H.R. 1, the massive budget package passed into law last summer, brought a lot of financial hardship to food banks in the form of funding cuts. But it also preserved a popular federal tax credit program designed to help community institutions raise needed funds.
Houston Food Bank is among the institutions putting the New Markets Tax Credit to work, in its case to help fund a new 310,000-square-foot facility that will boost food distribution and also house a network of trusted social-services partners. Loaves & Fishes Community Services in Naperville, Ill., also recently tapped the tax credit to increase its capacity, including through an expansion of its food distribution hub.
While such credits have proven effective in attracting private capital to projects led by food banks working in low-income communities (see our article here), food bankers warn that significant behind-the-scenes legwork, staffing and time are required to make them a success.
“Whatever time you think it will take to get this done, you probably need to double it, and you’ll be closer,” said Mike Havala, Chief Executive Officer of Loaves and Fishes, which received a $2 million net benefit from the program. The funds helped support the organization’s $15 million Nourish Together Campaign aimed at expanding its food distribution hub and increasing its ability to serve more people in need. “It’s very intricate, complex and time-consuming,” he said, noting that it took about nine months from the time Loaves and Fishes started the process until closing.
Congress first established the New Markets Tax Credit program in 2000, and its popularity led to its now-permanent status. The program lets individual and corporate investors receive a federal tax credit in exchange for making equity investments in Community Development Entities, specialized financial intermediaries that are often affiliates of community development corporations, government entities or banks. The credit equals 39% of the original amount invested, claimable over seven years.
While the tax credit has been well-received, the staffing and time commitment required are notable. “I can’t stress enough how long it takes to get it done and even to do the requirements after,” said Chinelo Aralu, Chief Financial Officer at Houston Food Bank, which netted roughly $17.5 million from its most recent round of tax credit-based funding. It can take hundreds of hours, she said, including paperwork and communicating with different stakeholders. Her involvement included weekly calls with the food bank’s legal team, accounting personnel and Community Development Entities.
This is the third time Houston Food Bank has tapped the tax credit program for funds. The net $17.5 million it received in the latest round will go toward the total projected $150 million cost of its new facility, of which $135 million has been raised. The project, known as CORE, broke ground in September and is expected to be operational in 2028. Support also came from a 52-acre parcel of land donated by Chevron valued at $10 million. In addition to about a dozen nonprofit partners, the facility will feature a food hall showcasing local vendors in the lobby, along with a commercial kitchen and a conference center for community engagement.
Food banks tend to have more resources to execute the program than food pantries, but it’s doable for organizations undertaking large projects—provided they have the resources to devote, Havala said. It won’t be a fit for every organization, he added, noting it generally takes a project of at least $8 million to garner investor attention and make it worth the time and investment. “If your project is a $2 million to $4 million project, it’s probably not at the level that you’re going to be able to participate in this program,” he said.
A good place to start is by talking to Community Development Entities and other food banks or pantries that have gone through the process. Though every project is different, the upfront reconnaissance helps. “You have to make sure that it’s worthwhile to do,” Havala said.
Once a food bank or pantry has decided to move forward, it’s advisable to hire a consultant who specializes in the New Markets Tax Credit program. Companies including Crow Island Community Capital and Cherry Bekaert have guided multiple community institutions through the process, providing valuable advice and connecting organizations to Community Development Entities and potential investors based on the size, scope and project location.
There can be multiple Community Development Entities involved, which adds a layer of complication. Beyond that, a food bank or pantry will need to assemble an internal team, which may consist of employees, board members or both. Team members should ideally include people who have finance, legal and capital markets experience.
Having someone who understands the financial piece is extremely important because of the reporting and paperwork, which can include audit statements from a few years back, previous budgets and future operating budgets, Aralu said. There are also reporting requirements after the food bank receives the money, she added.
Houston Food Bank did a previous tax credit transaction in 2010 for its main warehouse and also in 2017 for the facility’s kitchen. Even so, there was a large learning curve this time around, given that Aralu, who joined the food bank two years ago, hadn’t been part of those earlier efforts.
Nonetheless, she said she’d do it again in a heartbeat. “There’s a lot that goes into it, but it’s fulfilling in that it goes toward something positive.” – Cheryl Winokur Munk
Cheryl Winokur Munk is an experienced business journalist who writes for a variety of national and international publications on a wide range of topics. She worked full-time for the New Jersey Law Journal, American Banker and Dow Jones Newswires before launching a successful freelance career.
PHOTO, TOP: A rendering of Houston Food Bank’s new CORE facility, which broke ground in September.
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