As access to financing sources continues to challenge the development of new projects, the federal New Markets Tax Credit (NMTC) Program is becoming increasingly attractive. In instances where a project is proposed, planned, and prepared but cannot obtain financing or has a gap in financing, the NMTC program may be able to help bridge the shortfall if the project meets certain criteria. The financing provides developers with below-market interest rates and substantial forgiveness of debt after 7 years.
The NMTC Program provides incentives for financial institutions and other investors to provide equity as a source for unconventional and below-market financing for various projects located in "low-income communities," which are liberally defined to include roughly 40 percent of the United States and most central business districts. There is no shortage of investors who will invest in the NMTC Program because they receive a tax credit equal to 39 percent on their investment plus substantial after-tax returns of 7-to-12 percent.
What are the benefits to a developer?
Most NMTC financing involves interest rates at 1-to-2 percent below market interest rates, with interest-only payments for 7 years, and tax-free forgiveness of a substantial portion of any debt at the end of this period. Additionally, with rare exception, there is forbearance from foreclosing due to developer default during the first 7 years.
Nontraditional forms of financing that developers receive under the program include equity investments, debt with equity features, equity equivalent terms/conditions, subordinated debt and numerous others. As an added benefit, these can be combined with tax-exempt financing, tax incremental financing and other tax credits, such as historic and energy tax credits to fund a project.
What kind of projects can be financed?
Qualifying projects are those that do not otherwise receive traditional financing and are located in low-income communities (as defined by the program). Examples of projects that have been financed with NMTC proceeds include the revitalization of downtown areas centered on renovations or construction of office buildings, infrastructure improvements, commercial and retail buildings, shopping centers, mixed-use projects, for-sale affordable housing, workforce housing, transitional housing, hotels, arts centers, theaters, charter schools, hospitals, assisted-living facilities, nursing homes, college campuses, high-tech and biotech facilities, homeless shelters, and facilities to assist educating the homeless.
How can a developer take advantage of the NMTC program?
Developers can submit projects for financing consideration now. NMTC allocations are awarded to many of the organizations that developers are used to working with—banks and community development entities. $3.5 billion in NMTC allocations were awarded in September by the Community Development Financial Institutions Fund (the "CDFI Fund"); and the recently enacted American Reinvestment and Recovery Act of 2009 provides an additional $1.5 billion to prior awardees and applicants that scored well but did not receive an award. These funds are available now. Additionally, developers can submit their projects with 2009 applicants who must submit applications by April 8, 2009 with the CDFI Fund. A project is more likely to receive financing if it has been highlighted in an applicants application.