A CBO Financial Subsidiary, Community Development Funding, LLC was one of only 66 groups to receive New Markets Tax Credit allocation in Round 1 in 2003, and one of 62 groups to receive an allocation in Round 2 – one of only 10 organizations to receive both 1st and 2nd round allocations. Since then, the CBO team has gone on to secure additional allocations for our own CDE, and assisted numerous clients with establishing CDEs and successfully applying for a direct New Markets Tax Credit allocation award. The New Markets Tax Credit program create benefits to tax credit investors, businesses that need capital, and state and local government and economic development authorities seeking to improve low income communities.
NMTC Program for Low Income Communities
The New Markets Tax Credit program is designed to incentivize investment in low-income communities. The minimum requirement is that an eligible project must be in a Census Tract with a poverty rate of 20% or higher, or a median family income at or below 80% of the area median family income; however, 75% of the NMTC program is restricted to areas of higher distress, or 30% or higher poverty or 60% or less in area median family income.
What % of my project can the NMTC Program finance?
The New Markets Tax Credit program can generally provide 20% to 25% of a project cost in very flexible financing, which is typically forgiven at the end of a seven-year compliance period during which the borrower provides annual reports regarding the positive impacts of the specific project type.
How Does the NMTC Program Work?
New Markets Tax Credit program provide an investor with a 39% tax credit paid over seven years, at a rate of 5% in each of the first three years and 6% over the next four years. The investor pays a discounted amount up front for the stream of credits over the seven-year compliance period; the investor typically receives return of both principal and interest in the form of a tax credit, allowing the New Markets Tax Credit program portion of the loan to be forgiven.
Eligible NMTC Investment Projects for NMTC Allocations
Most project types are eligible, except for a short list of businesses the government does not want to promote in low-income communities, including liquor stores, casinos, massage parlors, racetracks, golf courses and others.
A new markets tax credit program investment is made in the form of equity-like loans to businesses located in low-income census tracts or ones that predominantly serve or primarily employ low-income persons.
New markets tax credit program financing typically is applied as “gap financing” for the development of commercial, industrial, and retail real estate projects (including community facilities).
Historically, New Markets Tax Credit financings have covered a wide spectrum of project types, including industrial, commercial, renewable energy and environmental remediation projects nationwide and in the U.S. Territories.
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:
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.
The borrower must be a Qualified Active Low-Income Community Business (QALICB) under NMTC regulations, which is a business that meets the following requirements:
Project expenditures made in the 24 months prior to funding of the New Markets Tax Credit program transaction can be included in the NMTC financing.
CDEs typically target a blended interest rate that is approximately 50% below market.
The process of obtaining NMTCs for either a CDE or a project type can vary widely, particularly as this is a highly competitive market. New allocations and allocation availability in the New Markets Tax Credit program are typically announced each year by the CDFI Fund. The CDFI Fund is in control of allocation availability and eligible census tracts with qualified low income or distressed communities. Once a CDE applies, it typically takes 7-10 months for the awards to be announced. The CDE then has five years to use their allocation from the NMTC program.
For projects, searching for credits from the New Markets Tax Credit program from CDEs that have received allocations can take months or years, or might never happen. Projects that can clearly articulate meaningful economic and community development outcomes will have a higher chance of obtaining New Markets Tax Credit financing.
Yes. The New Markets Tax Credit program can be paired with most federal, state and local programs, with one notable exception: they may not be combined with Low-Income Housing Tax Credits.
The CDFI Fund website provides a search engine for CDEs that provide financing in your area. You can research these CDEs to determine whether any have mission statements that might cover your project. In the event you find this search and the attempt to make connections overwhelming, you can use CBO Financial’s Free Project Analysis service to get expert advice on innovative financing avenues for your project.
Please contact us regarding a menu search for specific geographic locations. A menu search will also show that the New Markets Tax Credit NMTC program credits are typically applicable for the following property types & locations:
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