NBT Bancorp in Norwich, New York, is leveraging a core competency – commercial real estate lending – in a project that aims to increase the stock of affordable housing in its footprint, improve its Community Reinvestment Act profile and generate a strong return on investment.

NBT’s $12.1 billion in assets has partnered with CEI-Boulos, a Brunswick, Maine, real estate fund manager, to create a $10 million commercial real estate equity investment fund of dollars. While the bank will consider investing in multi-family, hotel, office and mixed-use projects, the fund, which launched last month, will focus on affordable housing, according to the president and chief executive. by NBT, John Watt.

As a community bank, we have an obligation to ensure that the communities in which we operate are vibrant,” Watt said. “One of the ways we do that is by focusing on affordable housing.”

The Community Reinvestment Act, or CRA, is a 1977 law that directs banks to meet the credit needs of communities in their footprint, including low- and moderate-income neighborhoods. Regulators review the activities of banks every four years. Compliance is critical because a poor rating impacts an institution’s ability to open new branches, merge with a partner, or acquire other banks.

The CRA has been in the forefront of the news recently, as regulators push a proposal for revision that would expand the list of activities eligible for credit and broaden the geographic scope of regulation, allowing large banks to serve areas where they have significant concentrations of lending and overall business, even in the absence of a branch. Promoting investment in affordable housing was a key priority of lawmakers in 1977 and remains so in the proposed revision.

By creating a real estate investment fund, NBT is following in the footsteps of Woodforest National Bank, a bank based in The Woodlands, Texas, which partnered with CEI Boulos in 2019 to create a $22 million commercial real estate investment fund. Since then, the Woodforest CEI Opportunity Fund has helped build or rehabilitate 1,200 homes and create 900 jobs, according to Noelle St. Clair Lentz, senior vice president, impact investing and strategic initiatives, with assets of $9.4 billion. Wooded forest.

NBT and CEI-Boulos have had a banking relationship for several years, “so there is a high level of comfort” between the two companies, Watt said. The relationship led to an introduction between NBT and Woodforest, who advised NBT in the creation of the NBT CEI-Boulos Impact Fund.

“I liked NBT’s approach and willingness” to create an investment fund, said Doug Schaeffer, Woodforest’s executive director for the Community Reinvestment Act. “They really dove deep into 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 attract them.

From investor to defender

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 ARC compliance. “They pack more punch than a lot of the much bigger banks,” Thomas said.

Woodforest received outstanding ratings for lending, investment and service in its last ARC assessment in June 2019.

Woodforest established its first fund with CEI-Boulos later that year using funds it received from the sale of two lines of commercial lending business to Montebello, New York-based Sterling Bancorp. Now, following the success of the initial fund, Woodforest is “actively working to rise and seed” two additional funds, one focused on commercial real estate and the other on small businesses, St. Clair Lentz said. .

“We are likely to generate a double-digit return if we do it right. It is important for our shareholders. Our communities will also benefit,” said John Watt, CEO of NBT Bancorp.

Van Zandbergen Photography

With all three funds, Woodforest has targeted investment activity in areas of opportunity that offer tax advantages to investors, including the ability to defer the payment of capital gains taxes.

The tax benefits offered by the Opportunity Zones program, created by the Tax Cuts and Jobs Act of 2017, “are very powerful incentives”, according to St. Clair Lentz, even if she has quick to add that ARC-themed investment funds “make sense.” even in the absence of tax benefits. “I don’t think tax incentives make a bad investment a good investment. It really makes a good investment, a great investment from our perspective,” said St.Clair Lentz.

Alongside its internal program, Woodforest is working to involve more banks in the concept of investment funds. The company plans to create a subsidiary that would handle Opportunity Zone funds involving other banks, St. Clair Lentz said.

While Woodforest, like NBT, has been the sole investor in its funds, St.Clair Lentz and Schaeffer say the best way to evolve the concept is to create funds that invest in multiple asset classes and include more an investor.

“If we’re going 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 the needs of communities across the country.”

Given the clear potential of community development investments to generate ARC credit, Schaeffer argues that investment funds are a natural fit for banks – although few beyond Woodforest and now NBT have continued the strategy.

“Banks don’t see it yet,” Schaeffer said. “I would like to see more and more people doing it.”

At the service of shareholders and communities

For its part, the NBT fund is not built around areas of opportunity. He plans to select projects with the help of a panel of seven regional community development experts. Another team inside the bank will underwrite potential candidates for an investment.

One of the goals that NBT shares with Woodforest is the expectation that its investment fund will generate net profit as well as social and ARC benefits.

“We have strong operators,” Watt said. “We are likely to generate a double-digit return if we do it right. It is important for our shareholders. Our communities will also benefit.

At Woodforest, the initial investment fund “is working as intended,” St. Clair Lentz said. And there is no shortage of quality investment 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 generate a strong financial return and benefit the community?”

Thomas also planned a strong pipeline for potential investment funds.

“There is a continued demand for investments in community development,” Thomas said. “We are in an environment where [environmental, social and governance issues] are so important.