Lane Powell provides legal services to project developers (including for-profit, governmental and private nonprofit organizations), investors, and lenders participating in New Markets Tax Credit (“NMTC”) financing transactions.
The NMTC program permits investors to receive credits against federal income taxes for making qualified equity investments (“QEIs”) in community development entities (“CDEs”) that use the QEI proceeds to provide capital to projects in qualifying low-income communities. The credit provided to the investor totals 39 percent of the amount of the QEI and is claimed over a seven-year period. In each of the first three years, the investor receives a credit equal to five percent of the QEI. In each of the final four years, the amount of the credit is six percent of the QEI. A QEI cannot be redeemed during the seven-year credit period without recapture of all credits claimed.
The proceeds of a QEI must be used by the CDE to make loans and investments in community development projects. Each project must be located in a qualifying low-income census tract. In most cases, an investor makes a QEI for the purpose of funding a specific project already identified by the CDE.
CDEs, which act as gatekeepers for the NMTC program, derive their power to play this role by receiving awards of NMTC allocation authority from the Community Development Financial Institutions Fund of the U.S. Treasury Department (“CDFI Fund”) through an annual competitive application process. An award of NMTC allocation authority to a CDE entitles the CDE to receive and deploy a specified dollar amount of credit-eligible investments from investors in the form of QEIs.
In order to take advantage of the NMTC in financing a project, the project developer must identify a CDE that has sufficient NMTC allocation authority and then persuade the CDE to use its allocation authority for the benefit of the project. In evaluating a project, a CDE will ascertain (1) whether it is likely that the project will qualify under the technical requirements of the NMTC program, and (2) whether the project satisfies the CDE’s own investment criteria (including criteria established in the CDE’s allocation agreement with the CDFI Fund). In larger projects, more than one CDE may participate.
The NMTC program became effective in 2001. To date, Congress has empowered the CDFI Fund to award $25 billion in general NMTC allocation authority as follows: $1 billion in 2001; $1.5 billion in both 2002 and 2003; $2 billion in both 2004 and 2005; $3.5 billion in both 2006 and 2007; $5 billion in both 2008 and 2009; and $3.5 billion in both 2010 and 2011. An additional $1 billion of NMTC allocation authority restricted to use in the Gulf Opportunity Zone has also been awarded. A NMTC award must be used within five years after the date the CDE receiving the award enters into an allocation agreement with the CDFI Fund. As of January 2012, the CDFI Fund reported that approximately $3.8 billion of NMTC allocation authority from awards granted as of the end of 2010 is still available for use in projects.
Comprehensive information about the NMTC program may be found at the CDFI Fund’s website.
