Billions Available for Desired Commercial Projects

Billions Available for Desired Commercial Projects

In 2016, the CDFI (Community Development Financial Institutions) Fund held $7 billion in NMTC (New Markets Tax Credits). More than $75 billion in total capital investment through public-private partnerships has been made since the program started.

The ABC’s of NMTCs

The NMTC program encourages a private investor, typically a financial institution, to invest in operating businesses (generally in the form of a loan) known as QALICBs (Qualified Active Low Income Community Businesses) that are located in a distressed census tracts. For making this investment, the investor receives a 39% tax credit (i.e. 39 cents for each dollar invested) on its total investment, which the investor receives over a 7-year period. Because the investor receives the 39% tax credit (i.e. year 1: 5%; year 2: 5%; year 3: 5%; year 4: 6%; year 5: 6%; year 6: 6%; year 7: 6% = 39%) over  seven (7) years it is typically committed to the project for a seven (7) year period. The tax credits are used by the investor to offset its tax liability, dollar-for-dollar. Even though the tax credits are received by the investor over a seven (7) year period, it must make its entire investment in the first year, which is made available to the project. The benefit to the commercial project is that a portion of the investment (i.e. debt) made to the project is forgiven (i.e. deemed free equity).

The equity investment made by the investor is passed through a third-party entity, called a sub-CDE (which is affiliated with the Community Development Entity (CDE)). The CDE holds the tax credits sought by the investor. There are numerous CDEs that are affiliated with financial institutions. The CDE receives the tax credits from the CDFI Fund, which is administered by the US Department of the Treasury. The capital investment that the CDE receives from an investor passes through the sub-CDE, and the money is made available to the project (QALICB). Because of the tax credits, which the investor receives for making the capital investment, the money received from the investor is passed to the project as an investment with favorable terms (e.g. interest-only payments for seven (7) years, part of the debt is forgiven at the end of the seven (7) year period). The amount of the free capital (i.e. equity) investment, the below-market interest rate, and the amount of the debt forgiven are based on a desired yield by the investor. At end of the seventh year, there is an exit strategy for the investor; typically, the investor has no interest in the project after it exists.

Desired Projects

Non-exhaustive examples of projects that have been financed with NMTC proceeds include: revitalization of downtown areas with renovations or construction of office buildings, commercial and retail buildings, shopping centers, mixed-use projects, for-sale housing, workforce housing, hotels, performing arts centers, theaters, charter schools, hospitals, assisted-living facilities, college campuses, high-tech and biotech facilities , homeless shelters, transitional housing, facilities to assist educating the homeless, and assistance with home ownership.

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