The New Markets Tax Credit Program: An Underutilized Opportunity for Indian Country

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Highlights

  • The New Markets Tax Credit (NMTC) program is a tax incentive designed to encourage investment in businesses and real estate projects located in economically distressed communities.
  • The recently launched NMTC Program Native Initiative is an effort to bring greater investment to NMTC Native Areas, and there are several ways in which tribes and affiliated entities can take advantage of the program to bring funds to their communities.
  • Big Water Consulting LLC has been tasked by the CDFI Fund to survey NMTC Native Areas lending practices and generate tools for greater activity in NMTC Native Areas.

In existence since 2000, the federal New Markets Tax Credit (NMTC) incentive has provided gap financing and infusions of cash in economically distressed communities for more than two decades. However, the amount of NMTC funds making their way to Native Americans and tribal lands is surprisingly low. In the latest round of NMTC allocations, for example, only one native entity was awarded NMTCs, comprising only 0.60 percent of the funding awarded. Further, the program historically has favored investments in urban settings rather than more rural locations, making investments in large portions of Indian Country less attractive to potential funding partners.

However, changes are expected due to, in part, a new initiative undertaken by the U.S. Department of the Treasury's Community Development Financial Institutions Fund (CDFI Fund), the agency responsible for administering the NMTC program. Announced in 2021, the CDFI Fund has launched an NMTC Program Native Initiative to bring greater investment in Federal Indian Reservations, Off-Reservation Trust Lands, Hawaiian Home Lands and Alaska Native Village Statistical Areas (collectively, NMTC Native Areas), which have historically lacked NMTC investments.

What is the New Markets Tax Credit Program?

The NMTC program is a congressional tax credit incentive codified under Section 45D of the Internal Revenue Code. The program is meant to encourage investment in businesses and real estate projects located in economically distressed communities and provide more attractive lending products to low-income community businesses than what is traditionally offered on the market.

The NMTC is generated when a "qualified equity investment," typically from an investment fund formed by a large corporate or institutional investor, is made in one or more "qualified community development entities" (CDEs) in exchange for a portion of the NMTCs allocated to it from the CDFI Fund. The CDEs then use the funds from such investments to make one or more loans to a qualified active low-income community business (QALICB) that operates in a low-income community. Most often, a leveraged structure is used to infuse additional cash into the investor entity, allowing for a larger "qualified equity investment" and ultimately a larger loan to the QALICB borrower. This structure accomplishes multiple goals: 1) it creates an incentive for investing in low-income communities by large investors seeking a credit for their tax bill, 2) it reduces the cost incurred by a borrower in financing a large project, and 3) it promotes more favorable lending terms to QALICB borrowers such as below-market interest rates and lower loan-to-value ratios.

The NMTC program is often successfully paired with other tax credit programs and funding sources – such as the federal historic rehabilitation tax credit, the Low-Income Housing Tax Credit (LIHTC), the Opportunity Zone Program and a number of comparable state tax credit programs – which, when coupled with the NMTC program, can create additional investment incentives for financial partners and can generate additional funds for any given project. Additionally, and unique to Native CDFIs, the Native American CDFI Assistance Program (NACA Program) awards financial assistance and technical assistance grants to Native CDFIs for use in projects that could also qualify for NMTCs.

How Can Indian Country Benefit from the New Market Tax Credit?

Tribes and organizations that serve tribal interests can participate directly in the NMTC program in the following ways.

  • First, they can apply to become certified as a CDE, seek to win an award of NMTC allocation and make loans to projects in NMTC Native Areas. Currently, there are 69 Native CDFIs, any one of which could register for CDE status and be automatically granted. The CDFI Fund's NMTC Program Native Initiative seeks to make the process of applying for CDE status and winning allocation easier for Native CDFIs and other tribal-affiliated entities.
  • Second, an organization serving tribal interests can seek NMTC financing as a QALICB borrower. Doing so does not require formal certification; a borrower need only meet certain program requirements such as operating its business in a low-income community. The funds received from NMTC loans can be used for any number of real estate development projects in NMTC Native Areas – such as building a new community facility, grocery store, museum, school or healthcare center – or can be used to equip an existing business with new materials like machinery for a factory, medical equipment for a dentist's office or computer-aided design equipment for a vocational training program.

Direct participation in the NMTC program does have barriers though, including the large amount of effort and resources required to mobile NMTC financing. However, tribes and tribal organizations can also benefit indirectly from increased investment in NMTC Native Areas, as even NMTC financing by non-native investors, lenders and borrowers bring about new facilities or improved operations of existing businesses to NMTC Native Areas. Such investments can also generate a number of new construction jobs as well as permanent jobs for the new project.

For tribes and affiliated organizations looking to invest in an NMTC project or find financial partners for their own NMTC project, there are a number of outlets available. The CDFI Fund's website includes an NMTC Program States Served Database, which makes every NMTC awardee searchable by the state(s) it services. In addition, organizations like the Native CDFI Network exist to advocate for and focus on increasing Indian Country economic development as well as to provide resources for those seeking to do so.

To that end, the CDFI Fund's initiative hopes to encourage greater participation in the NMTC program by native-owned and controlled entities as well as promote greater investment in NMTC Native Areas. On April 18, 2022, the CDFI Fund announced its selection of a contractor to conduct the work of the NMTC Program Native Initiative. As the chosen contractor, Big Water Consulting LLC is charged with producing a survey of historic NMTC lending practices in NMTC Native Areas, creating a self-assessment guide for use by native-owned or controlled entities and conducting technical workshops for such entities. Such efforts aim to learn from prior investments in NMTC Native Areas in order to inform best practices for such investments going forward as well as equip and assist existing and potential Native CDEs and borrowers with tools to successfully utilize the NMTC program.

It will be imperative to watch the progress of Big Water Consulting LLC as it conducts its study of NMTC investments in NMTC Native Areas. The results of its findings, along with the anticipated publication of its self-assessment guide and training materials, is expected to spur growth for NMTC investing in NMTC Native Areas.

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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