The NMTC Program incentivizes community development and economic growth through the use of tax credits that attract private investment to distressed communities.
Administered by the CDFI Fund at the US Treasury Department
CDFI Awards tax credits to Community Development Entities (CDEs)
CDEs allocate tax credits to specific Projects in Low Income Communities
Real Estate or Operating Business Investment – (Non-residential)
39% Federal Income Tax Credit
Sell the Tax Credits to create subsidy for the Qualified Active Low Income Community Business “QALICB” – aka the Project
After fees, net benefit =~ 20% of allocation amount
7 year compliance period
What is a Community Development Entity (CDE)?
CDEs come in a variety of forms:
An affiliate of a municipality to promote economic development
An affiliate of a bank to help meet the bank’s community reinvestment goal
Non-profit and for-profit entities with a mission to serve low income communities
CDEs have defined geographic service areas and are charged with evaluating each potential NMTC transaction for community impact
CDEs can be found using a search engine on the CDFI Fund website at www.cdfifund.gov
What is a Low Income Community?
Based on census tract data – median income and/or poverty rate
Qualifying vs. “Higher Distress” Includes unemployment, rural areas, Brownfield areas, designated Hot Zones, medically underserved areas, food deserts, Colonias and HUB Zones
Qualifying census tracts in non-metropolitan counties automatically qualify as “higher distress”
Qualifying census tracts can be located using the mapping program provided located on the CDFI Fund website at www.cdfifund.gov
An Investor buys the 39% tax credits for $.85 per dollar and makes an equity contribution to the project for that amount.
Need a private source of funds to “leverage” the Tax Credit and provide the balance of funds.
Together the Leverage lender & the Tax Credit equity flow to the project by way of the CDE.
Steps to Securing Allocation
Securing NMTC allocation for a Project is a competitive process. It starts with identifying CDE’s with a mission and a geographic focus that aligns with your Project. CDE’s then evaluate Projects based on the following:
Eligibility – Is it located in a highly-distressed census tract?
Certainty of Closing – Can this project close in a reasonable amount of time? Is it ready?
Strong Sponsorship – Does the development team have the capacity to execute and the financial pieces in place? Does the project provide strong returns?
Community Impact – Will this project have a meaningful impact on low income communities and low income residents?
Food production, health resources, education, innovation, Charter Schools, etc…
“But For” – Could this project move forward without NMTCs?
If the above requirements are met, the CDE will issue a term sheet and the Project moves into the financial closing process.