Part 1: How, What and Where of the New Market Tax Credit Program

Equity can transform a business or provide financial support necessary to develop a real estate project. It is difficult to find low cost equity, which is why the New Markets Tax Credit (NMTC) program was created. Since its inception in 2000, the NMTC program has deployed some $ 61 billion in tax credits to generate equity investments in low-income urban and rural communities. Investments are focused on manufacturing businesses, new and improved healthcare facilities, daycares, community facilities, nonprofits, and commercial real estate development.

In December 2020, Congress extended the NMTC with $ 25 billion in new loans to be disbursed over the next 5 years. These 25 billion dollars are intended to finance 690 companies, 225 health establishments and 775 investments in community establishments. Here is a brief description of the NMTC program and the projects eligible for credit.

How the program works

The NMTC program is administered by the United States Department of the Treasury through its Community Development Finance Institutions (CDFI) Fund. Typically, a community development entity (CDE) submits an annual application to the CDFI Fund for an allocation of NMTC. CDEs are typically your local community banks, but also include companies or partnerships that act as intermediary vehicles for granting loans, investments, or financial advice. The process to get an allowance from NMTC is very competitive and usually takes place on an annual basis. A list of EDCs by jurisdiction is available at www.novoco.com.

The NMTCs themselves are in fact claimed by investors who invest equity in eligible projects through CDE with NMTC rewards available. The investor can provide up to 39% of the cost of the project. Investors invest (usually with leveraged funds) in projects located in eligible low-income census tracts (Qualified Low-Income Active Community Businesses or QALICBs), projects selected by the CDE. The CDFI Fund website (www.cdfifund.com) includes a mapping tool that indicates eligible census tracts for this purpose.

Who uses the credits

A QALICB can be an operating business or a real estate project. Real estate projects must be physically located in an eligible census tract. Determining whether an operating business is in an eligible census tract is more complicated and will be determined by (i) the location in which income is derived the activity of QALICB, (ii) the location of tangible goods and (iii) the location of services provided by employees. There are other ways to qualify if the business provides services to “target populations”.
In order to obtain NMTC funding, a project must locate a CDE (or multiple CDEs) with an NMTC reward that is ready to commit to allowing an investor in the project to claim a portion of those NMTCs. There is a strong demand for NMTC funding, so the process is very competitive. The more your project is designed and thought out, the more likely it is to succeed.

To obtain an NMTC allocation, CDEs encourage investments in specific projects, for example, health-related facilities, mixed-use facilities, community centers. These investments in turn support job creation, improving access to health care, improving access to healthy food, increasing environmental sustainability, better educational opportunities and financing of businesses or projects neglected by traditional financiers . Identifying a CDE with missions and objectives related to a particular project can improve the likelihood of receiving funding from the NMTC.

Credits available until 2025

The $ 25 billion NMTC allowance approved by Congress in December is the biggest expansion in the program’s history. Despite its size, this pending NMTC award is likely to make only a small dent in the overall market demand for deserving projects seeking NMTC program funding. Indeed, many CDEs have already identified projects that they the intention to finance when they receive an allowance from NMTC in connection with upcoming awards. Given the multi-year horizon of the NMTC program, however, it is not too early for eligible projects to begin strategizing for success in future NMTC program funding cycles. In Part 2 on NMTC, we will provide a roadmap for companies and developers looking for a successful route to obtaining equity financing through an NMTC.

Brown Hatchett & Williams LLP is a specialty law firm located in New York City. Find us on www.bhwllp.com.