New Markets Tax Credits for Real Estate Development

by Blank Rome LLP
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Tax Management Real Estate Journal

The new markets tax credit (‘‘NMTC’’) was added to the Internal Revenue Code as §45D2 by the Community Renewal Tax Relief Act of 2000.3 Initially the program was to provide allocations of the tax credit through 2007, but has been extended several times for a total allocation availability of $40 billion through 2013.4 The 2013 allocations totaling $3.5 billion were recently awarded in June 2014.

The purpose of the NMTC is to encourage investment in low-income communities through real estate projects and operating businesses. NMTC investors receive a tax credit against their federal income tax liability in exchange for making equity investments in Community Development Entities (‘‘CDEs’’). The credit, which is taken over a seven-year period, adds up to 39% of their original investment.

Since its enactment, the most common NMTC investment has been in real estate projects. A recent release by the Community Development Financial Institutions Fund (the ‘‘CDFI Fund’’), the division of the United States Department of the Treasury that administers the NMTC program, stated that ‘‘4,670 (57.9%) of the total number of NMTC investments, in the amount of $20,315,818,262 (65.3%) were in real estate development and leasing activities’’ through fiscal year 2012.5 ‘‘Real estate projects are well suited to the new markets tax credit program.’’6

The use of NMTCs in real estate projects provides a benefit not only to the investor receiving the credit, but to the real estate developer as well. First, simply put, are the economics. The NMTC provides gap financing for a qualifying project, by which a developer may obtain below-market interest rates on loans, lower origination fees, longer than standard period for interest-only loan payments, higher than standard loan-to-value ratio, longer than standard amortization period, more flexible borrower credit standards, lower than standard debt service coverage ratio, and subordination to other available financing.

OPENING THE DOOR TO NMTCs — LOCATION, LOCATION, LOCATION

In order for a project to be eligible for NMTCs, it must be located in a ‘‘low-income community’’ (‘‘LIC’’) or serve a targeted population. An LIC is defined as a population census tract that meets one of the following criteria: (1) the poverty rate is at least 20%; or (2) the median family income for the tract does not exceed 80% of the applicable statewide or area median family income.7 Although these basic criteria must be met as a threshold matter, a project will be more likely to attract a CDE and its allocation if the project is located in a census tract that is severely distressed or in a non-metropolitan county. Census tracts are considered to be severely distressed if they meet one of the following: (1) poverty rate in excess of 30%; (2) median income in the census tract does not exceed 60% of the applicable area median family income; or (3) the unemployment rate in the census tract is at least 1.5 times the national average.8 Nonmetropolitan counties are qualifying census tracts located in counties that are not within a Metropolitan Statistical Area (i.e., rural).9

Targeted populations are individuals, or an identifiable group of individuals who are low-income persons (‘‘LIPs’’) or otherwise lack adequate access to loans or equity investments and are treated as LICs for purposes of the NMTC.10 LIPs are individuals whose incomes, adjusted for family size, are not more than 80% of the applicable statewide or area median family income.11 Serving a targeted population, like being located in a qualified census tract, is another minimum threshold option for qualification of a project for NMTCs. However, similar to the severely distressed and rural criteria that make a project more attractive to a CDE, to the extent the targeted population served by the project is at least 60% owned by LIPs, or at least 60% of the employees or customers are LIPs, the project will likely receive greater interest from potential CDEs.12

Furthermore, the following attributes, if at least two of them apply to the census tract and/or project, will cause a project to be more interesting to CDEs: (1) census tracts where (a) poverty rate is greater than 25%; (b) median family income does not exceed 70% of the applicable median family income; or (c) unemployment rates are at least 1.25 times the national average; (2) the businesses obtains HUB Zone certification from the U.S. Small Business Administration; (3) Brownfield sites;13 (4) areas encompassed by the HOPE VI redevelopment plan; (5) Federally designated Native American or Alaskan areas, Hawaiian Homelands, or redevelopment areas by the appropriate Tribal or other authority; (6) areas designated as distressed by the Appalachian Regional Commission or Delta Regional Authority; (7) Colonias areas as designated by the U.S. Department of Housing and Urban Development; (8) federally designated medically underserved areas, to the extent the investment activities will result in the support of health-related services; (9) federally designated Promise Zones, state Enterprise Zone programs, or other similar state/local programs targeted toward particularly economically distressed communities; (10) counties for which the Federal Emergency Management Agency has issued a ‘‘major disaster declaration’’ and made a determination that such county is eligible for both ‘‘individual and public assistance,’’ provided that the initial investment will be made within 36 months of the disaster declaration; (11) businesses certified by the Department of Commerce as eligible for assistance under the Trade Adjustment Assistance for Firms Program; and (12) census tracts identified as Food Deserts under the Healthy Foods Financing Initiative definition (USDAERS), to the extent the project will increase access to healthy food.14

PROJECT ELIGIBILITY — QUALIFIED BUSINESS

In addition to the threshold issue of location or serving a targeted population, the project developer seeking NMTC financing must be engaged in the active conduct of a qualified business.15 However, in the case of the rental of real property to others, the business will qualify only if the project meets two additional requirements. There must be substantial improvements on the real property, and the property may not be ‘‘residential rental property.’’16 The term ‘‘substantial improvements’’ has not been defined for purposes of NMTCs. However, the CDFI Fund’s Allocation Agreement for the New Markets Tax Credit Program requires that when NMTC financing is provided to an entity whose principal business activity is the rental to others of real property, the financing must be primarily used for (1) costs in connection with new construction on the property, (2) costs in connection with substantial rehabilitation of the property, (3) costs in connection with acquisition and substantial rehabilitation of the property, (4) acquisition costs in connection with new construction, or (5) take-out financing for a prior loan, equity investment, or other financing, the proceeds of which were used in one of the ways described above.17 If the property is being rehabilitated, in order to demonstrate ‘‘substantial rehabilitation,’’ the cost basis18 of the improvements to the property during a two-year period beginning, ending, or straddling the year in which the NMTC financing is made must exceed 25% of the adjusted basis19 of each building to which the improvements are made as of the beginning of the two-year period.20

‘‘Residential rental property,’’ which is excluded from obtaining NMTC financing, is a building or structure from which at least 80% of the gross rental income for the year is from the renting of houses or apartments used to provide living accommodations.21 Therefore, pure apartment projects are not eligible for the NMTC, but mixed-use projects, such as an apartment building with ground floor retail, would be eligible projects if the retail portion would generate more than 20% of the gross rental income from the project (the ‘‘Excess of 20% Test’’). However, typically, investors and CDEs involved in the project require project developers to demonstrate that expected gross rents from nonresidential portions of the property will exceed the minimum requirement by several percentage points for the term of the seven-year NMTC compliance period. In the event that a project, when viewed in its entirety, does not expect to meet this threshold, the property may be divided into two or more condominiums, including one condominium that contains either the commercial portion of the project alone, or the commercial portion and no more of the residential portion than would meet the Excess of 20% Test. If a project were so divided, only the commercial portion alone could be the subject of the NMTC financing. A separate financing transaction would need to be used for the residential condominium.

Although rental housing is not eligible for NMTC financing, NMTC financing is available for housing for sale, including condominiums. These transactions may be more complicated, because the cash flow from the sale of such properties may make it more difficult to meet certain NMTC requirements. Typically, NMTC financing is provided in the form of interestonly loans for a minimum of the seven-year NMTC compliance period, and prepayment of the principal is typically prohibited during that time. The reason for that prohibition is a requirement imposed on the CDE, as well as a requirement imposed on the developer. The CDE is required to meet a test known as the ‘‘substantially all’’ requirement, which provides that the CDE must use at least 85% of the equity investment it receives from the investor to make a qualified investment in a project (as further described below), and which must be maintained for each year of the seven-year NMTC compliance period.22 In the event the CDE’s investment in the project, whether principal or equity, is repaid during this compliance period, the CDE is required to reinvest such amounts received in another qualified project within one year of receiving the returned investment. Otherwise, the CDE will not be treated as having continually invested the investor’s investment in satisfaction of the substantially all requirement. If the CDE is unable to reinvest those amounts within the prescribed time frame, recapture of the tax credit will be triggered.

Recapture is significant in the case of NMTCs and does not follow the same rules provided with respect to other tax credits, such as the historic or low-income housing tax credits. If a recapture event, including failure of the CDE to maintain the substantially all requirement, occurs during the seven-year compliance period, the consequence is a 100% recapture of all of the NMTCs from the investor, such that the investor will be required to pay a tax in the amount of the recaptured tax credits plus interest on the investor’s underpayment of tax in each year the tax credit was taken.23 In the event of such an occurrence, the investor will utilize the guaranties provided by the CDE and the project developer at the closing of the transaction to recoup its lost investment, as well as any additional taxes it is required to pay owing to the payment of the guaranty. The project developer will be responsible for payment of its guaranty, generally, if the recapture of the NMTCs from the investor is due to actions or omissions over which the project developer had control.

Additionally, a for-sale housing project may require more careful structuring, because the developer must also meet a requirement that less than 5% of the average of its aggregate unadjusted bases of the property is attributable to ‘‘nonqualified financial property.’’24 Nonqualified financial property is ‘‘debt, stock, partnership interests, options, futures contracts, forward contracts, warrants, notional principal contracts, annuities, and other similar property [other than] reasonable amounts of working capital held in cash, cash equivalents, or debt instruments with a term of 18 months or less’’ or debt instruments (accounts or notes receivable) acquired in the ordinary course of trade or business for services rendered or from the sale of inventory.25 Thus, the project developer is unable to merely hold the cash from the sale of the properties until the end of the compliance period. However, careful planning and structuring of the transaction will enable the parties to successfully navigate these rules.

In addition to the exclusion of residential rental property from utilization of the NMTC, certain trades and businesses are also specifically excluded from being considered as qualifying businesses. These excluded businesses are the operation of private or commercial golf courses, country clubs, massage parlors, hot tub facilities, suntan facilities, race tracks or other gambling facilities, and liquor stores.26 Furthermore, where the project is the rental to others of the real property, the lessees of the project also may not be any of these excluded businesses.27

Finally, the business operating the project must be actively conducted. In situations where the project being financed is either new construction or rehabilitation of an existing property, and will not be generating income to the owner of the property until construction has been completed and the property is placed into service, the active conduct requirement will not be met immediately following the closing of the NMTC transaction. Fortunately, a special rule provides that an entity will be treated as engaged in the active conduct of a trade or business, if it can demonstrate that the CDE may reasonably expect the entity to generate revenues within three years of the date the NMTC financing is provided.28 In order to make such a reasonable demonstration, financial projections will need to be prepared by an accounting firm experienced in NMTCs, which show, among other things, expected income from the property following construction of the improvements.

ADDITIONAL DEVELOPER REQUIREMENTS

In addition to having a qualified location and qualified business, each developer must be a ‘‘qualified active low-income community business,’’ also called a QALICB. In order to be a QALICB, the developer must meet five additional criteria related to gross income, use of tangible property, services performed, collectibles, and nonqualified financial property (the ‘‘QALICB Requirements’’), and must demonstrate at the time the NMTC financing is provided that it is reasonable to expect that the developer will meet these QALICB Requirements for the duration of the CDE’s investment.29 First, a minimum of 50% of the developer’s total gross income must be derived from the active conduct of its qualified business within any LIC (the ‘‘Gross Income Requirement’’).30 Second, at least 40% of the use of the developer’s owned and leased tangible property must be within any LIC (the ‘‘Tangible Property Requirement’’), determined based on average values of the tangible property used within and without LICs.31 Third, at least 40% of the services performed for the developer by its employees must be performed in a LIC (the ‘‘Services Requirement’’), determined based on total amounts paid by the developer for services performed within and without LICs.32 Fourth, less than 5% of the average of the aggregate unadjusted bases of the property of the developer may be attributable to collectibles other than collectibles that are inventory for sale in the ordinary course of business.33 Fifth, the developer must meet the nonqualified financial property requirements (less than 5% of average aggregate unadjusted bases) described above.34

A few modifications to the QALICB Requirements provide alternatives to allow flexibility in meeting these requirements. If either the Tangible Property Requirement or the Services Requirement are met at least 50%, rather than the required 40%, then the Gross Income Requirement will be deemed to be met.35 Additionally, if the purported QALICB has no employees, the Services Requirement and the Gross Income Requirement will be deemed satisfied, if the entity satisfies the Tangible Property Requirement substituting 85% for 40%.36

PUTTING THE TRANSACTION TOGETHER

If a project developer believes that it and the proposed project will meet the location, qualified business, and QALICB Requirements discussed above, it will need to convince an investor to invest in the project and locate one or more CDEs with available NMTC allocation to use its allocation in the project. A CDE with available allocation may be the hardest transaction partner to locate, because the demand for NMTCs is high. For example, in the most recent allocations awards issued for the 2013 round of applications, announced on June 5, 2014, the CDFI Fund reported that 310 CDEs applied for allocations and requested an aggregate of $25.9 billion in allocations.37 However, only $3.5 billion is available for allocation38 and likely 100 or fewer CDEs will actually be awarded allocations following review of the applications.

While it may be tempting for a project developer to contact every CDE that has received an allocation in the last five years,39 a potential QALICB is wise to research the CDEs to determine the best match for its project and prepare a targeted list of proposed CDEs. A potential QALICB should be able to learn a lot from publicly available information and discussions with experienced advisors and/or potential investors who know the individual project requirements of the CDEs with which they have dealt in the past.

In order to qualify for certification as a CDE by the CDFI Fund, the entity must meet certain criteria. It must be a domestic corporation or partnership with a primary mission of ‘‘serving, or providing investment capital for, low-income communities or low-income persons,’’40 which is generally demonstrated through the entity’s organizational documents. It also must maintain accountability to residents of LICs through representation on either a governing or an advisory board of the entity.41 Among the information provided in its application for certification, a prospective CDE identifies: (1) how much of its activities will be in each of major urban, minor urban, and rural areas; (2) the types of products and services, including specific types of real estate financing (retail, industrial/ manufacturing, community facilities, hospital/ tourism, office space, for sale housing, business financing, or mixed use), that it will offer; and (3) its geographic service area (e.g., county, state/territory, multi-state, or national).42 Furthermore, when a CDE applies for allocation, it provides further details of the projects in which it intends to invest.43 A CDE’s certification and allocation applications are not publicly available; however, each month the CDFI Fund issues an ‘‘NMTC Qualified Equity Investment Report’’44 (the ‘‘Monthly QEI Report’’). The Monthly QEI Report ‘‘provides information on each entity that has not finalized all of its NMTC allocations, and identifies, among other things, the total allocation amount received by each entity; the dollar amount of allocation authority that has been issued to investors; the amount remaining to be issued to investors, and the predominant markets to be served by each entity.’’45 The Monthly QEI Report also provides the contact information for the CDE. Thus, a review of the Monthly QEI Report can quickly eliminate any CDEs which do not serve the geographic market where a potential project is located or whose predominant financing is other than that of the potential project (e.g., provides operating business or non-real estate financing, rather than real estate financing), or which do not have sufficient allocation for a proposed project. However, with respect to sufficient available allocation, as discussed below, depending on the size of the project, no single CDE may have sufficient allocation, and more than one CDE may be necessary for an NMTC transaction.

In recent years, the number of CDEs awarded NMTC allocations in each round of allocations has increased, and as a consequence, the average size of each allocation award has necessarily been reduced. For example, in 2008, 70 CDEs received allocations for the $3.5 billion NMTCs authorized by Congress,46 but in 2013, 87 CDEs received allocations for the same authorized $3.5 amount of NMTCs.47 CDEs generally try to maximize the number of projects for which they use their allocations, in order to demonstrate a good track record to the CDFI Fund when they apply for future rounds of NMTC allocations, hopefully resulting in subsequent awards. As a result, CDEs may use smaller portions of their allocation authority in individual projects than they previously did. On average, allocations by a single CDE into a project tend to run in the range of $8 million to $15 million.

In addition to researching and locating appropriate CDEs for its project, a developer needs to have sufficiently planned the project and be ready, or nearly ready, to close a transaction when reaching out to potential transaction partners. In other words, a project developer should know what other financing it has available to the project and be ready to break ground on the project within a few months of reaching out to CDEs and investors. Transaction partners will expect project developers to be able to put the NMTC financing to immediate use upon the closing of the transaction.

Although investors in NMTC projects are commonly large financial institutions, the NMTC is available to any taxpayer who holds a qualified equity investment (‘‘QEI’’), which is an equity investment (stock in a corporation or capital interest in an entity treated as a partnership for federal tax purposes) in a CDE, provided that the investment is acquired by the taxpayer solely in exchange for cash, the substantially all requirement, described above, is met, and the CDE designates the investment as a QEI for NMTC purposes.48 The NMTC is triggered for the investor at the time the QEI is made in the CDE and is taken over seven years in an amount equal to (1) 5% of the QEI for the year of the investment and the next two anniversaries of the QEI; and (2) 6% for the next four anniversaries of the QEI, for an aggregate 39% in tax credits.49

Once the QEI has been made, the CDE must then use at least 85%50 of the QEI to make a qualified lowincome community investment (‘‘QLICI’’) in a QAL-ICB. A CDE has up to one year to make the QLICI, although it is often made on the same day as the QEI. A QLICI into a real estate project will be in the form of either an equity investment in the QALICB or, more likely, a loan to the QALICB. The typical QLICI loan is an interest-only loan for a minimum of seven years, bears a below-market interest rate, and is secured by a mortgage on the real property.

LEVERAGING THE INVESTMENT

Typically, although not required by the NMTC program, investors desire to leverage their investment, which allows the investor a greater return on its investment. In such leveraged structures, the investor forms a wholly owned subsidiary (the ‘‘investment fund’’) and funds its investment fund. The investment fund then borrows additional funds (the ‘‘leverage loan’’) and uses the combined investor equity and leverage loan to make the qualified equity investment in the CDE. The amount of equity invested in the investment fund is determined by a formula: (QEI × .39 × tax credit price). The tax credit price is the price per credit the investor is willing to pay for the NMTC and fluctuates with market conditions. The leverage loan is then the difference between the QEI and the equity funded in the investment fund.

For example, if the intended QEI is $20 million and the tax credit price is $0.80, the investor will invest $6.24 million in the investment fund, and the investment fund will borrow the remaining $13.76 million. The investment fund will then make the $20 million QEI in the CDE and receive an aggregate of $7.8 million in tax credits over the current and next six taxable years, which credits will be available to the investor as the sole owner of the investment fund. Thus, the investor receives $7.8 million in credits for its $6.24 million investment.

Leverage loans may come from a variety of sources (‘‘leverage lenders’’). A financial institution investor itself or a third-party bank may provide the leverage loan. Additionally, an affiliate of the QALICB may act as leverage lender and use other sources of financing available to the project, such as grants, as a leverage loan. However, a project with other sources of financing will need to demonstrate to the CDE that ‘‘but for’’ the NMTC financing, the project would not be able to be completed.

Leverage loan terms often match the terms of the QLICI loans, including interest rates and maturity date. In fact, the QLICI loans commonly are divided into two tranches, an A Loan and a B Loan, with the A Loan in the same principal amount as the leverage loan. While the leverage loan and the QLICI A Loan tend to mirror each other, a couple of important differences exist. First, leverage loans are secured by a pledge of the investment fund’s interest in the CDE, and are not secured by the underlying real estate. Thus, in an event of default, the leverage lender’s recourse will be to foreclose on its collateral and take possession of the ownership of the CDE. However, the leverage lender will likely be required to agree to a seven-year standstill on foreclosing on its collateral until the NMTC compliance period expires.

OTHER FINANCING

In the event the QALICB has financing available for the project, but such financing is unable to be used by an affiliate in a leverage loan, or a lender is unwilling to accept mezzanine debt with a seven-year foreclosure standstill, a direct loan into the project may be made. Direct loans are outside of the NMTC structure and may be secured by the real property. In fact, direct lenders usually require a first position mortgage, with the CDE and QLICI loans subordinating to the direct loan.

SEVEN-YEAR COMPLIANCE AND EXITING THE TRANSACTION

At the end of the NMTC compliance period, the investor and the CDE will want to exit the transaction and unwind the structure. The precise structure of the unwind may take several forms and will depend on the agreement of the parties at the closing of the NMTC transaction, but in the end results in the same consequences. Generally, a project developer must plan to refinance the QLICI loans, or at least the A Loan, which may be maturing on or near the sevenyear anniversary of the closing of the transaction. The ability to refinance the loans at this juncture will have been contemplated from the beginning of the transaction, and the expected ability of the QALICB to refinance will have been demonstrated in financial projections prepared for closing. The refinancing proceeds will be used to repay the QLICI loans to the CDE, which will transfer the cash up to the investment fund either as a distribution or in redemption of the investment fund’s equity interest. The investment fund will then use the proceeds to repay the leverage loan in its entirety. If the QLICI B Loan was not refinanced, the CDE will also distribute that note to the investment fund.

At the time of closing the NMTC transaction, the investor and the QALICB or an affiliate of the QALICB will have executed an option agreement, which permits the investor, upon the expiration of the NMTC compliance period, to exercise a put option for a specified period of generally one year or less. The put option will be for the QALICB or its affiliate to acquire the investor’s interest in the investment fund and is typically an amount significantly less than the investor’s original equity investment in the investment fund. In the event the investor allows the put option to lapse, the QALICB or its affiliate generally has a call option to acquire, for fair market value, the same interest available under the put option. The fair market value must be determined by a qualified independent appraiser.

If the QALICB did not fully refinance the QLICI loans and repay both the A Loan and the B Loan to the CDE, then when either the put option or the call option is exercised, the amount of the B Loan, reduced by the purchase price paid under the option agreement, may cause cancellation-of-debt income to the QALICB. If the QALICB acquires the investor’s interest in the investment fund, it will have acquired its own loan, because the investment fund will hold the B Loan. Alternatively, if an affiliate of the QALICB acquires the investor’s interest in the investment fund, assuming the QALICB and the affiliate have a greater than 50% overlap in ownership, the acquisition by the affiliate will be treated as if the QALICB acquired its own debt.51 The amount of cancellation of debt income will depend on the price paid under the option agreement. However, if the B Loan is not refinanced, the amount of that loan, reduced by the purchase price under the option agreement and any taxes owed on cancellation of debt income, will be investment that remains in the project.

PROFESSIONAL ADVICE

The NMTC is complicated, but it is a valuable tool to revitalizing low-income communities by bringing commercial investment to areas of distress. If not managed properly, the closing of an NMTC transaction can result in high transaction costs. In order to maximize efficiency, it is important for project developers to ensure they have access to experienced NMTC professionals, including attorneys, accountants, and consultants. The universe of NMTC professionals is relatively small, which means that when the parties come together, there is a significant likelihood the professionals, the investors, and the CDE(s) will have experience working together, and will be more likely able to anticipate and efficiently handle issues that a particular transaction may present. Furthermore, retaining professionals with NMTC experience may aid in locating CDEs with available allocation and/or investors who may be interested in the project.

THE FUTURE

The results of the NMTC program are undeniable. Since its inception, the CDFI Fund has awarded 836 allocations of tax credit in the aggregate amount of $40 billion, and more than $31.1 billion in NMTCs have been invested in low-income communities through fiscal year 2012.52 The program is credited with creating or retaining over 560,000 jobs and constructing 22 million square feet of manufacturing spaces, 71.9 million square feet of office space, and 55.3 million square feet of retail space.53

However, the NMTC program is not a permanent part of the Code, although many hope that it will be someday. Several bills are currently pending in Congress to either extend or make permanent the NMTC, and it is hoped that when Congress returns following the November elections, one of those proposals will pass before the end of the year. The industry remains optimistic that the NMTC program will continue. In fact, the CDFI Fund recently concluded the next round of applications for additional tax credit allocation authority in anticipation of further Congressional authorization54 and received 263 applications requesting an aggregate total of $19.9 billion in NMTC allocation authority.55 The demand and the need for this program to continue clearly exist.

Notes:

1 Megan A. Christensen is a senior associate in Washington, DC in the Tax, Benefits, and Private Client Group of Blank Rome LLP.

2 Unless otherwise stated, all section references contained herein are to the Internal Revenue Code of 1986, as amended (the ‘‘Code’’) and the Treasury Regulations promulgated thereunder.

3 Pub. L. No. 106-554, 114 Stat. 2763 (2000).

4 See the Tax Relief and Health Care Act of 2006, Pub. L. No. 109-432, 120 Stat. 2922 (2006) (extending the program one year and adding $3.5 billion of allocation authority); the Emergency Economic Stabilization Act of 2008, Pub. L. No. 110-343, 122 Stat. 3765 (2008) (extending the program through 2009 and adding $3.5 billion of allocation authority); the American Recovery and Reinvestment Act of 2009, Pub. L. No. 111-5, 123 Stat. 115 (2009) (adding an additional $3 billion of allocation); the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111-312, 124 Stat. 3296 (2010) (extending the program through 2011 and adding $7 billion of allocation authority); the American Taxpayer Relief Act of 2012, Pub. L. No. 112-240, 126 Stat. 2313 (2012) (extending the program through 2013 and adding $7 billion of allocation authority). Additionally, the Gulf Opportunity Zone Act of 2005, Pub. L. No. 109-135, 119 Stat. 2577 (2005), added $1 billion of additional allocation authority for certain businesses located in the ‘‘Gulf Opportunity Zone.’’

5 U.S. Department of the Treasury, Community Development Financial Institutions Fund, New Markets Tax Credit Public Data Release: 2003-2012 Summary Report (July 24, 2014) (available at http://www.cdfifund.gov/docs/nmtc/2014/FY%202012%20NMTC %20Data%20Release%20Narrative.pdf).

6 T.D. 9600, 77 Fed. Reg. 59,544 (Sept. 28, 2012).

7 §45D(e)(1).

8 See CDFI Fund, NMTC Program 2014 Allocation Application, Q.24 (updated Aug. 20, 2014) (available at http:// www.cdfifund.gov/docs/nmtc/2014/Application%20Materials/ 2014%20Final%20NMTC%20Application.pdf), and CDFI Fund, New Markets Tax Credit Program Allocation Agreement Template, Section 3.2(h) (2013) (available at http://www.cdfifund.gov/docs/ nmtc/2013/NMTC_Allocation_Agreement_Template_2013.pdf).

9 Id. Metropolitan Statistical Area is defined in 44 U.S.C. §3504(e) and 31 U.S.C. §104(d) and Executive Order 10253 (3 C.F.R. Part 1949-1953 Comp., p. 758), as amended, with respect to the 2010 Census.

10 §45D(e)(2); Reg. §1.45D-1(d)(9).

11 Reg. §1.45D-1(d)(9)(i)(A).

12 Id.

13 Brownfield sites are defined in 42 U.S.C. §9601(39).

14 See NMTC Program 2014 Allocation Application, Q.24, and Allocation Agreement Template, §3.2(h).

15 See §45D(d); Reg. §1.45D-1(d)(4)(i), §1.45D-1(d)(5)(i). There is no requirement that employees of a qualified business be residents of a low-income community. Reg. §1.45D-1(d)(5)(i). A qualified business does not include any trade or business consisting of the operation of any private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other facility used for gambling, or any store the principal business of which is the sale of alcoholic beverages for consumption off premises. Reg. §1.45D-1(d)(5)(iii)(B). Neither farming, nor any trade or business that is predominantly the development or holding of intangibles for sale or license, constitutes a qualified business. Reg. §1.45D-1(d)(5)(iii)(C), §1.45D- 1(d)(5)(iii)(A).

16 §45D(d)(3); Reg. §1.45D-1(d)(5)(ii).

17 See Allocation Agreement Template, §3.3(h).

18 See §1012.

19 See §1011(a).

20 See CDFI Fund, New Markets Tax Credit Compliance and Monitoring Frequently Asked Questions, Q.18 (Sept. 2011) (available at http://www.cdfifund.gov/docs/nmtc/2011/ NMTC%20Compliance%20Monitoring%20FAQ%20September %202011.pdf).

21 §168(e)(2)(A).

22 Reg. §1.45D-1(c)(1)(ii), §1.45D-1(c)(5). The percentage is reduced to 75% in the final year of the compliance period.

23 This is in contrast to the rehabilitation (historic) and lowincome housing tax credits, the recapture amount of which is reduced 20% per year following the year the credits are taken.

24 Reg. §1.45D-1(d)(4)(i)(E)(1).

25 Reg. §1.45D-1(d)(4)(i)(E)(1)(i) and §1221(a)(4).

26 Reg. §1.45D-1(d)(5)(iii)(B).

27 Reg. §1.45D-1(d)(5)(ii).

28 Reg. §1.45D-1(d)(4)(iv).

29 Reg. §1.45D-1(d)(6)(i).

30 Reg. §1.45D-1(d)(4)(i)(A).

31 Reg. §1.45D-1(d)(4)(i)(B).

32 Reg. §1.45D-1(d)(4)(i)(C).

33 Reg. §1.45D-1(d)(4)(i)(D). Collectibles include works of art, rugs, antiques, metals, gems, stamps, coins, and alcoholic beverages. §408(m)(2).

34 Reg. §1.45D-1(d)(4)(i)(E).

35 Reg. §1.45D-1(d)(4)(i)(A).

36 Reg. §1.45D-1(d)(4)(i)(C).

37 CDFI Fund, NMTC Program Award Book CY 2013, p.6 (available at http://www.cdfifund.gov/docs/nmtc/2013/ 2013_NMTC_Program_Award_Book_06052014.pdf).

38 §45D(f)(1)(G).

39 A CDE must use its NMTC allocation within five years of it being awarded. See §45D(b)(1) (flush language).

40 §45D(c)(1)(A).

41 §45D(c)(1)(B).

42 See CDFI Fund, CDE Certification Application (Rev. Aug. 2014) (available at http://www.cdfifund.gov/docs/certification/ CDE/CDE%20Certification%20App%20Aug%202014.pdf).

43 See NMTC Program 2014 Allocation Application (available at http://www.cdfifund.gov/docs/nmtc/2014/Application% 20Materials/2014%20Final%20NMTC%20Application.pdf).

44 Latest report available at http://www.cdfifund.gov/docs/ nmtc/2014/NMTCQEI_Report_102014.pdf.

45 Id. at p. 1.

46 See CDFI Fund, 2008 New Markets Tax Credit Program Allocations, p.15 (available at http://www.cdfifund.gov/docs/2008/ nmtc/2008CompleteAwardBook(All%20Documents.pdf)).

47 See CDFI Fund, NMTC Program Award Book CY 2013, p. 3 (available at http://www.cdfifund.gov/docs/nmtc/2013/ 2013_NMTC_Program_Award_Book_06052014.pdf).

48 §45D(b)(1); Reg. §1.45D-1(c)(1).

49 §45D(a)(1); Reg. §1.45D-1(b).

50 As discussed above, 85% is enough to satisfy the NMTC statute and regulations; however, a CDE may be required by its individual allocation agreement with the CDFI Fund to invest a higher amount. The CDFI states that all 87 of the 2013 NMTC allocatees indicated that they would invest at least 95% of the QEIs received in QLICIs. See CDFI Fund, NMTC Program Award

Book CY 2013, p. 2 (available at http://www.cdfifund.gov/docs/ nmtc/2013/2013_NMTC_Program_Award_Book_06052014.pdf).

51 See §108(e)(4).

52 See CDFI Fund, NMTC Program Award Book CY 2013, p.2 (available at http://www.cdfifund.gov/docs/nmtc/2013/ 2013_NMTC_Program_Award_Book_06052014.pdf).

53 Id.

54 See Notice of Allocation Availability, 79 Fed. Reg. 46,503 (Aug. 8, 2014).

55 CDFI Fund, CDFI Fund Releases Application Demand for 2014 Round of NMTC Program (available at http:// www.cdfifund.gov/news_events/CDFI-2014-44-CDFI_Fund _Releases_App_Demand_for_2014_Round_of_NMTC_ Progra

Reproduced with permission from Tax Management Real Estate Journal, 30 REJ 362, 11/05/2014.

Copyright 2014 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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