May 17, 2014
The federal New Markets Tax Credit (NMTC) program is a prime example of a national program with local impact. Established in 2000 by Congress to spur new or increased investments into operating businesses and real estate projects located in low-income communities, the program attracts investment in low-income communities by allowing individual and corporate investors to receive a tax credit against their federal income tax liability.
Investors receive the credit in exchange for making equity investments in Community Development Entities (CDEs), the investment vehicle for NMTCs, which in turn loan or invest funds in or to Qualified Active Low Income Community Businesses (QALICBs) on favorable terms. Generally, the credit totals 39 percent of the CDE’s original investment amount in a Qualified Active Low Income Community Business (QALICB) and is claimed over a period of seven years (five percent for each of the first three years, and six percent for each of the remaining four years).
The impact of the NMTC is visible in several prominent coastal Georgia projects including the Savannah Law School, SCAD’s Museum of Art, and Southeast Georgia Health System’s new Medical Office Building and Community Care Center.
To be eligible for a NMTC investment from a CDE, a project or business must first be located in a federal census tract designated as a low-income community. Other than that, there are few types of projects that are not eligible for NMTC investments, the most notable exception being residential rental property. Other ineligible uses include golf course and country club facilities, massage/suntan parlor; liquor store, gambling facility; and certain farming activities. While most kinds of operating businesses and real estate projects are eligible for the credit so long as they are located in low-income communities, there is stiff competition for NMTC investments from the CDEs.
CDEs receive authority to make NMTC investments from the federal CDFI Fund (www.cdfifund.gov) through a competitive allocation process in which the CDE must demonstrate to the CDFI Fund that the types of investments it will make further the goals of the credit. Thus, the CDEs select projects and businesses for investment based upon the likelihood that the investments will yield permanent jobs, access to goods and services, new construction, and improved options for area residents. The creditworthiness, developer’s ability to complete a project, and the long-term financial viability of the project is therefore a primary consideration of CDEs.
The CDFI Fund anticipates making its next round of awards in late spring 2014, and developers and business owners seeking investments are already shopping their projects to CDEs for consideration. To increase the likelihood of a successful project, business owners and developers navigating the world of New Markets Tax Credits should consider discussing their projects with a financial consultant and counsel before seeking investments from CDEs.
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