The Intent of the NMTC Program
The intent of the federal new markets tax credit program (the “NMTC Program”) is to provide financing to “economically distressed communities”, which have historically lacked access to traditional financing.
The NMTC Program particularly focuses on the benefits to the residents in such economically distressed communities and targeted populations (such as low-income persons, unskilled workers, minorities, women, veterans and other populations who have historically lacked access to quality jobs, and community and consumer goods and services).
New market tax credits (“NMTCs”) are equal to 39% of the “Sub-NMTC Allocation” (as defined below).
The Forgiven Loan is provided by a Tax Credit Purchaser’s effective purchase price for the NMTCs (which are dollar-for-dollar offsets against federal income taxes).
The Community Development Financial Institutions Fund (the “CDFI Fund”, which is a division of the U.S. Treasury Department), administers the NMTC Program.
Borrowers do not apply to the CDFI Fund for NMTC Financing but rather they apply to those who have received non-monetary NMTC allocation authority awards (“Allocation Awards”) from the CDFI Fund.
Good Borrower and Project Candidates for NMTC Financing
Each of the following are good types of for-profit’s and nonprofit’s operations and projects are generally good candidates for the Forgiving Loan because they provide substantial community and economic impacts to residents in “Low-Income Communities,” “Low-Income Persons” and other “Targeted Populations:”
- manufacturing facilities/operations;
- health care facilities/operations;
- grocery stores/operations;
- charter and independent schools/operations;
- qualified mixed-use projects (i.e., those that satisfy the “80/20 Test”);
- community facilities/operations; and
- renewable energy and recycling facilities/operations.
Economic Benefits of NMTC Financing
NMTCs are equal to 39% of the “Sub-Allocation” of the “NMTC Allocation Award,” which is a “qualified equity investment” (a “Qualified Equity Investment”).
None of the Borrower, its affiliates or owners recognize the NMTCs.
A Tax Credit Purchaser is typically a financial institution or a large corporation.
A Tax Credit Purchaser does not receive any direct or indirect ownership interest in the Borrower or any of its affiliates.
Instead, a Tax Credit Purchaser makes a direct or an indirect Qualified Equity Investment in the amount of the NMTC purchase price (the “NMTC Purchase Price,” such as $0.72 per $1.00 NTMC) in an affiliate the Allocatee (which is a special purpose entity used solely to provide the particular Forgiven Loan to a particular Borrower).
A Tax Credit Purchaser “purchases” the NMTCs based on: (a) current market pricing; (b) desirability of participating in the particular NMTC Financing; and (c) whether or not other Tax Credit Purchaser is competing with other Tax Credit Purchasers to participate in the particular NMTC Financing.
The Allocatee’s affiliate community development entity as (a “CDE”).
Generally, with respect to the Forgiven Loan:
- it only requires approximate 1.2% to 1.5% interest-only payments during the 7-Year NMTC Compliance Period; and
- it is forgiven at the end of the 7-Year NMTC Compliance Period.
The terms and benefits of the Forgiven Loan also generally include:
- subordination to existing and subsequent debt;
- various non-traditional and favorable terms (such as high loan-to-values and low debt service coverage ratios);
- subject to flexible financial underwriting criteria (such as limited equity requirements, if any);
- no personal guarantees with respect to the NMTC Forgiven Loan (if certain reserves are established);
- ability to “leverage” its other sources of financing for a multiplier economic benefit;
- “softer” foreclosure and enforcement rights if there is a default;
- if applicable, state NMTCs provide additional subsidy;
- ability to obtain additional financing (based on the benefits described above); and
- substantial community and economic impacts to residents in “Low-Income Communities” and “Targeted Populations,” including “Low-Income Persons.”
We identify, profile and solicit Allocatees and Tax Credit Puchasers that provide optimal nontraditional and favorable terms and flexible underwriting requirements based on the type of our Borrower client, nature of its operations, and uses of the Forgive Loan.
NMTC Financing Facilitated by “Allocatees” and “CDEs”
The Sub-NMTC Allocation = the Qualified Equity Investment in the CDE.
Additionally, the Forgiven Loan = (x) the Qualified Equity Investment in the CDE less (y) the “Sub-Allocation Fee.”
A NMTC Allocation Award authorizes an Allocatee to designate a capital contribution in its CDE as a Qualified Equity Investment which authorizes NMTCs.
For each Forgiven Loan, an Allocatee spins off an affiliate which is a community development entity (a “CDE”). The Tax Credit Purchaser (or an affiliate) then makes the Qualified Equity Investment in the CDE, and the Allocatee makes a nominal capital contribution to the CDE (such as $100).
An Allocatee facilities NMTC Financings without using any of its own funds and receives a Sub-Allocation Fee for each NMTC Financing.
A portion of the Forgiven Loan interest payments permit the Allocatee to pay ongoing fees (such as for a particular Borrower asset management and monitoring fees) during the 7-Year NMTC Compliance Period.
For each particular NMTC Financing, an Allocatee “sub-allocates” a portion of its NMTC Allocation Award.
Once an Allocatee makes a Sub-Allocation to a CDE, the Allocatee is authorized to designate the Tax Credit Purchser (or its affiliate’s) capital contribution in the CDE as a Qualified Equity Investment. The NMTCs are equal to 39% of such Qualified Equity Investment in the CDE.
Borrowers must compete to obtain one or more “sub-allocations” from one or more Allocatees, which is also an extremely competitive process.
Each Allocatee has a service area, which can be national, regional, multi-state, or local and targets particular:
- types of Borrowers (such as for-profits or nonprofits);
- types of operations (such as manufacturing, health care, or renewable energy/recycling etc.);
- what the NMTC Financing will be used for (such as for real estate, equipment or operations etc.);
- types of communities that are benefited (such as rural or metropolitan);
- types of economic distress in the “low-income community” (such as a certain minimum poverty rate or unemployment rate);
- particular “underserved states” (which are those 10 states and Puerto Rico, which have been designated by the CDFI Fund as not receiving their proportionate share of NMTC Financings over the past few years); and
- types of direct and indirect community and economic impacts to residents in “low-income communities,” “low-income persons,” and other “targeted populations.”
How NMTC Transaction Participants Benefit
The benefits of the Forgiven Loan is allocated among each of:
- the Tax Credit Purchaser, which:
- receives the NMTCs;
- receives an internal rate of return on the Qualified Equity Investment; and
- generally receives credit under the Credit Reinvestment Act (for providing financing in an economically distressed community in order to open branches in the particular geographic area).
- the Borrower, which receives gap financing with nontraditional and favorable terms, which is subject to flexible underwriting criteria, in the form of a Forgiven Loan, and the terms of which include (a) approximate 1.2% to 1.5% interest-only payments during the 7-Year NMTC Compliance Period, and (b) forgiveness at the end of such period.
- the Allocatee, which:
- receives the Sub-Allocation Fee;
- receives ongoing asset management, monitoring, and overhead etc. (out of the Forgiven Loan interest payment; and
- is able to further its mission of serving, or providing investment capital, for low-income communities or low-income persons.
The Forgive Loan can be used in connection with state NMTCs, historic tax credit financing, and other community and economic development programs (such as opportunity zone financing, and those provided by the USDA Programs and the CDFI Programs). However, NMTC Financing cannot finance any square feet to the extent that low-income housing tax credits finance such square feet.
Although the typical NMTC Financing structure is quite complex based on all of the sources of funds, the fundamental economics and initial structure of any NMTC Financing is illustrated in the following link:
For a discussion and illustration of the unwind of NMTC Financing after the 7-Year NMTC Compliance Period, please click on the following link:
For a more detailed discussion of the benefits of NMTC Financing to a Borrower, and applicable legal requirements and underwriting requirements, please click on the following link:
Please click the following link to watch our pre-recorded webinar:
To apply as a Borrower for NMTC Financing, please click on the following link:
For a more detailed discussion of the benefits of participating as a CDE in NMTC Financings, and applicable legal requirements and underwriting requirements, please click on the following link:
To apply as a CDE for a NMTC Allocation Award, please click the following link:
