- Opportunity for nonprofits to subsidize or provide gap financing for developments in a qualified census tract (low income, high unemployment).
- Financial benefits to developers, businesses and charities.
- Major investors such as Goldman, Bank of America, JP Morgan, US Bank or PNC buy credits for cash infusion to the development which may not be paid back at the end of the 7-year compliance period.
- Under leverage structure, investor may receive in excess of 9 to 10% return after tax.
New Markets Tax Credit – A Government Sponsored Joint Venture Vehicle
- Basics: $33 billion in NMTC allocated through 2012; extended by Congress for 2 more years at $3.5 Billion each year.
- Purpose: The new markets tax credit (NMTC) serves as a way to provide subsidy or gap financing to real estate developments, business activities, or charitable operations planned in qualified census tracts (high unemployment or poverty rate, low median family income).
- What does it provide? 39 Percent tax credit on the capital invested in a community development entity (CDE), over seven years (five percent in years one through three; six percent in years four through seven).
- Who benefits from the credit? The investor (typically national banks, insurance companies) making an investment in a CDE gets a tax credit of $0.39 for every $1 invested and CRA credit, which under a “leveraged” structure yields in excess of a ten percent after-tax return. The CDE directs capital into qualified projects or businesses. The investor is not repaid its equity investment.
- Community businesses, including e.g. hospitals, charter schools.
- Commercial or mixed-use real estate projects (at least twenty percent of gross income from commercial component).
- 105-Unit, The Bradford -- $45 million affordable housing and ground floor retail space in Bedford-Stuyvesant. Innovative structure allowed HDC and HPD financing to be used, with Goldman Sachs as the equity investor; BRP and Bedford-Stuyvesant Restoration Corporation were the development partners.
- $100 Million charter high school in Mott Haven, Bronx. Robin Hood Foundation was sponsor; JP Morgan Chase was investor.
Use of Leverage Debt and Alternative Capital Sources
- In structuring an NMTC transaction one of the most important elements in structuring is the use of the leverage lender. Practitioners need to be creative in structuring; in this regard it is important to recognize that the lender may take a security interest in the investment fund (pledge of partnership interest) borrower’s assets but not QALICB/developer’s property.
Opportunities for Nonprofits
Consistent with its charitable purpose, a section 501(c)(3) organization may play various roles in NMTC transactions:
- As a community development entity (CDE);
- As a qualified active low-income community business (QALICB);
- As a leverage lender.
- In the event that the leverage lender is controlled by a section 501(c)(3) entity or is itself a charity, it may decide to forgive all or a portion of the leverage loan at the end of the compliance period, but it must not be legally obligated to do so at inception.
- Alternatively the QALICB may also “refinance” the property and use the funds it receives to repay to the CDE the qualified low-income community investment (QLICI) note that mirrors the leverage loan (but not the QLICI note that reflects the investor’s equity). The CDE will then use the funds received from the QALICB to repay the leverage lender.
- There is additional concern at the QALICB level that there could be a change of administration and attitude by the investor at the end of the compliance period as compared to its present intent, especially by an institutional investor, who may decide not to exercise the put.
- Consistent with its charitable purpose, a section 501(c)(3) organization may play various roles in NMTC transactions:
"NMTC Structure Ancillary Venture Overview," by Michael I. Sanders, originally appeared in the May 2013 edition of EO Tax Journal. For more information, please click here.