December 1, 2009

It’s a problem more businesses probably wish they had: Town and Country Foods, a small local grocer that was a fixture on the north side of Bozeman, Montana, had become too popular. Sales were booming, but customers complained about the store’s crowded aisles and cramped parking lot.

The customer base seemed large enough to support a second store, and Town and Country knew of a perfect spot. “There were no grocery stores serving the south side of Bozeman,” says Carol Perlinski, president of Town and Country Foods. “Our market research found sizable demand for one there.”

“That part of Bozeman does not have a lot of the kind of large retail sites that are necessary to attract the big chain grocery stores,” adds Travis Frandsen, the company’s vice president. “Because we can use a smaller space than a chain store can, we had a lot of flexibility in choosing a site.”

Town and Country soon found an ideal property, a former movie theater with space for a 25,000-square-foot grocery store and two smaller commercial tenants. Unfortunately, the lending environment was not as ideal as the location. Town and Country learned that commercial loans large enough to cover the multi-million dollar purchase and renovation would be too expensive. Even loans available through the Small Business Administration weren’t going to do the trick.

Then Town and Country learned about the New Markets Tax Credit, a federal program that offers credits against income-tax liability in return for equity investments in projects that benefit low-income communities. A little research showed that Bozeman’s south side qualified, and Town and Country started working with its bank and with the Montana Community Development Corporation to design a New Markets Tax Credit loan product that would cover the project they had in mind.

“There is a lot that goes into setting up a New Markets Tax Credit project,” says Heidi DeArment, vice president of financial services at the Montana Community Development Corporation, which allocates New Markets Tax Credits in Montana. “But the basic idea is that we’re trading a tax credit for an influx of cash from an investor, and that influx of cash greatly reduces the equity that borrowers need to come up with on their own, substantially driving down the cost of the loan.”

Town and Country started the process of securing a loan based on New Markets Tax Credits in January 2009, and the deal was complete by May. For Town and Country, the outcome of the New Markets Tax Credit loan process was much the same as it would have been with a commercial loan: a line of credit—$8.3 million, in this case—held by a bank, against which the company can write checks for project expenses.

However, because the financing for Town and Country’s New Markets Tax Credit loan was cheaper than it would have been for a comparable commercial loan, the company’s interest payments will be much lower. Another advantage of New Markets Tax Credit loans is the way repayment is structured. Payments are interest-only for the first seven years, and—while commercial loans typically require interest payments throughout the loan period—Town and Country’s loan includes a $250,000 fund intended to cover all interest payments during construction of the new store.

“Because of that fund, we don’t have to use our cash reserves to pay interest and can make purchases that wouldn’t be covered by a construction loan, like inventory and equipment,” says Frandsen. “Because this payment structure makes this loan so much less painful up front than a commercial loan, the New Markets Tax Credit program gives us more time to get our feet under us before we start incurring a heavy debt load. That’s a huge help.”

The New Markets Tax Credit program isn’t for everyone. Start here to find out whether your business might qualify. The most important factor is whether a proposed project will primarily affect a low-income area, but—even if you meet that requirement—a range of other factors will be taken into account, according to Rosalie Cates, president of the Montana Community Development Corporation.

“The money available through this program is very inexpensive, so it’s a competitive process,” says Cates. “It’s all about building a case that a particular project is the best way that money can be used, so what’s important is job creation, job quality and benefits, asset accumulation, sustainability, and so on. Applicants don’t have to meet all of these criteria, but the more they can meet, the better their chances.”