What Is the New Markets Tax Credit Program
The NMTC program can be highly complicated and difficult to understand for first time NMTC applicants. The PCDE team stands ready to help as you explore the program’s suitability. Our priority is always to provide the best economic opportunities to low income areas. Review the following information and if we can be of any help please contact us any time!
The New Markets Tax Credit Program (NMTC Program) was established by Congress in 2000 to spur new or increased investments into operating businesses and real estate projects located in low-income communities. The NMTC Program attracts investment capital to low-income communities by permitting individual and corporate investors to receive a tax credit against their Federal income tax return in exchange for making equity investments in specialized financial institutions called Community Development Entities (CDEs). The credit totals 39 percent of the original investment amount and is claimed over a period of seven years (five percent for each of the first three years, and six percent for each of the remaining four years). The investment in the CDE cannot be redeemed before the end of the seven-year period.
Since the NMTC Program's inception, the CDFI Fund has made 836 awards allocating a total of $43.5 billion in tax credit authority to CDEs through a competitive application process. This $43.5 billion includes $3 billion in Recovery Act Awards and $1 billion of special allocation authority to be used for the recovery and redevelopment of the Gulf Opportunity Zone.
An organization wishing to receive awards under the NMTC Program must be certified as a CDE by the Fund.
To qualify as a CDE, an organization must:
be a domestic corporation or partnership at the time of the certification application;
demonstrate a primary a mission of serving, or providing investment capital for, low-income communities or low-income persons; and
maintain accountability to residents of low-income communities through representation on a governing board of or advisory board to the entity.
Allocations are used to provide tax credit incentives to investors who finance business and real estate projects in low income communities. Low income communities are defined through a combination of US Department of Treasury and Census data. Low-income communities (LIC) are census tracts that have a poverty rate of 20% or more, or the median income is below 80% of the greater than (a) statewide median income; or (b) metropolitan median income.
The community benefits from the effects of the NMTC Program which has supported a wide range of businesses including manufacturing, food, retail, housing, health, technology, energy, education, and childcare. Communities benefit from the jobs associated with these investments, as well as greater access to public facilities, goods, and services.
Small and medium-sized businesses have a better access to financing that is flexible and affordable. Investment decisions are made at the community level and typically offer more favorable terms and conditions than the market normally offers. Benefits can include lower interest rates, flexible provisions such as subordinated debt, lower origination fees, higher loan-to-values, lower debt coverage ratios and longer maturity.
Investors receive a federal income tax credit equal to 39% of their investment in a CDE. The tax credit must be taken over a seven year period (5% in years 1-3, and 6% in years 4-7). 85% of the funds raised must “remain invested” during years 1- 6 of the tax credit period. This decreases to 75% during the 7th year. Investors may claim the initial portion of the credit as soon as the Qualified Equity Investment (QEI) is made.
Is the NMTC Program Right for You?
- Most of the deals in/near Texas’ largest cities and on Tex-Mex border along with the following 9 underserved states, as areas that have received fewer dollars of “qualified low-income community investments” in proportion to their statewide population residing in Low-Income Communities: Alabama, Arkansas, Florida, Georgia, Idaho, Kansas, Nevada, Tennessee, Texas, and West Virginia.
- Annual revenues of the companies must be over $2 MM
- Target job retention, creation
- Companies that provide goods and services to LICs
Sample Investment Structure on a $10MM transaction
Simplified Investment Structure
($10 MM Transaction)
• Tax Credit Investor contributes $2.8 MM and receives $4.2 MM in tax credits over 7 years
• Lender provides $8 MM of market rate debt
• The qualifying business (QALICB) receives $10 MM of investment; $2 MM of which is forgiven in year 7
Feel free to contact us to discuss how you can benefit from the New Markets Tax Credit Program either as an investor or a qualifying business.