There Cannot be a Recapture Event During the 7-Year NMTC Compliance Period

The 39% new markets tax credits (“NMTCs”) are recognized by the NMTC investor over the 7-year NMTC compliance period as follows:  5% in each of the first 3 years, and 6% in the remaining 4 years. Unlike other tax credits, if there is a recapture event during the 7-year NMTC compliance period, 100% of the NMTCs are “recaptured.” 

Specifically, if at any time during the 7-year NMTC compliance period there is a recapture event, then all NMTCs recognized in previous years are recaptured and all NMTCs that otherwise would have been recognized in the year of the recapture event and the remaining years of the 7-year NMTC compliance period are disallowed.

With respect to a CDE, a “Recapture Event” includes, but is not limited to, each of the following:

• failure to maintain its status as a CDE (such as no longer being “accountable” to residents of a “Low-Income Community” or low-income persons;
• receiving prepayment of any portion of the NMTC financing unless it is timely redeployed in another “Low-Income Community;” or
• participation in an abusive transaction in connection with the NMTC financing.

The CDE must execute a NMTC guaranty with the NMTC investor, pursuant to which the CDE indemnifies the NMTC investor for all economic detriments, including 100% of the NMTCs, penalties and interest.

A CDE must execute a recapture guaranty with the NMTC investor, pursuant to which the CDE indemnities the NMTC investor.  However, to date, there has never been a Recapture Event after $42 billion of NMTC financings.

Community Reinvestment Associates:

• underwrites each NMTC financing to ensure the satisfaction of all guidance and all legal and compliance requirements of the NMTC program;
• implements safeguards to minimize the risks of a Recapture Event;
• monitors the NMTC financing during the 7-year NMTC compliance period;