New Markets Tax Credits (“NMTCs”) are a federal tax credit available with respect to investments made in a Community Development Entity (or “CDE”) that uses the funds so invested to make investments in businesses located in Low-Income Communities (“LICs”). NMTCs can be a significant benefit in financing a real estate project or other business not because the business or its owners claim NMTCs, but because the CDEs can loan to, or invest in, the business on favorable terms due to the return obtained by the investor in the CDE from the NMTCs. While some aspects of the NMTC program do not directly affect the owner of a business that desires to raise money from NMTC-subsidized sources, it is essential that the owner have a detailed understanding of the NMTC program and transaction structures to attract such NMTC financing sources and close transactions.
- A Quick Summary - Alphabet Soup –NMTC Investors; QEIs; CDEs, CDFI Fund; QLICIs, QALICBs and LICs.
NMTCs are available to an investor (the “NMTC Investor”)
That makes a Qualified Equity Investment (“QEI”) in a
Community Development Entity (“CDE”) but only if
The CDE Received an award of NMTC authority from
The Community Development Financial Institutions Fund (the “CDFI Fund”) and
The CDE uses Substantially All of the QEI to make a
Qualified Low-Income Community Investment (a “QLICI”) in a
Qualified Active Low-Income Community Business (“QALICB”) which has a substantial presence in a Low-Income Community (“LIC”).
The Amount of NMTCs Available to NMTC Investors – 39% of the QEI. An investment in a CDE that qualifies for NMTCs is referred to as a Qualified Equity Investment or “QEI”. NMTCs are available to an NMTC Investor that makes a QEI on the date that the QEI is made, and the next succeeding 6 anniversary dates of the QEI in an aggregate amount equal to 39% of the QEI - If an NMTC Investor makes a QEI of $100, it gets an aggregate of $39 of NMTCs over a 6-year period.
- Basic Transaction Structures. Attached Diagrams 1 and 2A through 2C reflect examples of transactions/structures using NMTCs.
NOTE: These are two very basic/common structures used for illustration purposes only. A myriad of variations are possible - one size clearly does not fit all situations.
- Diagram 1 - Non-Leveraged Structure. This structure involves a CDE lender that is an affiliate of a bank or other financial institution (a “Bank”). The Bank uses the CDE to make loans to QALICBs on more favorable interest terms than would otherwise be available due to the yield/return provided by the NMTCs. But since the NMTCs only provide a return equal to 39% of the amount of the loan made by the CDE Lender, the CDE Lender will generally require repayment of the entire loan at the end of the 7 year compliance period and will not utilize any of the possible exit structures discussed below with respect to Leverage Loan structures.
- Diagrams 2A through 2C – Leverage Loan Structure Involving a Leverage Lender Affiliated with the QALICB.
- These diagrams reflect three stages of a basis Leverage Loan structure. Many NMTC transactions involve a fund (the “Leverage Fund”) that makes an investment in a CDE that qualifies for NMTCs. The Leverage Fund raises amounts to make the QEI from two sources - an equity investment from an NMTC Investor, and a loan (the “Leverage Loan”) to the Leverage Fund from a lender (the “Leverage Lender”).
- In the attached Diagram 2A, it is assumed that the CDE will ultimately make a loan to the QALICB of $20M. Based on the assumptions described in the Diagram as to fees and transaction costs, the Leverage Lender is assumed to make a Leverage Loan of $14.36M to the Leverage Fund and the NMTC Investor is assumed to make a capital contribution to the Leverage Fund of $6.24M for a total amount of $20.6M raised by the Leverage Fund. Such amount, after payment of assumed fees of $600K, yields the Leverage Fund with $20M to make a QEI in the CDE that is in turn lent to the QALICB. By using the Leverage Loan to fund a portion of the QEI, the NMTC Investor can earn a return on its equity investment solely from the NMTCs it will obtain. Subject to tax structuring considerations, this can result in the NMTC Investor being willing to exit from the transaction after 7 years for minimal consideration and effectively not require repayment of its equity. See 4.b. below.
The Leverage Lender can either be an affiliate of the QALICB or an unrelated third party. If an affiliate of the QALICB, the principal of the Leverage Loan represents amounts that would otherwise have gone into the QALICB as an equity investment, and any interest paid on the Leverage Loan effectively goes back to the same group that controls the QALICB. If the Leverage Lender is an affiliate of the QALICB, the net cost of the QLICI Loan to the QALICB and its affiliated Leverage Lender may be limited to the annual asset management and other fees charged by the CDE/NMTC Investor.into the QALICB as an equity investment, and any interest paid on the Leverage Loan effectively goes
4. Economic Benefits to QALICBs from NMTC-Subsidized Loans.
a. Extremely low interest rates. The NMTCs and other tax benefits obtained by an NMTC Investor using the
Leverage Fund structure often provide the investor with a sufficient return on its equity investment without
regard the need for the investor to receive any cash flow. Other than any amounts that must be paid to
the Leverage Lender (if it is not an affiliate of the QALICB), the only net costs during the 7-year NMTC
compliance period may be the fees that may be charged by the CDEs and reporting/compliance costs.
b. Possibility of Acquisition of the QLICI Loan by the QALICB or an Affiliate of the QALICB After the 7-Year
NMTC Compliance Period. For a variety of reasons, it is common in many NMTC structures for QLICI
Loans to have a term significantly in excess of 7 years, whereby the loans begin to provide for principal
amortization after interest-only payments during the 7-year NMTC compliance period. In such structures,
after the end of the 7-year NMTC compliance period, it is common for the NMTC Investor to have a
put option that permits it to dispose of its interest in the Leverage Fund to the QALICB or an affiliate for
minimal consideration. As a result of the NMTC Investor exercising such a put option (and certain related
transactions), all or a portion of the QLICI loans made to the QALICB are acquired by the QALICB or an
affiliate, resulting in actual or effective cancellation of that portion of the debt.
i. A myriad of considerations must be addressed in such structuring and such structuring may not work/
be available in all situations. At a minimum, to address tax considerations, the decision of the NMTC
Investor to exercise a put option must be made in the sole and absolute discretion of the NMTC
Investor – neither the QALICB nor any other party can force the NMTC Investor to exercise the put
ii. Cancellation of debt income (“COD Income”) is recognized upon the acquisition of debt by the
borrower or a party related to the borrower. As a result, the exercise of the put option by the NMTC
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Investor often results in COD Income. For QALICBs that are nonprofit organizations, such COD
income may not have adverse tax consequences. For other QALICBs, however, COD Income and the
phantom income tax liability resulting therefrom must be considered up front in quantifying the potential
benefits to the QALICB from entering into a NMTC transaction.
iii. As discussed above, a Non-Leveraged Structure can provide very low interest rates, but will generally
result in the QALICB repaying the entire principal amount of the QLICI Loan to the CDE Lender.
5. Community Development Entities or CDEs.
a. To be a CDE, an entity must be treated as a corporation or a partnership for federal income tax purposes
and must also receive a determination of such status from the Community Development Financial
Institutions Fund (the “CDFI Fund”). The CDFI Fund is a branch of the US Department of Treasury that
administers the NMTC program.
b. An entity qualifies as a CDE only if its primary mission is serving, or providing investment capital in the
form of loans or equity for, LICs; and it maintains accountability to residents of LICs by having at least
20% of the members of the governing board or an advisory board of the entity be representative of the
LICs served by the CDE.
c. Not-for-profit entities can be CDEs. But if a not-for-profit CDE receives an award of NMTC authority, it
must assign its NMTC authority to subsidiary CDEs that are for profit entities.
6. CDE Must Have Received an Award of NMTC Authority from the CDFI Fund.
a. For an investment in a CDE to be eligible for NMTCs, the CDE must have received an allocation of NMTC
authority from the CDFI Fund. Each year CDEs file applications for allocations of NMTC authority with
the CDFI Fund. The CDFI Fund evaluates the applications and makes awards of NMTC authority from
among the applicants. The application process is very time-consuming and competitive.
b. In connection with the competitive application process, a CDE will agree to make QLICIs in a manner that
not only satisfies the minimum statutory requirements for NMTCs, but may also agree to certain additional,
requirements for making loans/investments, such as the types of QALICBs (real estate or non-real estate)
to which the CDE will provide QLICIs; the geographic area in which the QALICBs that receive QLICIs
are located (national, multi-state, single state or other limited area); making QLICIs to QALICBs that are
located in LICs that have certain additional characteristics that indicate a higher need for investment
capital (a “High Distress LIC”), and limiting the portion of any QEI that will be used by the CDE to pay fees/
compensation, as opposed to being used to make QLICIs. All of these requirements/commitments are set
forth in an “Allocation Agreement” that is entered into between the CDFI Fund and the CDE.
c. The amount of NMTC authority available for award by the CDFI Fund is limited by statute. The amount
of NTMC authority available for awards was originally set at $1 Billion for 2001. For applications filed
in 2010 through 2013 the amount of NMTC authority was $3.5 Billion. Applications for awards of
2013 NMTC authority were filed with the CDFI Fund in September 2013, with awards expected to be
announced in Spring 2014. At present there is no statutory authority for NMTC awards for 2014 or later.
Various legislative proposals have been submitted to either permanently establish the amount of NMTC
authority available for awards each year, or continue the practice of temporarily extending the authority
for a few more years.
NOTE: While awards of NMTC authority have been made on an annual basis, CDEs generally have
5 years after an award to use the authority. CDEs try to receive QEIs and make QCICIs quicker than
that to improve their chances of getting future awards, but many CDEs do have unused NMTC authority
available – though they may have reserved as an internal matter for a particular use..
7. Substantially All of a QEI Must be Used by a CDE to make Loans to/Investments in Businesses that have a
Substantial Presence in LICs.
a. A condition for an NMTC Investor continuing to qualify for NMTCs and avoid a “recapture” of NMTCs
previously claimed is that the CDE use Substantially All of the QEI to make loans to, or equity investments
in, eligible businesses throughout the 7-year compliance period. Those eligible businesses are referred
to as Qualified Active Low-Income Community Businesses (or “QALICBs”). A loan to, or investment in, a
QALICB is referred to as a Qualified Low-Income Community Investment (or “QLICI”)1.
b. “Substantially All” of the QEI received by a CDE must remain invested by the CDE in QLICIs throughout a
7-year compliance period that begins with the date the QEI is made, subject to a couple of exceptions:
i. The CDE has 12 months from the date the QEI is originally made within which to initially have the
funds invested in a QLICI.
ii. If any principal payments are made within 6 years of the date of the QEI, the CDE must reinvest
the principal payments in other QLICIs. If principal payments are received during the 7th year of
the compliance period, the CDE isn’t required to make another QLICI (but it cannot distribute any
principal payments it receives to the NMTC Investor until after the end of the 7-year compliance
c. For these purposes Substantially All generally means at least 85% of the QEI (though the minimum
percentage reduces to 75% in the 7th year of the compliance period). Allocation Agreements, however,
can impose a higher percentage than the minimum percentages based upon the commitments made by
a CDE in its application for an award of NMTC authority.
d. If any portion of a QEI is returned by the CDE to the NMTC Investor/redeemed during the 7-year
compliance period, no further NTMCs are available and all NMTCs previously claimed are recaptured.
e. To minimize reinvestment obligations/recapture risk, nearly all QLICIs that are made as loans provide for
interest-only payments during the 7-year compliance period.
8. Detailed Requirements for an Eligible Borrower/Investment –QALICB –Location/Significant Activities within a
LIC. Any entity that is treated for federal income tax purposes as a corporation (for-profit or non-profit) or
partnership is a QALICB with respect to any taxable year if it satisfies the requirements summarized in 6.a.
through 6.d. below.
a. Active Conduct of a Qualified Business. A QALICB must be engaged in the active conduct of a Qualified
Business. For these purposes, a Qualified Business is defined by exclusion – a Qualified Business is
any trade or business other than the following:
i. Operation of a golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or
other gambling facility, or any store whose principal business is the sale of alcohol for consumption
off premises; (restaurants and bars are okay – liquor stores are a no go) (though some might
disagree with the label, any such ineligible business is commonly referred to as a “Sin Business”).
ii. Farming where the assets used in the business have an unadjusted basis or fair market value of
more than $500,000.
1 QLICIs can also include the purchase by a CDE of loans made by other CDEs that are QLICIs, certain investments in other CDEs if the other CDE
subsequently uses that investment to make QLICIs, and certain financial counseling and other services provided by the CDE to businesses located in, or
residents of, LICs.
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iii. Any trade or business consisting predominantly of the development or holding of intangibles for sale
iv. Residential rental property. For these purposes, property is “residential rental property” for any
taxable year if 80% or more of the gross rental income of the property is derived from rental
income from dwelling units. Mixed-use developments will not be residential rental property if more
than 20% of gross rents are derived from other sources. While not insurmountable, issues do arise
with establishing that a nursing home, skilled nursing facility or other form of assisted living facility is
not residential rental property.
v. Nonresidential rental property, unless (A) “substantial improvements” are located on the property,
and (B) none of the tenants of the property are engaged in a Sin Business.
NOTE: An entity not currently engaged in the active conduct of a Qualified Business can
nonetheless be a Qualified Business if, at the time the CDE makes its investment/loan, the
CDE reasonably expects that the entity will generate revenues (or in the case of a nonprofit, will
engage in an activity that furthers the nonprofit’s purpose) within three years after the date of
the investment/loan. This rule permits startups/new construction to qualify from inception as a
b. Property/Services and Gross Income Substantially Related to LICs. A Qualified Business must have a
substantial connection to a LIC. This is reflected in the Tangible Property Test, the Services Test and the
Gross Income Test summarized below.
i. Tangible Property Test. At least 40% of the use of the tangible property of the business (whether
owned or leased) during the taxable year must be within a LIC. The percentage is determined by
dividing the average value of tangible property of the entity that is used during the taxable year in a
LIC by the average value of all tangible property used by the entity during the taxable year.
ii. Services Test. At least 40% of the services performed for such business by its employees must be
performed in a LIC. The percentage is determined by dividing the total amount paid by the entity for
employee services performed in a LIC during the taxable year by the total amount paid by the entity
for employee services during the taxable year. If (as is the case with most real estate businesses
that consist of ownership and operation of a project) the business has no employees it will be
deemed to satisfy both the Services Test and the Gross Income Test if it satisfies the Tangible
Property Test using “85%” instead of “40%.”
NOTE: There is no requirement that the employees of a QALICB be residents of a LIC.
iii. Gross Income Test. At least 50% of total gross income must be derived from the active conduct
of a qualified business within any LIC. While this test can be met based on all the facts and
circumstances, there is a safe harbor that deems this test satisfied if the entity meets the Tangible
Property Test or the Services Test by using 50% instead of 40%.
c. Limit on Assets that are Collectibles. Less than 5% of the average of the aggregate unadjusted bases of
the property of the business can attributable to collectibles that are not held primarily for sale to
customers in the ordinary course of business.
d. Limit on Assets that are Nonqualified Financial Property. Less than 5% of the average of the aggregate
unadjusted basis of the property of the business can be attributable to Nonqualified Financial Property
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i. NQFP includes stock, debt, partnership interests, options, futures contracts, forward contracts,
warrants, notional principal contracts, annuities and other similar property.
ii. NQFP does not include reasonable amounts of working capital held in cash, cash equivalents or
debt instruments with a term of 18 months or less. For these purposes the proceeds of a loan/
investment by a CDE will be treated as reasonable working capital if they will be expended for
construction of real property within 12 months after the date of the loan/investment.
e. Portions of a Business. A trade or business (or portion thereof) conducted by an entity or an individual can
be a QALICB if (i) the trade or business (or portion thereof) would meet the requirements for a QALICB if
it were separately incorporated, and (ii) a complete and separate set of books and records are maintained
for the trade or business (or portion thereof).
i. This rule permits an entity that operates multiple lines of business or has multiple locations to obtain
a loan that qualifies as a QLICI notwithstanding that other aspects of the entity would prevent the
entire entity from satisfying the requirements for a QALICB.
ii. If this special rule is relied upon, however, all of the proceeds of the QLICI must be used in the trade
or business (or portion thereof) that is treated as a QALICB.
f. Targeted Income Population QALICBs. As discussed in more detail in 9.b. below, Targeted Populations
may be treated as LICs. As a result of such treatment, a Qualified Business which is owned by, provides
a substantial portion of its services to, or a substantial portion of the employees of which, are members
of a Targeted Population will be a QALICB even through it is not located in a LIC. But as discussed in
9.b.iii. below, the business must be located in a census tract that while not a LIC, has median incomes
that do not exceed certain specified maximums.
9. Low-Income Community (“LIC”).
a. General Requirements. Any HUD census tract is a LIC if:
i. the poverty rate of the tract is at least 20%;
ii. for tracts located in a non-metropolitan area, the median family income of such tract is 80%
or less of the statewide median income; or
iii. for tracts located in a metropolitan area, the median family income is 80% or less of the greater of:
(A) statewide median income, (B) or metropolitan area median family income.
The CDFI Fund has an online mapping tool through “my cdfi fund” account that definitively
determines whether a location is a LIC. To establish a “my cdfi fund” account, go to
www.cdfifund.gov and look for the “log onto myCDFI Fund” button, click that and follow the prompts
to establish an account (no charge for doing so). While the CDFI Fund’s mapping tool is definitive
for purposes of NMTC qualification requirements, there are other mapping tools available on the
internet that are much more user-friendly and can be useful for preliminary planning purposes.
b. Targeted Populations Treated as a LIC. The American Jobs Creation Act of 2004 added Section 45D(e)
(2) to the Code, authorizing the IRS to issue regulations pursuant to which one or more “Targeted
Populations” may be treated as a LIC for purposes of the NMTC requirements. Such regulations were
finalized in 2012.
i. “Targeted Population” means individuals, or an identifiable group of individuals, including an
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Indian tribe, who (i) are low-income persons (“LIPs”); or (ii) otherwise lack adequate access
to loans or equity investments. For these purposes, a LIP is someone having an income, adjusted
for family size, of not more than (i) for metropolitan areas, 80% of the area median family income;
and (ii) for non-metropolitan areas, the greater of (A) 80% of the area median family income; 0r (B)
80% of the statewide non-metropolitan area median income.
ii. Under this rule, an entity that operates a Qualified Business is treated as a QALICB notwithstanding
that it is not located in what otherwise would be treated as a LIC if (i) at least 50% of the entity’s
gross income for any year is derived from sales, rentals, services or other transactions with
persons who are part of a Targeted Population; (ii) at least 40% of the employees of the entity are
members of a Targeted Population; or (iii) at least 50% of the entity is owned by members of a
iii. Even though an entity that satisfies the Targeted Population requirement need not be located in a
LIC, it must satisfy the requirements of 9.b.i. and ii. above with respect to a HUD census tract that
while not a LIC, does not have a median family income that generally exceeds 120% of statewide
median income (for a tract not located in a metropolitan area) or 120% of the greater of statewide
median income or metropolitan area median family income (for a tract located in a metropolitan
area). Extremely limited exceptions to this “near LIC” location requirement can apply to certain
businesses located in very low-population rural areas and for certain types of businesses located in
c. High Distress LICs. As referenced in 6.b. above, Allocation Agreements between CDEs and the CDFI
Fund require that at least some specified percentage (75% for the 2012 award round) of the QLICIs
made by the CDE be made in LICs that are characterized by certain indicia of higher distress. Such LICs
that meet those requirements are commonly-referred to as “High Distress LICs.” See Section 3.2(h) of
the 2012 Form of NMTC Allocation Agreement. High Distress LICs per the 2012 Allocation Agreement
include the following:
i. LICs with a poverty rate of greater than 30% (vs. 20% for a LIC).
ii. LICs that have a median family income that does not exceed (A) for non-Metropolitan areas, 60%
of statewide median family income; or (B) for Metropolitan areas, 60% of the greater of: (A) state
wide median income, (B) or metropolitan area median family income (vs. 80% for a LIC).
iii. LICs with an unemployment rate at least 1.5 times the national unemployment average;
iv. LICs in a county that is not within a Metropolitan Statistical Area – non-Metro LICs;
v. Projects serving Targeted Populations to the extent that (a) such projects are at least 60% owned
by LIPs; (b) at least 60% of the employees are LIPs; or (c) at least 60% of the customers are LIPs
(vs 40%-50% for Targeted Populations to be a LIC).
vi. LICs located in areas that are characterized by at least two of items (vi) through (xviii) identified in
Section 3.2(h) of the Allocation Agreement. Examples include areas designated pursuant to various
state and/or federal development programs.
10. Practical Considerations with NMTC Transactions.
a. Transaction Expenses are High. NMTC transactions are complicated and involve multiple parties at
multiple tiers with transaction documents at each tier that differ from typical loan/investment documents.
The resulting transaction expenses are nearly always significantly higher than arise in more traditional
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lending/investment transactions, and require that the QALICB have legal and accounting advisors
experienced in NMTC transactions.
b. Limited NMTC Allocation Authority Means Prospective Borrowers are Competing/Must Attract CDEs to
their Projects/Businesses. Prospective borrowers must understand what CDEs are looking for to get
them interested in their projects.
i. Job creation and other economic impact on the LIC where a business/project is located.
ii. Best to have as many financing sources/parties for a transaction lined up BEFORE approaching a
CDE, including a Leverage Lender with funding sources and a prospective NMTC Investor.
iii. Be ready to close – “shovel ready.”
iv. Be in a High Distress LIC. While CDEs can use a portion of their NMTC authority in LICs that are
not High Distress (up to 25% for 2013 NMTC allocation authority awards), a transaction in a High
Distress LIC is more appealing to a CDE.
v. Have realistic expectations as to the amount of NMTC financing that will be available for a particular
project/business. While CDEs may have previously made $10M or more of NMTC authority for a
single transaction, that is extremely unlikely with the current level of allocation authority awarded
by the CDFI Fund and, absent unusual circumstances, any project/business looking to receive $10M
or more of NMTC authority should assume that they will need to get multiple CDEs involved, with
c. Unique Guarantees and Other Provisions in NMTC Transaction Documents. The 2 foot jump over a
1-mile deep chasm.
Attorneys at Law
Diagram 1 - Non-Leveraged Structure
QLICI - Loan - $20M
(Bank owner of CDE/Lender)
1. CDE (Lender) is an affiliate of a bank.
2. Assume market interest rate on the loan
would be 7% ($1.4M/year), yielding $9.8M
of interest over a 7-year term. With $7.8M
of NMTCs, that reduces cash flow needed
to yield a market rate of return to the
CDE/Lender during the 7-year term from
$9.8M to $2M. Ignoring time value of
money considerations, the benefit to the
NMTC Investor from the NTMCs could
permit the CDE Lender to make the
interest rate on the loan about 1.4%
Attorneys at Law
Diagram 2A - Leveraged Structure – Leverage Lender is QALICB Affiliate Closing
Explanation of Amounts/Net Equity Raised
1. QEI of $20M, yields aggregate NMTCs of $7.8M (39%).
Assuming a price per NMTC of $0.80, this yields a
capital contribution of $6.24M from the NMTC Investor.
Assume that fees paid by the Leverage Fund to the
CDE sponsor total 3% of the QEI, yielding a net amount
to the Leverage Fund from NMTC Equity of $6.24M -
$600K, or $5.64M
2. To get to a QEI of $20M, with net NMTC equity of
$5.64M, requires a Leverage Loan of $20M-$5.64M, or
3. Leverage Lender is assumed to be an affiliate of the
QALICB. The Leverage Lender obtains the funds
needed to make the Leverage Loan from (a) amounts
that would otherwise have directly gone into the
QALICB/project in the future as equity/contributions; (b)
amounts that previously have been advanced to the
QALICB/project in the past through a “day loan”
structure; and/or (c) loans to the Leverage Lender by 3rd
4. Only security for the Leverage Loan is a
pledge by the NMTC Investor of its
interest in the Leverage Fund, and
Leverage Lender must agree to not
foreclose on that security interest during
the 7-year compliance period except for
limited exceptions negotiated with NMTC
5. Assume closing/transaction costs paid by
QALICB from loan proceeds of $400K.
Also assume annual management fees to
CDE Sponsor equal 50 basis points on
the QEI. A reserve in an amount equal to
those fees is often established by the
QALICB from loan proceeds that is
pledged as security for the QLICI Loan.
6. Net to QALICB from NMTC Equity:
Gross NMTC Equity - $6.24M
CDE Sponsor Fee - (0.600M)
Closing Costs - (0.400M)
Fee Reserve - (0.700M)
Net to QALICB - $4.54M
All numbers are for illustration purposes only.
Total QLICI Loans - $20M
A Loan - $14.36M - B Loan -
Attorneys at Law
Diagram 2B - Leveraged Structure – Leverage Lender is QALICB Affiliate During 7-Year NMTC Compliance Period
Entity/Sponsor $7.8M NMTCs
Explanation of Amounts and Flow of Funds
1. Interest on Leverage Loan typically is set at 1% -
$143,600 /year, or $1,050,200 for 7 years.
2. Interest on the QLICI Loans is set at an amount
sufficient to give the CDE Lender an amount equal to
the sum of the interest due on the Leverage Loan and
any other expenses agreed to be paid by the QALICB.
Assuming that includes the annual management fee of
$100K per year, total annual interest needed under the
QLICI would be $243,600/year, or $1,705,200 for 7
3. The QALICB makes QLICI interest payments to the
CDE Lender of $243,600/year. CDE Lender uses those
amounts to (a) pay management fee of $100K/year, or
$700K for 7 years, and (b) make a distribution to the
Leverage Fund of $143,600/year, or $1,050,200 for 7
years. Given fee reserve of $700K funded at closing,
net, out-of-pocket cost to QALICB of QLICI interest is
$1,050,200 over 7 years.
4. Leverage Fund uses $143,600 it receives from the CDE
Lender each year to make interest payments to the
Leverage Lender, a total of $1,050,200 over 7 years.
Net interest on
QLICI Loans -
$7.8M - NMTCs
Attorneys at Law
Diagram 2C - Leveraged Structure – Leverage Lender is QALICB Affiliate After 7-Year NMTC Compliance Period
Leverage Fund Explanation of Possible
1. NMTC Investor “puts” its interest in the
Leverage Fund to the QALICB/Affiliate (may
be Leverage Lender).
2. CDE Lender liquidates and distributes the
QLICI Loans to the Leverage Fund and a pro
rata amount of cash to the CDE Controlling
3. If Leverage Fund owner and QALICB are
related parties per IRC Section 108(e)(4),
COD Income will be recognized by the
4. If Leverage Lender is recipient of put
option/owner of Leverage Fund, need to
consider tax effect of effective termination
/cancellation of Leverage Loan.
Total QLICI Loans - $20M
A Loan $14.36M - B Loan -
Leverage Fund Owner
Attorneys at Law
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