NBT Bancorp in Norwich, New York, is leveraging a core competency — commercial real estate lending — as part of a project that aims to increase the stock of affordable housing in its footprint, burnish its Community Reinvestment Act profile and generate a solid return on investment.
The $12.1 billion-asset NBT has teamed with CEI-Boulos, a real estate fund manager in Brunswick, Maine, to create a $10 million commercial real estate equity investment fund. While the bank will consider investing in multifamily, hospitality, office and mixed-use projects, the fund, which launched last month, will emphasize affordable housing, according to NBT President and CEO John Watt.
“We have an obligation as a community bank to ensure that those communities we’re doing business in are vibrant,” Watt said. “One of the ways we do that is to focus on affordable housing.”
The Community Reinvestment Act, or CRA, is a 1977 law that enjoins banks to meet the credit needs of the communities in their footprints — to include low- and moderate-income neighborhoods. Regulators review banks’ activities every four years. Compliance is critical since a poor rating impacts an institution’s ability to open new branches, merge with a partner or acquire other banks.
CRA has been in the forefront of the news recently, as regulators
In creating a real estate investment fund, NBT follows in the footsteps of Woodforest National Bank, a bank based in The Woodlands, Texas, that partnered with CEI Boulos in 2019 to create a
NBT and CEI-Boulos have had a banking relationship for several years, “so there is a high comfort level” between the two companies, Watt said. The relationship led to an introduction between NBT and Woodforest, which advised NBT in the creation of the NBT CEI-Boulos Impact Fund.
“I liked NBT’s approach and their willingness” to create an investment fund, said Doug Schaeffer, Woodforest’s executive director for the Community Reinvestment Act. "They really dove in deep with our team. Noelle spent a lot of time with them, as did our finance team [and] our accounting team. We kind of opened our arms to pull them in.”
From investor to advocate
Ken Thomas, founder and CEO of Community Development Fund Advisors in Miami, called Woodforest “a really good model to follow” for banks interested in improving CRA compliance. "They have more punch than a lot of far bigger banks," Thomas said.
Woodforest received outstanding ratings for lending, investment and service on its most recent CRA evaluation in June 2019.
Woodforest established its first fund with CEI-Boulos later that year using funds it received from the sale of two commercial lending lines of business to the Montebello, New York-based Sterling Bancorp. Now, in the wake of the initial fund’s success, Woodforest is “actively working to stand up and seed” two additional funds, one focused on commercial real estate and the other on small businesses, St.Clair Lentz said.
With all three funds, Woodforest has targeted investment activity in opportunity zones that produce tax advantages for investors, including the ability to defer payment of capital gains taxes.
The tax benefits offered by the opportunity zone program, created by the 2017 Tax Cuts and Jobs Act, “are very powerful incentives,” according to St.Clair Lentz, though she was quick to add that CRA-themed investment funds “make sense” even in the absence of tax benefits. “I don’t think the tax incentives make a bad investment a good investment. It really makes a good investment a great one from our perspective,” St.Clair Lentz said.
Along with its in-house program, Woodforest is working to get more banks on board with the investment fund concept. The company plans to establish a subsidiary that would manage opportunity zone funds involving other banks, St.Clair Lentz said.
While Woodforest, like NBT, has been the sole investor in its funds, both St.Clair Lentz and Schaeffer say the best way to scale the concept is to create funds that invest in multiple asset classes and include more than one investor.
“If we’re going to get to scale, multi-investor, multi-asset funds are the way to go,” St.Clair Lentz said. “It gives fund managers more capital and more flexibility to meet needs in communities around the country.”
Given the obvious potential community development investments have for generating CRA credit, Schaeffer contends that investment funds are a natural fit for banks — though few beyond Woodforest and now NBT have pursued the strategy.
“Banks just aren’t seeing it yet,” Schaeffer said. "I’d love to see more and more people do it.”
Working for shareholders and communities
For its part, NBT’s fund isn’t built around opportunity zones. It plans to select projects with the help of a seven-member panel of regional community development experts. Another team inside the bank will underwrite prospective candidates for an investment.
One goal NBT shares with Woodforest is the expectation its investment fund will generate a bottom-line profit along with social and CRA benefits.
“We have strong operators,” Watt said. “We’re likely to generate a double-digit return if we do this right. That’s important for our shareholders. Our communities will also benefit.”
At Woodforest, the initial investment fund is “performing as expected,” St.Clair Lentz said. And there is no shortage of investment-quality projects for future funds, she added, noting that Woodforest reviewed more than 250 before settling on a portfolio of 10 for its initial fund.
“We’re looking at it through an asset-based lens,” St.Clair Lentz said. “Where are there underutilized assets that, with proper investment, can yield a strong financial return and benefit the community?”
Thomas, too, forecasted a strong pipeline for prospective investment funds.
“There’s continued demand for community development investments,” Thomas said. “We’re in an environment where [environmental, social and governance issues] are so important.”
