Tax

Financing Growth for Rural Manufacturers Through New Markets Tax Credits

Federal program allows companies to expand, open new markets and compete globally.

Buzz saws are carving the future for rural workers at the oldest and most successful quality hardwood plywood manufacturer in rural South Carolina, but that almost wasn’t the case. Although Darlington Veneer stood proud since its founding in 1918, even during the Great Depression, its key subsidiary was close to closing after the last economic downturn.

The building industry’s dramatic decline in 2008 had a major impact on wholesale building supplies distributor Diamond Hill Plywood. The third-generation family-owned company struggled under the weight of the recession. Leadership sought options to save the multi-state distribution network, which had already shrunk from 11 to five centers, and a 200-plus rural workforce, many with more than 40 years of service.

Then, Darlington Veneer learned about the federal New Markets Tax Credits program.

The federal financing program allowed Darlington Veneer to free up working capital to create a more sustainable organization and more efficiently employ their assets for future equipment and plant expansion needs. Specifically, it opened up the dormant DV Timber timberlands for active harvesting under Sustainable Forestry Initiative (“SFI”) Standards, helping preserve 228 jobs at the parent company facilities as well as create some new logging, mill and warehouse positions. With the project, Darlington Veneer has able to deliver upon the triple-bottom-line of profit, society and the environment.

“The New Markets Tax Credit program empowered Darlington Veneer to not only sustain itself financially but to also expand and add incremental new jobs,” said Kennedy Breeden, chief financial officer of Darlington Veneer. “The company has not looked back, financially or operationally, since then.”

A lifeline for rural manufacturers

Business growth requires ready access to capital, but access can be especially challenging for rural manufacturers. Geographic isolation creates barriers to attracting both credit and skilled workers. For 16 years, the federal New Markets Tax Credit Program has lent a helping hand to thousands of companies to build new plants, finance expansions and introduce new technologies, especially in rural communities across America. Businesses solve their own funding challenges with an assist from the Program and also help to empower and revitalize their local communities.

These projects generate new jobs and retain existing ones, but also contribute to many more indirect jobs and community-wide economic growth. The ripple effects add up to a sum that’s greater than the parts. Without the New Markets Tax Credits financing, the businesses could not have proceeded with the projects. Such progress has also contributed to an uptick in employment in rural areas following a decline after the Great Recession, as documented in the recent annual report, Rural America at a Glance, issued by Secretary of Agriculture Tom Vilsack’s office.

To qualify, New Markets projects are required to pass a “but for” test. In other words, the project cannot be successfully funded through conventional financing sources. In addition, the Program drives capital into the most economically distressed areas. Among the criteria, the business must be in a defined low-income community, derive at least 50 percent of its income in a low-income community, or 50 percent of its employees must qualify as low-income individuals at the time of hire.

Success can be seen not only in Darlington Veneer with its more traditional timber operations, but also in rural manufacturing projects as varied as a specialty glass manufacturer maintaining its global competitive edge or a newly formed food processing entity constructing one of the largest and most technologically advanced plants within its industry.

Big expansion for big glass

The horizon keeps expanding for jumbo sizes in architectural glass. As skyscrapers get taller and vistas grow broader in building design, the demand – and competition – increases for specially manufactured architectural glass. Viracon, Inc., a subsidiary of Apogee Enterprises, is a manufacturing leader in high-performance glass with three U.S. locations in Minnesota, Georgia and Utah. Its architectural products portfolio is featured in buildings as diverse as One World Trade Center in New York City, the U.S. Bank Stadium in Minneapolis to the International Jetport in Portland, Maine. Yet, as design specifications called for ever-larger expanses of glass, and global competition continued to intensify, Viracon ran into limits with its existing equipment.

“We needed to upgrade our capability to manufacture oversized glass panels,” said Gary Johnson, vice president and treasurer at Apogee Enterprises Inc. “We analyzed how to respond and where to site those capabilities to remain competitive. The New Markets Tax Credits program helped us with that decision and its execution.”

Viracon ultimately selected its existing one-million-square-foot facility in Owatonna, Minnesota, where it has operated since 1970. The 300,000-square-foot expansion will house new specialty equipment capable of producing larger glass panels up to 130 inches by 236 inches. Added capabilities include digital printing and the manufacture of insulated glass, laminated glass, and tempered glass.

With 1,300 employees, Viracon is one of the top five employers in the rural community of Owatonna. Expanding within this facility will preserve those jobs. Just as important, the project is expected to generate 80 to 100 new jobs, which will pay a living wage and provide full benefits.

Viracon qualified for the New Markets program as a result of its ability to create jobs in a low-income census tract where unemployment levels were more than twice the national average. New Markets Tax Credits were an important piece in the overall capital stack, which also included equity, grants and municipal tax financing.

Peanuts and much more

Natural resources power many rural economies. That’s especially true for Douglas, Georgia and its peanut farmers. Yet, the nature of farming is fickle to farmers in southern Georgia. Contracts between growers and processors are short-term, often no more than a year, and vary widely in availability and pricing. With uncertain revenue streams, farmers struggle to plan crop rotation and capital needs.

That’s where Premium Peanut comes in. This newly-formed organization sought to make the most of those resources for its 225-member farms through a cooperative-like arrangement to build the nation’s largest single shelling facility in Douglas. The goal of the shelling facility was to bring more stability to farmers through better markets access, improved profitability and vertical integration to smooth out boom-or-bust cycles.

The hurdles were financing and an extremely compressed production schedule.

With 225-member farmers, Premium Peanut wasn’t the traditional loan applicant in its search for affordable financing to build and equip its shelling plant. And as Karl Zimmer, president and CEO of Premium Peanut, says, the enterprise was working under a very limited time to scale up production, growth and demand fulfillment. “We were a very different financing project, and we went from zero to 100 overnight,” said Zimmer.

Premium Peanut’s location and potential benefit to the community made it a fit for the New Markets Tax Credit Program. The shelling facility is in a census tract with high levels of poverty. Nearly 29 percent of the local population has an income below the poverty line, and the city of Douglas had an approximately 9 percent unemployment rate at the time the project was underwritten.

The shelling plant came online in early 2016, boasting a capacity to de-shell 140,000 tons of peanuts annually. The plant is projected to create 100 direct jobs and roughly 30 indirect jobs, primarily to truckers who haul the peanuts. Most direct jobs were been made available to low-income individuals, and all will pay a living wage with benefits.

Projects funded with New Markets Tax Credits have supported the growth and economic viability of enterprises across industries spanning manufacturing, the arts, healthcare, agriculture, conservation, hospitality, technology and more since it was established in 2000. It is poised to continue to do so, helping to diversify shallow economies and revitalize communities.

 

Charlie Spies is CEO of CEI Capital Management.