The U.S. Treasury Department has announced its award of $3.5 billion of New Markets Tax Credit (NMTC) allocations to 87 Community Development Entities (CDEs) across the country. The allocations will generate $1.365 billion of federal income tax credits to financial institutions and others seeking to invest in low-income communities.
The NMTC program was created by federal legislation in 2000 to encourage investors to provide capital to low-income communities. In the 11 rounds to date, the CDFI Fund of the Treasury Department has made 836 allocation awards totaling $40 billion in tax credit authority. The awards are made to CDEs on a competitive basis nationally and are not based on mathematical formulas. Although the program expired at the end of 2013, most industry observers expect it to be extended for at least two more years.
Key features of the NMTC program are as follows:
A federal income tax credit is available to an investor who makes a qualified equity investment (QEI) in a CDE that, in turn, makes a qualified low-income community investment (QLICI) in a qualified active low-income community business (QALICB).
The total amount of credits is 39 percent of the QEI and is spread over seven years (5 percent in each of the first three years and 6 percent in each of the next four).
The QEI must remain invested for the full seven years, after which the NMTC structure is unwound.
QALICBs include businesses that operate in low-income communities or that serve primarily low-income populations. There is no requirement that owners or employees of the business be low-income persons or residents of a low-income community.
Low-income communities include any census tract where the poverty rate is at least 20 percent or the median family income is not more than 80 percent of the median for the state or metropolitan area. CDEs tend to give priority to projects located in “severely distressed” census tracts and rural areas.
Benefits to Project Sponsors
Through leveraged financing structures, the tax credits provide potential subsidies in the range of 10 percent to 20 percent of project costs, depending on the size of the project and other variables. In addition, the interest rate on project financing is below market.
Financial institutions may participate in, and benefit from, the NMTC program in a number of ways, including (1) making equity investments that qualify for the income tax credits, (2) providing the debt capital in a leveraged structure, and (3) sponsoring a CDE that may earn substantial fees when it commits its allocation to specific projects. Moreover, since the investment or lending activities are targeted to low-income communities, they may also qualify for Community Reinvestment Act credit.