A New Way To Finance Activities in Low Income Communities
By Gordon Goldie & Tim Frens
Universal Advisor , 2005 Issue No. 2


Since its creation by Congress in December 2000, the New Markets Tax Credit (NMTC) program has begun to attract significant investment in low income communities. The benefits of this program can be considerable to business owners, nonprofit organizations, and real estate developers in such areas. This article is intended to assist businesses, nonprofit organizations, and developers in understanding the NMTC program so that they can take advantage of its benefits.

Overview

Under the NMTC program, the Department of Treasury has authority to grant approximately $6 billion of federal tax credits through 2007 to taxpayers who make investments in or loans to qualified businesses or organizations located in low income communities. These tax credits are equal to 39 percent of the amount invested in or loaned to the qualified organization. Investors claim the credits over a seven-year period, beginning with the date of the initial investment.

Investors can claim NMTCs if they make an equity investment in a Community Development Entity (CDE) that has received an allocation of NMTCs from the CDFI Fund of the Department of Treasury. Substantially all of the qualified equity investment must in turn be used by the CDE to provide investments in low income communities. Authority to provide NMTCs is awarded annually to CDEs under a competitive application process. To date, the CDFI Fund has made 170 awards totaling more than $3 billion in available tax credits.

Benefits to Activities in Low Income Communities

Many businesses and nonprofit organizations located in low or moderate income areas qualify to receive an enhanced loan or equity investment from a CDE that has an allocation of NMTCs. Each CDE has a unique strategy to maximize the economic impact of its NMTC allocation upon the low income communities that it serves. For example, one CDE has committed to utilize its NMTC allocation to assist nonprofit faith- and community- based organizations seeking to establish new facilities. Another CDE is using its NMTC allocation to provide below-market, subordinated loans for commercial redevelopment in low income communities throughout the nation. Other CDEs are targeting such activities as charter school facilities, health care facilities, historic rehabilitation projects, and real estate developments.

Investments in residential rental real estate are not eligible for NMTCs. However, a mixed use facility can qualify for NMTCs as long as the rental income from the residential portion of the building is less than 80 percent of the building’s gross rent revenue.

Since the investor’s rate of return is subsidized by the tax credits, the investor is able to make loans and equity investments to qualified organizations at very favorable terms. For example, the interest rate on an NMTC enhanced loan may be as much as 2 percent to 3 percent below market. Alternatively, a portion of the loan principal may be forgivable. Many real estate developers are also combining historic tax credits with NMTCs to enhance the equity contribution that the tax credit investor is willing to make to the project by approximately 25 percent.

Eligibility Requirements

Businesses and nonprofit organizations must meet the following two eligibility requirements to qualify under the NMTC program:

• The organization must be located in a census tract with either (1) a poverty rate of at least 20 percent or (2) a median income less than 80 percent of the median income for the area.
• The organization must have a substantial connection to that location, as measured by the source of the organization’s revenue, the location of its property, and/or the geographic area where its employees provide their services.

These requirements apply to the business unit receiving the investment, which could be a branch, plant, or division of an organization. In other words, an organization does not need to establish a new entity in the eligible census tract, as long as the CDE’s investment can be traced to the facility in the eligible tract.

How To Access NMTC Enhanced Capital

An organization that desires to access funds from the NMTC program would first need to determine if its project qualifies and would then need to identify a CDE with an allocation of NMTCs to invest in its organization or development. Information regarding CDEs that have been allocated NMTCs is available at www.cdfifund.gov. If you’re interested in learning more about the program and obtaining its benefits, please contact Gordon Goldie at 248.375.7430 or Tim Frens at 847.697.6161.