Stonehenge uses New Markets Tax Credits to grow businesses
When timber company RoyOMartin began expanding its manufacturing plant in Chopin five years ago, the timing was a bit unusual.
The national housing bubble had just burst, and adding capacity to a plant that makes plywood for the home building industry was a curious endeavor, to say the least. Lenders had slammed on the brakes, and many manufacturers shelved projects while the world watched.
“Of course, we timed it perfectly, expanding our plant at the time of the collapse of the housing market,” company President Roy Martin said wryly last week.
But Martin said the company wanted to move forward with its $110 million project anyway, and had been talking to Baton Rouge-based Stonehenge Capital Co. about providing some of the funding through the federal New Markets Tax Credits program.
Stonehenge, which had been granted an allocation from the U.S. Treasury Department with the task of finding worthy recipients, saw one in the plywood mill in a poor, rural Natchitoches Parish town of 200 people.
The mill employed 330 — providing jobs to people in the towns of Chopin, Natchitoches, Alexandria and Jena and in Vernon Parish — and would grow to 710 after the expansion.
Martin said the roughly $19 million, low-interest loan it got from Stonehenge through the program — about a quarter of which was financed at 0.5 percent interest for seven years to be forgiven after that — played a key role in getting the deal done.
“We had a severe housing downturn, and this was the gap (financing) that pushed that thing over the top,” he said.
The RoyOMartin plant is just one of 44 projects across the country that have gotten a critical lift from federal New Markets Tax Credits allocated by Stonehenge.
The Baton Rouge private equity and venture capital firm has had success getting the credits through the U.S. Treasury Department in a competitive, annual application process. Most recently, it was awarded a $40 million allocation in the $3.5 billion round announced last month.
The East Baton Rouge Redevelopment Authority, for example, won New Markets Tax Credits two years ago but didn’t get any in each of the last two rounds.
“We’re good at New Markets Tax Credit financing, and we’re pleased to do a lot of it,” Stonehenge Director Ben Dupuy said.
Stonehenge President Tom Adamek formed Stonehenge in 1999 with Gordon LeBlanc Jr., David Webber and John Witten, his fellow managing partners at Bank One Capital Markets. There, they managed about a half-billion dollars in private equity investments.
Adamek said almost two-thirds of those investments, about $300 million, had been in low-income census tracts, making a move into New Markets Tax Credits a good fit.
During the Treasury’s second round of tax credits in 2003, Stonehenge’s first application went well, getting itself $127.5 million to allot to projects.
An allocation is a sum of money a community development entity, or CDE, like Stonehenge brings to a qualifying project. Seventy-five percent of the amount is conventionally financed by a private lender and 25 percent takes the form of a low-interest loan forgiven after seven years. The recipient pays an origination fee to the CDE of up to 3 percent and half-point per year in interest during the seven-year period. The amount forgiven is offset by the proceeds of tax credits, which are 39 percent of the allocation. Those credits are sold for roughly 70 cents on the dollar to businesses that owe taxes to the federal government. The buyer gets to pay the tax debt off at a discount; the CDE gets the fees; and the qualifying project gets part of the loan on very favorable terms.
Stonehenge is classified as a non-real estate community development entity by the Treasury. While agencies like the East Baton Rouge Redevelopment Authority can use their allocations for housing, Stonehenge can’t do anything considered speculative real estate; everything must be owner-occupied.
Adamek said Stonehenge also agreed with the U.S. Treasury that all of its allocations will be used in highly distressed communities with 1.2 times the average poverty rate and 80 percent of median income.
Stonehenge works with the Urban League and its network of 120 affiliates to find worthy projects.
Stonehenge’s new markets projects aren’t exclusively in Louisiana. Adamek said the firm selects its projects on a case-by-case basis, regardless of where they are located.
- In December 2005, shortly after Hurricane Rita hit southwest Louisiana, Stonehenge used a $3.4 million allocation that allowed the owner of Paramount Nissan in Lake Charles to expand. John Stelly, who did not return calls for comment, now owns four dealerships and employs 100 people.
- Stonehenge used a $14 million allocation to help fund the addition of the Solomon Victory Theater and some restaurant space to the National WWII Museum in New Orleans. The expansion created 25 direct jobs to the museum, which employs 300 in the city. The expansion created 500 construction jobs.
- In 2008, Highland Baking, a family-owned company in Chicago, was looking for an East Coast presence and found an empty commercial baking facility in Spartanburg, S.C., but had a gap in financing it needed to close. Stonehenge used a $13.5 million allocation to do so, and the facility was brought back online last year and now employs 200 people.
- Last year, Cherry Growers Inc. needed to expand a factory in northern Michigan where it made a squeezable apple sauce called Go Go Squeeze. Stonehenge stepped in with an $11.5 million allocation, and the project created 137 full-time jobs.
Adamek said Stonehenge uses a metric that looks at how many jobs a project will create compared to how many tax credit dollars it will use.
“That’s something we think the Treasury is starting to look at, so we want to make sure the federal government is getting the most bang for their buck.”
Adamek also attributes Stonehenge’s success in getting tax credit allocations to the projects it chooses to help fund.
“There is a ‘but for’ test in new markets that really is meant to say, “But for this credit, this deal would not get done.”
Lastly, Stonehenge makes sure it deploys its allocations quickly and efficiently.
The $40 million it received last month? “We will deploy all that capital by December of this year,” Adamek said.
Some benefits are not as quantifiable as others.
Whether it’s a YMCA in Michigan or a Head Start facility in New Jersey, where low-income parents can leave their children so they can work, some projects have benefits beyond direct job creation.
Adamek said the expansion of the D-Day museum in New Orleans, for example, is a project where the direct and indirect job creation validated the project, as well as the impact on the local tourism business. “There are some things that can never be quantified from a monetary standpoint, but the ultimate test is: ‘Do we get another allocation? Does Treasury like what we’re doing?’”
Stonehenge has gotten a half-billion dollars worth of new markets allocations over the years, but it also has gotten just over $400 million from similar state programs operated in Alabama, Florida, Illinois, Maine and Oregon. Adamek said Louisiana had a similar program, though the state let it expire a few years ago.
Stonehenge dedicates six of its staff to the new markets line of the business.
“It’s significant,” Adamek said of the new markets portion of Stonehenge’s business. “I would say it represents a third of all of the resources for what we do and a third of the profitability.”
“Even when you’re only getting a half a point on a billion dollars, it’s decent money,” he said.
Adamek pointed out, however, that given the current federal budget standoff, there are at this point no scheduled allocations after next year’s $3.5 billion round. The program is in President Barack Obama’s proposed budget, but Adamek said his industry will likely have to go to Washington, D.C., to make its case to ensure future rounds.
The other two parts of Stonehenge’s business are its traditional private equity and venture capital business, as well as its structured products group.
The former has Stonehenge raising and investing about $660 million in small, privately held businesses, a lot of it low-tech manufacturing and cutting-edge medical technology. This line generates fees and interest for Stonehenge.
The latter has Stonehenge taking ownership stakes of at least five years in projects that receive tax credits — historic, Brownfields, renewable resources and low income, for example — which it can then take advantage of itself or sell.
In Baton Rouge, Stonehenge became a partner in the restoration of the downtown building that became Hotel Indigo, while in New Orleans, it did so for the redevelopment of the Hibernia and Roosevelt buildings.
Adamek said Stonehenge currently manages about $2 billion of investments and employs 45 people, about half from the banking sector and three in-house lawyers.