New Markets loan program tosses small Illinois firms a lifeline
Late last year, when it needed more capacity at its Far West Side plant, Charter Steel Trading Co. counted itself lucky to find a nearby building that had been abandoned by rival Leeco Steel Co. But how to finance the deal?
Charter, a processor of steel coils with annual revenue exceeding $50 million, took advantage of a little-noticed initiative called the New Markets Tax Credit Program offered by the state and federal government. It provides tax credits of up to 39% for investment of up to $10 million in companies like Charter. Pools of investors, including big banks such as J. P. Morgan Chase & Co. with outsized tax liabilities, are recruited to take advantage of the credits, typically extending loans to recipients at below-market interest rates.
The program’s goal is job creation, or at least job conservation. Charter landed a $4.8-million loan at 1.3% interest, giving it enough cash to finance the $1.5-million purchase of Leeco’s building and to buy equipment for an expansion expected to add 10 to 20 jobs in the next 12 months to its workforce of 70.
“We might have gotten a bank loan, but New Markets made more sense to us,” says Michael Cipolla, Charter’s chief financial officer. “We saved at least two percentage points on the loan, maybe more. It reduces our costs substantially and makes the addition feasible.”
The state’s New Markets program is only 18 months old and has funded a few dozen organizations so far with $125 million in investments. The federal program, worth up to $33 billion, has been around since 2000. Both are aimed at businesses operating in low- income neighborhoods. Illinois is one of seven states that piggyback on the federal program.
“New Markets was attractive because it didn’t require any outright grants from the state,” says John Kamis, legislative affairs and economic development adviser to Gov. Pat Quinn. “But for these tax credits, the money being invested in these companies would otherwise not get invested.”
Robert Kruk, president and majority owner of Inscerco Manufacturing Inc. in Crestwood, received a $5-million New Markets loan recently “to keep my business flowing.” Inscerco, a maker of mail-processing equipment with 50 employees—down from 120 before the recession—was facing layoffs of 30 or more workers before the loan came through.
“The program is good for us, and it’s good for the investors,” Mr. Kruk says. “For us, it saved jobs at a difficult time.”
Gary Comer College Prep in the South Side’s Greater Grand Crossing neighborhood opened to 500 charter school students in late August. The 45,000-square-foot facility, built at a cost of $20 million, was financed by a combination of grants from the Comer Science and Education Foundation (established by entrepreneur Gary Comer, the founder of the Lands’ End catalog house in Wisconsin) and a $5.5-million New Markets loan. The school employs more than 30 people, most of them teachers.
“In a tough economy, we could not get other philanthropies to invest in this,” says Bill Schleicher, a Comer Foundation vice-president. “The New Markets money got us over the bridge and allowed us to build this beautiful high school.”
Some of the loans are very small. Bud Electronic Supply Co. in Danville ran into trouble when it tried to expand into three new retail locations in Indianapolis just as the economy crashed in 2008. For a time it looked like the 16 employees it had in three Danville locations—selling cell phones and installing home theater systems—might all lose their jobs as the company spiraled into debt. But an $800,000 New Markets loan kept the business operating.
“We’re doing better now. The New Markets money allowed us to catch our breath,” says Neal Ehrlich, who coowns Bud along with wife Melody. He’s considering expansion again. “Next time we’ll be much more cautious about that.”
New Markets loans are typically negotiated by specialty finance firms such as Advantage Capital Partners of Clayton, Mo., which raised $50 million for Illinois businesses last year. “Traditional banks have trouble financing small companies in low-income neighborhoods,” says Mark Lewis, an Advantage principal. “With the tax credits, we have no shortage of investors willing to fill that void.”