How to Access the New Markets Tax Credit Program
The New Markets Tax Credit program is allocated annually by an agency within the U.S. Treasury Department named the CDFI Fund to Community Development Entities (CDEs). There are two ways to access the New Markets Tax Credit program.
To fund a single project, you will need to solicit community development entities that currently have an allocation and have an investment strategy that complements your business model and geographic location. If you have a rather large project type or a pipeline of a specific sort of project type in need of financing, the best option is to form a CDE and apply to the CDFI Fund for an allocation.
Community Development Entities are private companies that have a primary mission of providing investment capital to low-income communities, and are accountable to those communities through engagement of community representatives in prioritizing investments. Upon receiving an allocation award CDEs are responsible for investing their allocations into individual projects.
CDEs typically have specific types of projects they are interested in, for example manufacturing, office/retail, community services, renewable energy and others. CDEs have a specific geographic service area, however approximately ½ of awards go to CDEs with a national service area, which includes the 50 states and U.S. Territories. CDEs are looking for high impact, “shovel ready” projects (meaning ready to pull a building permit) that have not been able to secure sufficient capital from conventional sources to move forward. NMTCs can typically close a gap of 20% to 25% of a project cost in very flexible financing.
The first step in securing NMTC program credits for a project is to develop a financing request that highlights the positive economic, social and environmental impacts of the project being financed.
The process to secure NMTCs for a project is as follows:
- Develop a comprehensive project plan & financing request package
- Secure commitment letters for all other sources of financing (e.g. debt, donations, local subsidies)
- Conduct request for proposals to potential NMTC equity investors, review proposals and select investor
- Update the financing request package to include the above commitments
- Identify all CDEs with allocation available and project site in their service area
- Distribute to all potential CDEs
- Follow up with each CDE recipient to secure term sheets
What are CDEs looking for?
CDEs are looking for high-impact projects that are ready to pull a building permit but have been unable to secure enough capital from conventional sources to move forward.
A menu search of our site will reveal that most CDEs target specific project types and geographic areas with low income communities. CDEs are looking to fund projects that will have meaningful economic impacts in their communities which are qualified active low income tax areas that would be ideal for investors. This means CDFI fund tax credit project sponsors must be able to express (and back up) metrics such as job creation, environmental impacts, community and commercial goods provided, equity investments and more in this qualified active low income communities.
Sponsors should consider commissioning a community impact analysis of their project to help understand the direct and indirect impacts it will have. This will allow CDEs to see how the project will improve its NMTC portfolio.
Priorities for CDEs include:
- Significant positive community impact and likelihood to attract additional investment
- Use and building permits ready to be pulled
- Committed financing for 75% to 80% of the project cost, including a NMTC Equity Investor.
- An experienced project sponsor
- Legal and accounting professionals engaged