New Markets Tax Credit
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The New Markets Tax Credit (NMTC) Program is designed to stimulate the economies of low-income communities. The NMTC Program was created through the Community Renewal Act of 2000. It is administered by the Community Development Financial Institutions (CDFI) Fund under the U.S. Department of the Treasury. Each year, tax credits are allocated for distribution to certain qualifying entities, known as Community Development Entities (CDEs), through the CDFI Fund. The NMTC is beneficial to brownfields developers.
The NMTC Program provides private-sector investors (e.g., banks, insurance companies, corporations or individuals) with federal income tax credits, in return for new investments in eligible businesses in low-income communities, including brownfields projects. CDEs can include organizations such as community development corporations (CDCs), community development financial institutions, community development venture capital funds, small business development corporations, community loan funds, specialized small business investment companies and others. The purpose of the NMTC Program is to expand the availability of credit, investment capital, and financial services in distressed urban and rural communities. This unique funding mechanism offers a viable option for brownfields stakeholders.
The NMTC Program allows certified CDEs to apply through a competitive application process to receive an allocation of New Markets Tax Credits. Once a CDE receives an allocation of credits, the credits can be offered to investors in exchange for project financing and stock or capital interest in the CDE project. The credit provides a total of 39 percent of the cost of the investment and is claimed over a seven-year credit allowance period. In each of the first three years, the investor receives a credit equal to five percent of the total amount paid for the stock or capital interest at the time of purchase. For the final four years, the value of the credit is six percent annually. Investors may not redeem their investments in CDEs prior to the conclusion of the seven-year period.
For example, an investor wants to receive tax credits from a CDE that has received an allocation of New Markets Tax Credits. This investor (taxpayer) has $100,000 to invest in the CDE. The identified CDE is completing a mixed-use redevelopment project on a brownfields property. In exchange for the $100,000 investment in the CDE’s project, the taxpayer receives $39,000 worth of tax credits (available over seven years) which will reduce the amount of income owed by the investor by $39,000. The investor will also receive stock or an equity interest in the CDE’s redevelopment project.
Although all of a CDE’s investments must be made within a low-income area identified by a CDE, there is significant flexibility in the types of projects the CDE can support. All investments made by a CDE have some potential for a rate of return. Eligible investments for CDEs in low-income communities include:
- An investment in a qualified active low-income community business
- The purchase of a loan or loans made by a CDE to qualified active low-income community businesses which allows return via secondary market-type approach
- Financial counseling and other technical services to qualified active low-income community businesses
- Loans or investments in real estate projects, including brownfields cleanup and redevelopment
Each investor can claim 5% or $5,000 annually from their federal income tax in years one to three of the tax credit. In years four through seven, the investors can claim 6% or $6,000 per year. The total tax credit value to the investor over seven years is $39,000 or 39%.
Before being eligible to receive New Markets Tax Credits, a CDE must become certified. When applying to become certified as a CDE, the CDFI Fund evaluates CDE applications in four areas: business strategy, capitalization strategy, management capacity and community impact. In addition, the CDE must maintain accountability to residents of low-income communities through representation on a governing or advisory board. Community entities applying to become a CDE may submit CDE Certification Applications at any time of the year to the CDFI Fund. The CDE application process is straightforward and takes little time to complete. Once an organization is certified, the designation lasts for the life of the organization. Both nonprofit and for-profit groups may apply to be certified by the CDFI Fund.
As a certified CDE, the organization can then apply to receive an allocation of New Markets Tax Credits. The NMTC Allocation applications are due in the fall with recipients being announced the following spring.
How the NMTC process functions:
- An entity applies to the CDFI Fund for certification as a CDE.
- Once certified, the CDE engages in a competitive application process for the tax credit allocation.
- If selected, the Fund awards a tax credit allocation to the CDE. (If not selected, the CDE may apply to another existing CDE that has been selected to receive Tax Credits. For example, if the ACME Community Development Corporation does not receive an allocation of tax credits but Jackson Heights Coalition does, ACME can apply to Jackson Heights to receive tax credits. ACME functions as another investor in Jackson Heights.)
- The CDE secures investors through the sale of stock or issuance of an equity interest in exchange for the tax credits.
- The CDE uses the resulting investor equity to make investments in low-income communities.
CDEs Investing in Brownfields Projects
Several CDEs are exploring investments in brownfields projects, such as:
- Great Lakes Region Sustainability Funds LLC: This CDE will make loans and take equity positions in businesses and real estate projects in low-income communities in Illinois, Indiana and Wisconsin. These investments focus on remediating and redeveloping area brownfields. The NMTC allows Great Lakes to offer new products including tenant loans, financing for brownfields projects, financing for lead abatement and technical assistance to low-income municipalities and nonprofits.
- Shorebank Enterprise Pacific: In order to assist low-income communities in the Pacific Northwest, this CDE will subordinate debt and equity to environmentally sensitive commercial properties, industrial properties, brownfields and community development real estate projects.
- MassDevelopment New Markets LLC: Four real estate development projects that are not only on brownfields, but are of critical importance to four of the most deeply distressed communities in Massachusetts, will be financed by this CDE.
- Milwaukee Economic Development Corporation: This group has a goal to provide “gap” financing for businesses located in distressed areas of the city, including abandoned brownfields properties.
For more information on these and other CDEs, please visit http://www.cdfifund.gov
Parties interested in using the NMTC Program to supplement brownfields project financing have three primary options.
- The first option for stakeholders is to apply to existing CDEs to fund their projects. Of the 2004 second round CDE allocatees, several have identified brownfields redevelopment as specific goals for their economic development efforts. Brownfields stakeholders are encouraged to access the CDFI Web site for the location of CDEs in their region.
- The second option is for stakeholders to apply for CDE certification themselves, apply for an allocation of tax credits and offer the tax credits to potential investors. Although this process is more complex than the first option, it is viable for entities committed to large scale or long-term brownfields efforts.
- The third option for stakeholders is to apply and become certified as a CDE, then apply to receive equity financing from other CDEs, which have an allocation of New Markets Tax Credits. One of the purposes of a CDE, as defined earlier, can be to invest in projects of other CDEs. Investment by one CDE in another CDE is viable when the proceeds are used for a qualified low-income community investment, including brownfields redevelopment projects.
Brownfields stakeholders will also find several advantages by using the NMTC Program for financing brownfields cleanup and redevelopment projects.
- Often, a CDE is willing to structure a more favorable deal than traditional lending institutions for brownfields properties.
- CDEs can offer funding for a full range of redevelopment activities, including land acquisition, environmental remediation, demolition, site preparation, construction, renovation and infrastructure improvements.
- In certain situations CDEs can provide technical assistance for brownfields cleanup. Typically a CDE’s staff is knowledgeable of these items.
- CDEs involved with brownfields cleanup and redevelopment projects can “package” funding sources together, including a wide range of federal and local financing credits and initiatives such as tax increment financing and HUD’s Community Development Block Grants. Funding can also be used in conjunction with EPA Brownfields grants.
- A certified CDE that is willing to commit the time and resources to apply for an allocation of tax credits may significantly improve its project financing options. An allocation of tax credits offered to investors can be an inducement for investors to commit additional funds for a qualified low-income community investment project.
601 13th Street, NW, Suite 200 South
Washington, DC 20005
NMTC Support Line: 202-622-6355
The CDFI Fund Web site is a government site that provides access to CDE application materials and workshops, legal review services of NMTC-related documents, and a map of qualified census tracts and counties under the NMTC Program. The Web site also provides a list of certified CDEs, profiles of community revitalization projects CDEs are targeting, and can guide stakeholders towards possible brownfields project financing.