NEW MARKET TAX CREDITS EXPLAINED
The Federal New Markets Tax Credit (NMTC) Program is designed to foster private investment in businesses and economic activities in low-income communities. You would be surprised to see how many areas actually qualify as eligible areas. The NMTC program – like many government programs – is complex and there are many variables within each transaction. No two NMTC transactions are ever alike. Many organizations have NMTC eligible projects yet have never explored utilizing the credits due to the complexities and ambiguities of the NMTC program. I have aligned myself with a group of national NMTC experts and together we provide NMTC consulting on a success fee basis, with a small retainer, for the purpose of coordinating all aspects of NMTC allocations for your benefit. References and a partial list of completed projects are of course available when you desire it.
Companies can benefit from a NMTC allocation by either using the credit themselves if their EBITDA justifies it, or by monetizing the credit allocated, which requires participation from a lender to leverage the allocation. If the NMTC is utilized by the benefiting organization, instead of sold or leveraged, than the IRR on the NMTC can be significantly higher than the equivalent net cash infusion from leveraging the NMTC. A non-monetized NMTC allocation can result in a 30% IRR or better post-tax, and tax free. The leveraged credit will generally provide a one-time tax free cash infusion of around 20% of the total eligible project cost. These estimates factor the compliance cost over the 7 year run of an allocated NMTC.
With every NMTC project there are a minimum of three or four participating organizations with direct involvement. They are the benefiting organization, in this case your company, your expert NMTC consulting team (yours truly et. al.), the Community Development Entity (CDE), and a leveraged lender – if you chose to monetize the credit up front.
NMTCs are competitively issued annually to CDEs who then receive applications for eligible projects. The CDEs can be for profit or non-profit, and can be organized for specific purposes, including but not limited to renewable energy investment, urban redevelopment, rural development, or for general purposes. CDEs can be organized for development within specific geographic regions or nationally.
In addition to the technical complexities, a key element of completing NMTC transactions is a thorough knowledge and relationships with the Community Development Entities that are allocated credits, and whom ultimately must agree to competitively issue credits to a desired project.
Our team can work with you to analyze which of your pending and/or completed projects are eligible for the program, and coordinate and implement all aspects of obtaining the NMTC allocation for you. We can also coordinate on a success fee basis any other eligible economic incentives, whether program based or negotiated for your benefit. As long as amortizing and/or permanent financing is not yet in place, you can also go back two years and request NMTCs for a completed project, if that completed project is in a qualified census tract. NMTC-related transactions take longer than ordinary loans to approve and close and there are increased costs associated with closing them (primarily legal fees). Each transaction is unique, but it is not uncommon for NMTC transactions to take 6 months or longer to move from initial review to final closing.
In general terms, the team that I work with can successfully navigate through eligible projects so the benefiting organization can generally receive a net cash infusion at closing of at least 20% of the total project costs or if the credits are used by the benefiting organizations then the IRR can jump to over 30% or more.
The first step to any NMTC transaction is to determine if the project is located in a qualified census tract. Please provide me with the address (Number, Street, City, State, and Zip Code) so that I can quickly determine if the project is in a qualified census tract. Please note that even if the project is in a qualified census tract, it may not ultimately qualify for the program or meet our community impact requirements. If it has been determined that the proposed project is in a qualified census tract, then we have a questionnaire we can review with you to further determine viability of a NMTC allocation on a project by project basis. For your convenience I have attached a summary sheet of general project ranking criteria and various programs that can be coupled with NMTC allocations.
I look forward to helping you with this endeavor. It would be very helpful if you could contact me to confidentially discuss your project. Afterwards, if interested I can make a more detailed proposal for you, including a detailed summary of how the NMTC can work for your project, as well as answer questions I’m sure you will have.
General Project Ranking Criteria For NMTC Allocation
And Various Programs That Can Be Coupled With NMTC Allocations
Below is a summary of the major factors needed for projects to receive the highest consideration in the NMTC competitive review process:
Need at least 1 of the following:
______ Poverty rate greater than 30%
______ Median income less than 60% of area median income
______ Unemployment rate at least 1.5x national average
OR Need at least 2 of the following:
______ Federally designated Empowerment Zone/ Enterprise Community/ Renewal Community
______ SBA designated HUB Zone (Note: QALICB must be certified)
______ Federally designated Native American/Alaskan Native/Hawaiian Homelands area
______ Federally designated Brownfields redevelopment area
______ Encompassed by a HOPE VI redevelopment plan
______ Located in a CDFI Fund Hot Zone
______ Areas designated distressed by Appalachian or Delta authority
______ Colonias areas designated by HUD
______ Federally designated medically underserved areas
______ State or local TIF district, enterprise zone programs, other state/local programs
______ High migration rural county
OR Need 1 of the following:
______ County declared “major disaster” area since 7/15/05 by FEMA
Projects that address areas identified as Food Deserts by the USDA also can receive higher ranking in the review process. We are researching to see if there are any specific funding sources or subsidies directly tied to Food Deserts as well.
Other programs which can be coupled with NMTC include, but are not limited to the above list, plus:
- Federal Employment Tax Credit
- Tax Increment Financing (TIF)
- Sales Tax TIF
- Tax Abatements
- Community Development Block Grants (CBDG)
- Other negotiated economic incentives
