The New Markets Tax Credit (NMTC) Program is intended to facilitate flexible, long-term investments in businesses located in low-income communities. The attributes of the program are particularly helpful during situations such as the current COVID-19 crisis. However, notwithstanding the forgiving nature of the program, there are several technical and practical considerations that transaction participants should continue to monitor. In addition, possible further federal stimulus legislation could afford an opportunity for enhancements to, or even expansion of, the current NMTC Program. The following is a nonexhaustive list of NMTC considerations:
- Real Estate Construction – QALICBs are subject to a 5% cap on the amount of “nonqualified financial property” (including cash) they may carry on their balance sheets. Many NMTC financings for real estate projects rely on the special rule for construction of real property, namely that QLICI proceeds to be expended for construction of real property within 12 months after the date of a CDE’s investment are excluded from the NQFP computation. The COVID-19 crisis could cause delays resulting in construction extending beyond this 12-month grace period.
- Operating Business Compliance – To qualify as QALICBs, businesses must pass a nexus test to show their activities are conducted in low-income communities. One component of the test for QALICBs with employees is whether a minimum threshold of the business’s employees perform their services within a qualified low-income community. As an increasing number of employees work remotely during the COVID-19 outbreak, QALICBs should consider the effect of the remote work environment on their ongoing QALICB status.
- Potential Loan Modifications – Most QLICIs are structured as loans to QALICBs. To the extent parties must vary the terms of their debt QLICIs as a result of the current economic situation, parties should bear in mind the potential effects of a significant modification of a QLICI loan. Under Treasury Regulations § 1.1001-3, certain modifications could result in the deemed reissuance of the QLICI loan as of the date of the modification. Such a deemed reissuance necessitates a confirmation that the investment constitutes a QLICI as of the date of the reissuance. Notably, temporary waiver of defaults under a debt instrument does not generally constitute a significant modification of the debt instrument under the applicable regulations.
- Reporting Obligations – QALICBs are typically required to provide robust reports on their projects and community impacts, and upon the occurrence of certain material adverse changes. QALICBs should be mindful of these obligations and maintain open lines of communication with their financing partners, particularly during times of financial difficulty.
- Forthcoming Stimulus – At the time of this publication, the third stimulus bill in response to the COVID-19 outbreak is expected to be signed into law imminently, and Congress and industry stakeholders are already discussing the next stimulus bill. In the past, unforeseen economic turmoil has given rise to significant tax incentives, such as the GO Zone Act of 2005, which was passed to help those affected by Hurricane Katrina and Hurricane Rita. Stakeholders in the NMTC industry will likely seek improvements and enhancements to the NMTC Program as a part of the next stimulus package, including increased allocation authority. The attorneys and other professionals at BakerHostetler will continue to monitor pending legislation to best position our clients to take advantage of forthcoming incentives.