On November 17, 2016, the US Department of the Treasury’s Community Development Financial Institutions Fund (CDFI Fund) announced the largest single round award of New Market Tax Credit (NMTC) allocations since the program’s creation in 2001. One hundred and twenty organizations, headquartered in 36 states, the District of Columbia and Puerto Rico, were awarded a total of $7 billion of NMTC allocations.
The NMTC program was created to encourage investment in low-income communities and grow businesses, create jobs and sustain healthy local economies through federal tax incentives (a 39 percent tax credit over a seven-year period).
In a typical NMTC structure, an investor makes an investment in a special entity called a community development entity (CDE), which may provide either equity investments or loans to certain qualified businesses in low-income communities. The NMTC is generated at the time a qualified equity investment is made to the CDE, i.e., the moment an investor invests. That CDE uses the investment to loan money or make an equity investment in a qualified active low-income community business (QALICB).
Investors have received NMTCs for funding commercial and industrial facilities, retail and mixed-use properties, including shopping centers, hospital and medical facilities, company headquarters, community facilities, green energy production facilities, and biotech research facilities.
Most business other than residential real estate, golf courses, farming, gambling and liquor stores and similar type business qualify as QALICBs for NMTC financing as long as they are located in a qualified census tract. Because this allocation is so large, many of the CDEs awarded NMTC allocations will be looking for projects to fund, making this the ideal time to explore a possible transaction and to prepare materials to attract interest from NMTC funding.