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Cascade: No. 65, Spring/Summer 2007

Lender Shares Community Development Insights

Pamela M. Woodell is senior vice president of Sovereign Bank’s tax credit investment division. The division, which is based in Reading, Pa., makes investments and community development loans for affordable housing or economic development. Woodell is responsible for the approval, negotiation, closing, and monitoring of low-income housing, new markets tax credits, and historic tax credit investments; commercial loan originations and approvals; and use of all Federal Home Loan Bank products.

Woodell joined Sovereign Bank in 1997 following positions with National Penn Bank as a commercial real estate lender specializing in community development lending and with Interfaith Community Development Corporation in Pottstown, Pa., as a program coordinator.

Can you share some insights about your approach to community development deals and ways to make them work?

It is important to have an attitude of “how can I make this project work, keeping to ‘safety and soundness’ ” instead of “this project is too risky, too ‘out of the box’ for me.” In other words, be a deal-maker, not a deal-killer.

Instead of just looking to the developer/ owner as a guarantor, perhaps there are other things that might substitute. The nonprofit loans that my department has done rarely, if ever, have guarantees from the nonprofit. Some of the mitigating factors may include extra collateral, primarily real estate, and larger reserves.

Instead of requiring a mandatory 20 percent equity from the owners, we have in certain instances booked construction and permanent loans to nonprofits where:

  • The nonprofit commits 10 percent equity, all of which is paid at construction loan closing.
  • In construction financing, Sovereign’s loan could be 90 percent of project costs, but the loan-to-value is no higher than 80 percent “as complete.”
  • Government grants are considered as developer’s equity. The developer must have, at a minimum, 5 percent of its own funds in the deal.

What is Sovereign’s experience as an investor and allocatee in new markets tax credit (NMTC) deals?

Sovereign began its experience with NMTCs by investing with third-party community development entities (CDEs). Sovereign has closed over $101 million in NMTC projects through third-party CDEs. The internal rates of return and the return on assets were far above other community development investment deals at the time and continue to be so.

I have found the NMTC program to be very flexible, allowing transactions of almost any complexity to be financed through the program so long as a substantial commercial piece is involved. When I first explored the program, I was reluctant to be involved because it seemed very convoluted. Once I worked on my first NMTC deal, I realized that it wasn’t that difficult and was very easily tailored to various deals.

Since Sovereign received the CDFI Fund’s approval in 2006 for $94 million in allocation authority, the entire amount has been targeted to “live” deals, or transactions that were in our pipeline. Our CDE’s focus is to buy Sovereign-originated community development loans that carry the nontraditional lending features required in the NMTC program. We have also received numerous unsolicited phone calls regarding whether we could participate in other transactions. As a result, we have a waiting list of deals. This program has met with great enthusiasm from our clients and has proven to add financial strength to these transactions that did not exist before the infusion of NMTC money.

It is amazing that there are many more worthwhile, qualified transactions than there is allocation to fund them.

Sovereign Bank is an investor in new markets tax credits and historic rehabilitation tax credits in the Boston (Mass.) Medical Center’s BCD building, a former hospital ward built in 1864 that now contains the center’s information technology department. Photo by Victor Rodriguez, William A. Berry and Son Inc

Do you think that banks should consider becoming involved as NMTC investors or allocatees?

My experience as an investor and allocatee has convinced me that either position is very valuable to a bank as a way to deploy community development funds into worthwhile transactions. In either case, it will take the willingness to learn a new program and to devote additional time and resources to it.

The process of becoming certified as a CDE and applying for a NMTC allocation is grueling and expensive. It requires a consultant very familiar with the program.

A bank that receives an NMTC allocation and signs an allocation agreement with the CDFI Fund must make a long-term commitment for the origination, negotiation, closing, compliance reporting, and asset management of loans and investments made with the allocation.

We are very pleased that we took the chance and received an allocation and will, most likely, apply again.

Bank NMTC investors receive federal tax credits, CRA credit, interest income from loans made by the CDE to the borrower, and fee income from the deals. They also generate deposits that are related to the deals.

Banks that obtain NMTC allocations have some additional opportunities:

  • Commitment fee income of a percentage of the total qualified equity investment. Sovereign has chosen to take no more than 2 percent, but allocatees typically receive fee income ranging from 1 percent to 12 percent.
  • Annual asset management fee income from project operations to cover compliance and asset management costs.

We’ve heard for some time that it’s difficult to finance and develop mixed-use projects in the Third District. Has Sovereign financed such projects?

I’ve financed many mixed-use properties. They’ve ranged from small inner- city properties with retail stores and apartments to $35 million mill conversions with office, retail, and residential components. I don’t understand why people think they’re difficult.

When underwriting mixed-use properties, the lender has to proceed on two fronts. The residential units are looked at as though they were in a multifamily building, and the commercial piece is analyzed separately. Then they are put together in the cash flow analysis.

Do you see some good investment opportunities for banks in the Third District?

Sovereign Bank is currently managing a half billion dollars of assets in low-income housing, new markets tax credit, and historic tax credit investments. These investments have opened the door to other bank products. I believe it is good business to partner up with smaller institutions that need to invest but do not have the expertise. I would welcome interest from other banks willing to explore this possibility.

Do you have any suggestions for nonprofit developers that want to obtain bank financing?

Nonprofits should provide comprehensive, complete, easily understood financial and other information; realize that banks have limitations based on their lending policies, particularly in the areas of safety and soundness; and be willing to entertain alternative ways of structuring projects.

They should also establish long-standing relationships with several banks. Random shopping for every deal will not necessarily provide the best outcome. Conversely, relying on only one bank for all transactions can be difficult, as each bank has a lending limit based on exposure to one client.

If your nonprofit has not been developing for a long time, walk before you run. Perhaps partnering with a more experienced developer on several transactions is wise. However, make sure each partner is fairly compensated for what they bring to the table.

Be familiar with all of the governmental and foundation dollars available to you. Don’t miss out on valuable resources that may provide needed capital to your transactions.

Which community development deal has been the most rewarding to you personally?

I guess if I had to narrow it down to one, the New Covenant Church relationship has been very rewarding to me. Originally, I met with the church leaders to refinance their campus in Mt. Airy, Philadelphia. Located on a beautiful former college campus, the church has a vibrant, growing congregation. In addition, it has used the large, historic, stone buildings on the campus for excellent community development opportunities – a charter school, a public school, and a small-business incubator.

Several years ago, I was approached by the church to partner with them on the conversion of one of the college buildings into a historically significant apartment building for seniors. Sovereign provided the low-income housing and historic tax credit equity for this transaction. Our equity has helped to create a beautiful environment in which the senior residents can live in security and with pride.

For information, contact Pamela M. Woodell at pwoodell@sovereignbank.com.

Loans to Houses of Worship and Nonprofits

Pamela M. Woodell, senior vice president of Sovereign Bank, reports good experience
with loans to houses of worship and nonprofits:

“I’ve made a dozen church loans ranging from $50,000 to $23 million for construction, bridge, and permanent financing. There have been no defaults on these loans, which were made to churches primarily in New Jersey and Pennsylvania.

“The underwriting in church loans needs some additional considerations, such as:

  • What has been the consistent membership growth over the past five years and what is it anticipated to be over the next five years?
  • What would happen if the senior pastor were to leave? Are there other pastors who could carry on the ministry in his absence? Would the church lose members over it?
  • What has been the growth pattern in tithes and offerings over the past five years? What is projected for the next five years?
  • One of the objections to church lending is the ‘special purpose use’ of the real estate. The property needs to be looked at with an eye toward ‘Can this building be used for another purpose?’
  • A very substantial mitigant to the risks of church lending is character, an important factor in the credit decision. Churchgoers will dig deep into their pockets to rescue the ministry from financial distress.

“Banks that make loans to houses of worship may become the depository for the church’s funds, which can involve demand deposit accounts, certificates of deposit, wealth management, and cash management services.”

She added: “Banks can provide nonprofits with term loans for the nonprofit’s headquarters, working capital lines of credit, predevelopment financing for real estate projects, and revolving loan products for construction projects. Many lenders believe that nonprofit lending is inherently riskier and more complicated than for-profit lending. This can be the case. However, it is an area of business that can be rewarding both in terms of financial return and CRA responsiveness, and it should not be overlooked.”

Woodell noted that smaller loans can be worthwhile: “The smallest loan I ever underwrote was $25,000 for a small real estate developer. In the 15 years since that time, that developer’s business has grown and he has remained a loyal customer of mine.”

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Federal Reserve Bank of Philadelphia
Community Development Studies and Education Department
Ten Independence Mall
Philadelphia, PA 19106-1574

(215) 574-6458 – phone
(215) 574-2512 – fax
info.communitydevelopment
@phil.frb.org

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