New Markets Tax Credits

The NMTC program stimulate new investments in low-income communities that would not otherwise occur.

The New Markets Tax Credit (NMTC) program is a federal subsidy program designed to incentivize investments into low-income communities, providing approximately 25% of project cost in flexible, below market funding that is typically forgiven at the end of the 7 year compliance period. NMTC investors make investments in companies known as Community Development Entities (CDEs) that in turn make loans to businesses in low-income communities. The intent of the program is to spur positive economic revitalization in these areas.

NMTCs create benefits to tax credit investors, businesses that need capital, and state and local government and economic development authorities.

  • Potential new or additional source of capital for qualified borrowers
  • Provide capital where previously unavailable
  • Result in availability of capital at substantially lower cost
  • Result in conversion of up to 30% of project debt to borrower equity
  • NMTC essentially guarantees return of investment plus a return on the investment regardless of borrower performance
  • Investors can further increase investment return and project subsidies with additional tax credits (e.g., historic and renewable tax credits)
  • Opportunity to combine public funding with tax credits to induce development
  • Potential additional sources of revenue to agency as a CDE

TYPICAL NMTC TRANSACTION

  • Investor forms a new investment company and invests $3,000,000 in the investment company
  • Investment Company borrows $7,000,000 at 7%
  • Investment Company makes a $10 million equity investment in a CDE

CDE makes two loans to Borrower as follows:

Senior Loan $7M Interest only for 7 years at 7%
Subordinate Loan $3M Interest only for 7 years at a very low interest rate (e.g., 1%)

Exit Strategy:

  • Generally, at the end of the 7 year credit period, the Senior Loan is repaid and the Subordinate Loan is effectively forgiven.
  • In other words, the Borrower obtains a loan for $10 million but ultimately is required to repay only $7 million
BENEFIT TO INVESTOR
$3,900,000 Total tax credit
($3,000,000) Investment
$900,000 Total return over 7 year period (approx. 10% IRR)
BENEFIT TO BORROWER
$3,000,000 Debt eliminated
$1,260,000 Interest savings on sub debt (assume 6% lower)
($1,200,000) Tax on cancellation of subordinated debt*
($1,150,000) Additional NMTC Transaction Costs
$1,910,000 Total Subsidy

*Calculated at 40% tax rate. The tax from debt cancellation can be deferred and does not apply to tax-exempt entities.

WHAT IS A LOW-INCOME COMMUNITY?

A low-income community is a census tract with at least 20% poverty, or one that has a median family income that is at or below 80% of the area’s median family income.

ELIGIBLE NMTC ACTIVITIES

Investments are 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. This financing typically is applied as “gap financing” for the development of commercial, industrial and retail real estate projects (including community facilities). Other NMTC financeable projects may also include for-sale housing designated for moderate-to-low-income families, renewable technologies, and sustainable, environmentally friendly technologies operating on a commercial scale.

NMTCs also can be used to offset the cost of industry-related consulting services such as assistance to a newly formed CDE, project plan development, financial modeling, and operating assistance. Innovative applications of NMTCs are on the rise. The only true way to find out whether your construction project is NMTC-eligible is by asking a CDE.

HOW TO ACCESS NMTCS?

There are two ways to access the program. To fund a single project, you will need to solicit CDEs that currently have an allocation and have an investment strategy that complements your business model and geographic location. If you have rather large project or a pipeline of projects in need of financing, the best option is to form a CDE and apply directly for an allocation of NMTCs.

WHAT REQUIREMENTS MUST BE MET BY THE BORROWER TO QUALIFY?

The borrower must be a Qualified Active Low-Income Community Business (QALICB), which is a business that meets the following requirements:

  • It is a corporation (for profit or nonprofit), or a partnership
  • It actively conducts any business except residential rental, development, sale or licensing of intangibles, golf course, golf club, massage parlor, hot tub facility, suntan facility, race track, off-sale liquor
  • Less than 5% of its assets consist of “collectibles” (e.g., antiques, jewelry, wine, etc.)
  • Less than 5% of its assets consist of “financial property” (e.g., stocks, bonds, cash other than reasonable working capital)
  • 40% of its tangible assets are located in a low-income community
  • 40% of employee services are rendered in a low-income community