Mind the gap: Increasing the likelihood of getting your NMTC deal to a successful closing

(Editor’s note: Sarah Wheelock is the guest author for this post. Sarah is an attorney at Fredericks, Peebles & Morgan LLP and is a member of the Meskwaki Nation (Sac & Fox Tribe of the Mississippi in Iowa).)

In my college days, I spent a semester abroad in Wales, and, given the relatively short distance, I made the trip to London on several weekends. To make my way through the city, I rode the London Underground, and I became familiar with the constant reminder from a woman’s voice with a crisp British accent to “mind the gap.” She was referring to the small space, maybe 5 inches across, that exists between the edge of the platform and to the doorway of the subway car. It is the space where nothing exists to support that which might step into it. The space where, should an unwary soul step into it, he or she might get a shoe stuck, and maybe trip, or labor publicly to get it out before the doors of the subway car begin to close.

“Mind the gap” is a simple reminder to be aware of our surroundings and proceed accordingly. The reminder is applicable in a myriad of other contexts as well, including complex financial transactions in Indian Country. In particular, minding the gap in the context of a New Markets Tax Credit (NMTC) transaction can mean the difference between a deal that falls apart and one that closes successfully.

What is the gap?                
The gap, with respect to complicated financial transactions, and even more so NMTC deals, in Indian Country, is a multi-faceted disconnect between cultures on at least two macro-levels, primarily occurring between:

1. The culture of the indigenous people located and organized as independent tribal nations within the United States and the culture of the dominant Euro-centric population of the United States; and
2. The culture of governments and the culture of private lending businesses.

In an NMTC deal, these cultures come together, much as the edge of the platform and the edge of the subway car, long enough for the transaction to occur and then they part ways. And there is a space between them that must be navigated skillfully.

Not only are tribes and tribally-owned entities different from Community Development Entities (CDEs), investors, and NMTC consultants, but they are also different in important ways from the types of organizations with which most CDEs, investors, and NMTC consultants are familiar. The differences are many, and I do not have space to describe them all here, but I offer a few examples.

• The manner and timing in which decisions are reached by a tribal government, which is often a tribal council comprised of several elected representatives of the people, is very likely considerably different from how decisions are reached by other parties to an NMTC deal such as the CDE or investor.

• The tribal council may have certain unwritten cultural protocols that are necessary to build consensus and support for a project necessary to carry the NMTC deal to a closing.

• The tribal governmental officials are politicians beholden to the people they represent and to many of whom they are probably related.

• Tribes are subject to an entire title of the U.S. Code and the oversight and regulations of the U.S. Bureau of Indian Affairs (BIA), which can make the BIA into a lurking variable with which many in the NMTC industry are unacquainted.

On the other hand, CDEs and investors make decisions more quickly and have more flexibility as private entities. The decisions of the usual NMTC parties are driven by the market and the annual cycle of the NMTC world as dictated by the U.S. Treasury and its regulations. The rhythms of the tribal world and the NMTC world are unique and therefore likely not in sync with each other.

Indeed, working in Indian Country adds a layer of complexity to every transaction that is fraught with issues that simply do not arise when the Qualified Active Low-Income Community Business (QALICB) or leverage lender is not a tribal entity or located on Indian land. It also brings a richness and nuance that makes this work ever interesting, challenging and rewarding.

Knowing the specific gap you are facing
Of course knowing that the gap exists is merely the first step in successfully navigating it. The second step requires that you understand the cultural gap at play in your transaction and are able to identify the disconnects that need to be addressed. This requires getting to know the parties to a potential or existing deal.

More than 560 federally recognized Indian tribes exist in the United States. Each tribe has its own customs, laws, government, and history that define its people and how it operates. There is no “one size fits all” for doing business with Indian tribes. Thus, those in the NMTC industry who are not familiar with tribes or have only worked with one or two often do not recognize the necessity of learning about their tribal business partner and importance of respecting the unique characteristics of the tribe or tribally-owned entity with which they are working.

An additional factor is that, while many tribes are quite commercially savvy, there are many that do not have great depth of knowledge or experience in the business world of the majority culture. The level of sophistication in Indian Country varies widely and can affect whether a deal makes it to closing. A lack of understanding on the part of the tribal party to the transaction with regard to the NMTC deal terms, structure, obligations of the QALICB and/or leverage lender, and the eventual unwind can cause problems throughout the closing process and possibly lead to a lack of support by the tribal entity’s governing body at the crucial meeting where final documents for an imminent closing are presented for approval and execution.

As anyone who works in this area knows, NMTC transactions are complicated. They come with their own vocabulary, their own section of the U.S. Code, and their own life cycle. They can be intimidating and fussy. They are also an unparalleled means of leveraging existing capital and getting private investment into tribal communities, which makes NMTCs an attractive tool for tribal economic development.

Due to the complicated nature of NMTCs, the QALICB and leverage lender are advised to retain their own legal counsel and consultants to guide them through an NMTC transaction.

This is where yet another complicating factor can pop up. Based on historical experiences, many Indian people and governments have a certain level of distrust of the majority culture – which is pretty much the group that makes up the CDEs, investors, and consultants in the NMTC industry.

And here is that gap again. So what is the solution? How do we navigate it to avoid a critical misstep that could lead to a failure of the transaction to close?

Bridging the gap with trust, communication and education
The solution is trust, which must be achieved through good solid communication and a willingness to be educated by all parties. Trust, communication, and education should be facilitated by the professionals (i.e., attorneys and consultants) who are working on the transaction. It is critical for all parties to a transaction to hire professionals with whom they feel comfortable and trust to guide them through the transaction – professionals who are capable of not only minding the gap, but bridging the gap.

In my experience, bridging the gap is more art than science. The most effective attorneys will thus be able to communicate well in both the tribal world and the NMTC world, which can be a rare combination but which also gives a transaction the best chances of closing and at a lower cost. Such individuals are bridge builders because their ability to communicate adeptly with all parties to the transaction enables them to anticipate and proactively address issues before and as they arise, troubleshoot problems more efficiently, and act as a cultural guide between the various parties (including players at other entities such as the BIA) in meaningful ways that directly impact the potential for closing the deal.

An effective bridge can’t be beat. Thus, I hope you will hear that reminder at the beginning of your next NMTC transaction, or any complex financial transaction, in Indian Country, and choose to “mind the gap.” NMTCs are a valuable financing tool for economic development in our tribal communities, and the success of such transactions is vitally important to building a better future.

The contents of this article are not intended as legal advice for any specific legal problem. Nothing in this article is intended to create an attorney-client relationship between the author and the reader. The author is licensed to practice law in Minnesota and Iowa. You can reach her at swheelock@ndnlaw.com.