values& & Table&4& CalPERS&Asset&Allocation&&&Target& & Table&5& Bank&of&America&Community&Venture&Fund,&LLC&&Provides&capital&to& rural&and&urban&markets,&especially&in&California&(fund&is&fully& invested)& & Figure&4& Illustrative&Woody&Biomass&Facility,&Sources&&&Uses&of&Funds&Budget& & Figure&5& Source&&&Use&Diagram&for&$20M&NMTC&Financing&of&a&Woody&Biomass& Facility& & Figure&6& New&Markets&Tax&Credit&(NMTC)&Program&Eligibility&and&Severely& Distressed&Status&(Map)& & Figure&7& Tax&equity&financing&provides&incentives&and&opportunities&for&banks& & Figure&8& Funding&Objective:&Optimize&all&streams&over&the&project&life&to& maximize&value&and&build&community&wealth& & & & DRAFT& DRAFT& Disclaimer& & Information&contained&in&this&report&is&for&discussion&purposes&only&and&should&not& be&relied&upon&as&legal,&accounting&or&tax&advice.& & & DRAFT& DRAFT& Executive&Summary& & California’s&biomass&plants&use&roughly&6.6&million&tons&of&wood&biomass&as&fuel& annually&to&produce&more&than&600&megawatts&of&baseload&renewable&energy& thereby&avoiding&the&equivalent&of&2.2&million&tons&of&annual&CO2&emissions.1&&Most& of&these&facilities&are&ending&their&contract&life&for&power&sales&to&the&state’s& investorQowned&utilities&at&a&time&when&they&are&needed&to&help&restore&forest&health& and&remove&6.4&million&tons&of&dead&trees&in&high&hazard&zones.&Calforests&estimates& that&the&continuing&expansion&of&insect&and&disease&in&the&rest&of&the&state&will&cause& an&additional&58&million&tons&of&dead&trees&that&need&to&be&removed&to&reduce&the& threat&of&fire,&safeguard&our&communities,&and&create&healthier&and&more&resilient& forests.2&& & With&the&right&infrastructure&and&financial&investment,&this&dire&challenge&can&be& met.&&Expanding&access&to&additional&sources&of&capital&will&be&critical&to&success.&& This&report&discusses&one&strategy&that&employs&combining&a&taxQincentive&financing& structure&with&investment&crowdfunding.&&The&US&Treasury’s&Community& Development&Finance&Institution&(CDFI)&Fund&and&the&IRS&coQadminister&the&New& Markets&Tax&Credit&(NMTC)&Program&to&attract&private&capital&into&lowQincome& communities.&&Through&the&NMTC&program,&individual&and&corporate&investors& receive&a&tax&credit&against&their&federal&income&tax&in&exchange&for&making&equity& investments&in&specialized&financial&intermediaries&called&Community&Development& Entities&(CDEs).&The&credit&totals&39&percent&of&the&original&investment&amount&and& is&claimed&over&a&period&of&seven&years.&&& & These&NMTC&credits&can&be&leveraged&with&debt&financing&to&supply&more&capital.&&& A&potential&source&of&debt&financing&is&investment&crowdfunding.&&This&is&a&securities& offering&by&an&“issuer”&(a&for&profit&or&nonprofit&company&raising&the&money)&that&is& open&for&investment&by&the&“crowd”&(meaning&both&accredited&and&nonQaccredited& investors).&&&Traditional&approaches&for&raising&capital&relies&upon&accessing&high& netQworth&individuals&or&financial&institutions&such&as&bank.&&Investment& crowdfunding&expands&the&size&of&the&pool&of&individuals&and&organizations&that&an& issuer&can&directly&ask&for&funds&from&1&percent&to&virtually&100%&of&the&investing& population.&&Investment&crowdfunding&connect&issuers&and&their&communities,&help& build&publicQprivate&partnerships,&and&create&community&wealth&that&recognizes&not& only&financial&returns&but&quality&of&life&benefits&as&well.& & Combining&NMTCs&and&investment&crowdfunding&holds&great&potential&to&generate& the&capital&needed&for&infrastructure&to&help&address&forest&health,&other&climate& &&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&& 1&Westlands&and&Mountain&Counties&Letter&to&Governor&Brown,&March&9,&2016,& http://acconsensus.org/2016/03/12/useQbiomassQinQforestQmaintenanceQ westlandsQandQmountainQcountiesQletterQtoQgovernorQbrown/& 2&Calforests&comments&on&CPUC&biomass&resolution,&February&23,&2016,& http://calforests.org/calforestsQcommentsQonQcpucQbiomassQresolution/& Applying&New&Market&Tax&Credits&&&Direct&Public&Offerings&to&Woody&Biomass&Projects&in&California& 1& April,&2016& DRAFT& change&challenges&and&community&development&opportunities.&&In&2014,& Development&Finance&Institutions’&(DFIs)&climate&finance&investments&reached&$131& billion&globally&Q&33%&of&total&flows.3&&The&US&Treasury’s&CDFI&Fund&has&awarded& $43.5&billion&in&NMTCs&since&the&program&was&established&in&2000.&&An&additional& $3.5&billion&will&be&awarded&this&year&and&through&the&Protecting&Americans&from& Tax&Hikes&(PATH)&Act&of&2015,&this&level&of&funding&is&authorized&to&continue& annually&through&2019.&& & The&“mass&affluent”&represents&consumers&with&an&annual&household&income&over& $75,000&or&liquid&financial&assets&between&$100,000&and&$1&million.&&In&California,&it& is&estimated&that&there&are&over&4&times&as&many&mass&affluent&households&that&do& not&qualify&as&accredited&investors&under&US&securities&laws&as&there&are&accredited& investor&households.&&This&nonQaccredited&crowd&holds&approximately&$845&billion& in&assets.&&State&securities&laws&and&recent&changes&to&federal&securities&laws&are& opening&up&opportunities&for&this&mass&affluent&segment&to&directly&invest&in& businesses&and&funds.&&While&there&may&be&investing&limits&placed&on&investment& crowdfunding&products&to&protect&small&investors,&for&issuers,&crowdfunding& provides&a&larger&pool&of&investors&to&approach&and&greater&flexibility&to&structure&an& offering&that&satisfies&both&a&financial&return&objective&and&an&affinity&or&relationship& return&with&personal&values&and&nonQfinancial&benefits&(i.e.&impact&investing).& & While&traditional&finance&focuses&on&singleQbottomQline&profits,&impact&investing&is&a& tripleQbottomQline&approach&that&considers&people,&planet&and&profits.&&A&wood& biomass&project&may&not&satisfy&the&financial&return&objectives&of&a&singleQbottomQ line&investor.&&By&considering&other&factors&such&as&improved&forest&health,&local&job& creation,&reduced&carbon&emissions,&etc.,&a&tripleQbottomQline&investor&may&seek& lower&financial&returns&to&receive&other&benefits.&&New&Market&Tax&Credits&and& investment&crowdfunding&both&support&tripleQbottomQline&investing.&&By&combining& these&two&investing&strategies,&more&capital&can&be&deployed&in&communities&and&to& projects&like&wood&biomass&where&it&is&critically&needed.& & The&purpose&of&this&report&is&to&describe&NMTCs&and&investment&crowdfunding&in& greater&detail&and&how&these&two&financial&tools&can&be&used&to&support&wood& biomass&projects.&&Section&1&provides&an&overview&of&these&financing&tools.&&Section&2& describes&New&Market&Tax&Credits&in&greater&detail&Q&What&are&NMTCs?&&Where&can& NMTCs&be&used?&&How&can&NMTCs&be&used?&&Who&are&the&NMTC&actors?&&How&can& NMTCs&provide&leverage?&&What&are&some&key&metrics&to&evaluating&NMTC&value?&& What&are&some&Community&Benefits&that&a&project&provides&through&NMTC& financing?& & &&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&& 3&Global&Landscape&of&Climate&Finance&2015,&Climate&Policy&Initiative,&November&16,&