With 10 years and over $2 billion of direct and indirect NMTC allocation management experience on my timeline, I’ve been asked dozens of times whether there's a universal software solution to managing an NMTC-derived portfolio, and more often, whether outsourcing to niche-oriented packages is even necessary. To be fair and without risking specific recommendations, I generally report on a cadre of packages tailored to NMTC platform management which achieve variable utility levels, with overall utility varying directly with the needs of the underlying platform. Companies with strong operating platforms have found that minor extensions of their existing, non-NMTC specific systems better solve their overall need than bulky and costly niche-specific programs and frequently see little utility in outsourced software solutions.
Companies which find limited utility in niche-software include community loan funds, start-up NMTC funds, and hefty commercial banks. The reason for this is that while scale has a lot to do with the solution path, its the size of the allocation that matters more than the size of the company. Since traffic density on the allocatee highway drops with great rapidity as individual allocation awards accumulate, there’s a good chance that you’re in the large pool of allocatees with simple needs who don't need special software packages - assuming an average deal size of $10 million, nearly 40% of allocatees are managing ten projects and 60% are managing around 20. In fact, only 5% of the total $43 billion allocated has been awarded to CDEs with $600 million or more of individual allocation, so it’s very rarefied air indeed among the NMTC big spenders managing big portfolios.
Given that utility varies directly with allocation size, it’s no surprise then that several developers of software packages are self-managing large portfolios (50-60+ projects) either as early-entrants into the NMTC segment nearly 15 years ago with no other substantive transaction base or as long-time institutional lenders whose platform pre-dates their NMTC line-extensions. These offerings are generally packages which were developed for internal use based on the in-house management tactics and strategies and then generalized for sale.
But if you’re not in that class, do you really need a NMTC software package to manage your projects and maybe more importantly, what’s the math on this if you’re a C-Suite decision-maker at a small-to-modestly sized CDE?
On the first day … there was Lotus 1-2-3.
It’s incredible that just ½ a career ago, organizations were first discovering that Lotus 1-2-3 and WordPerfect derived data-bases could be effective management tools, and that since then the evolution of analytic data-management systems has resulted in suite-after-suite of data-storage arrays which not only can tell a Walmart logistics manager when and on what truck to ship a load of laundry soap from Long Beach to Hood River, but also report to a CDFI CFO that a potential tax-credit recapture event will spoil the company BBQ on Saturday unless something's fixed on Friday.
Nevertheless, it’s worth remembering that at the core of all these systems is a multi-dimensional data-array which in many, many contexts can be easily replicated and managed in Excel, and that all of the mission-critical NMTC compliance tests can be reduced to nothing more than simple checklists and Excel worksheets. Adding database unification, calculation, data porting, data mining, and integration with other data-bases creates the “management” programs that are on the market as calming solutions to NMTC allocation management, but when viewed from a short distance, its not hard to see that a modestly sized portfolio can be more than adequately managed free of these whistles, bells and subscription costs.
De-mystify NMTC compliance to determine actual need.
This article isn’t an exploration of NMTC technical compliance, but look-it, there’s really only three regulatory trip-wires which can cause cataclysmic disaster and that triplet presents an easy-to-manage risk profile and time commitment if managed via an informed analytic model. Incorporated into each of the three core tests are a short menu of sub-routines to ensure program compliance. Of the three, two are calculable bright-lines derived from financial statements and one isn’t, but in all cases, the work-flow to the deliverable isn’t especially complex or time-consuming.
To be sure, there’s a secondary level of asset management data-mining and reporting which in failure mode can be very disruptive to the overall business plan, including run-of-the-mill loan and investment serving and the not-to-be underestimated importance of data-mining the 150+ factoids per project which comprise the CDFI CIIS universe. But, given the fact that financial transaction track record and management platform has been a consistent prerequisite to an NMTC allocation award in the first place, the odds are good that for most allocatees functional extensions can be limited to narrow NMTC compliance activity-groups and that no massive pivot to new 3rd party software is required.
Basically, there’s: a) stuff which your organization already does and has systems in-place for and there’s b) the few compliance tests unique to NMTCs. The (b) items are easy enough to perform, record and track in Excel and the (a) items, were happening already anyway. Layering (a) onto (b) with short extensions of existing capacities will advance your business plan with minimal interruption.
So that’s the math on how laying out big bucks for integrated NMTC packages doesn’t always make any sense - adding a few new plays to the existing playbook is a more likely path to efficiency and efficacy than shifting to a whole new playbook: add the one-time cost of adding internal capacity, subtract the saving realized by absorbing unused marginal capacity, and subtract the otherwise re-occurring cost of subscriptions to the to total cost.
Is global platform integration really possible?
There’s another dimension to the software offerings that make them very appealing, which is their potential to act as global data integrators, and this is particularly warming when it comes time for CIIS reporting. But, regardless of platform or portfolio size and whether there's an implementation of niche-software, the problem with data integration is that for the most part the real CIIS hazard for CDEs is that the data in the database from which the CIIS report is ported becomes incrementally decoupled from five other key frameworks, and can be re-coupled only through a continual review process which is not capable of being reduced to simple data-entry occurring in a space devoid of judgement and expertise. These frameworks tend to either generate their own data-blocks or skew data from other frameworks, and include the app writing process, Allocation Agreement provisos which result, project and deal exigencies, the compliance testing process itself, and ... the passage of time which tends toward an evolution of facts and circumstances.
Fully automating CIIS, or any other mission-critical deliverable, via a storage array inside a black box isn't the best idea if the goal is to ensure consistency, integrity and transparency. It's clear that the CDFI Fund regards CIIS reports as key sources of data not only from CDEs, but also to Treasury’s user-constituencies in the Administration and Congress. It’s equally clear that CDFI field-audits have included the drawing of lines between CIIS data-cells and the other frameworks, and that CIIS instructions, like their cousins the App instructions and Compliance FAQs, include shaded and nuanced definitions which relate to deal metrics, NMTC allocation application tables and Allocation Agreement deployment schedules. All of those evolve and change over time due to regulatory adjustment, industry mores, or street-level facts. The real bottom line isn't the money-math on whether to purchase a package or which package to use, but whether the CDE is confident that all information is consistent, transparent and integrated platform-wide. That requires a personal level of detail which values substance over software, and over-reliance on software as a global solution can be badly misplaced.
Should the purchase of 3rd party NMTC software be ruled out? Certainly not. Should CDEs have an internal review program which periodically tests for data consistency, integrity and transparency? Absolutely.
Neal Sacon, J.D.., LL.M. is Managing Director of the SkyBlue Center for Community Development, LLC, which provides legal services, structured finance, and portfolio management solutions to community development organizations, investors and developers. https://SkyBlue.us.com.