Benefits of New Markets Tax Credit Program Subsidy

The federal new markets tax credit program (the “NMTC Program”) subsidy provides “gap” financing with favorable and nontraditional terms and flexible underwriting criteria, which is in the form of either:

  • if the total NMTC financing is over $5 million a forgivable loan (at the end of 7 years) equal to approximately 33% of the total NMTC financing, or
  • if the total NMTC financing is under $5 million a non-forgivable loan equal to 100% of the NMTC financing (which may mature up to 40 years).

Our discussion applies to both types of NMTC Program subsidies (such as legal requirements and underwriting criteria), except that we will also discuss the basic forgivable loan NMTC structure and the unwind of the NMTC financing at the end of the 7-year NMTC compliance period.

The smaller NMTC Program subsidy (i.e., the non-forgivable loan) (a) has nontraditional terms and flexible underwriting criteria that are similar to those of the forgivable loan (except that it is not forgiven); and (b) is subject to the same legal and underwriting requirements of the forgivable loan.

The general benefits of the NMTC Program subsidy include:

  • gap financing;
  • in the form of a forgivable loan (at the end of 7 years);
  • with approximate 1.5% interest-only payments during such 7-year period (i.e., no principal payments);
  • generally, subordination to other creditors;
  • nontraditional terms and flexible underwriting criteria (such as higher loan-to-values); and
  • substantial community impact to residents in “Low-Income Communities” and “Targeted-Populations,” including “Low-Income Persons.”

Given that the NMTC Program subsidy loan is (a) forgiven at the end of 7 years, and (b) may be subordinated to other financing, creditors and equity providers generally view this forgivable loan as “equity” or a “grant.”

Therefore, it is not uncommon that a borrower will be able to obtain additional debt and/or equity financing in the traditional market place.

Good Borrower and Project Candidates for NMTC Program Subsidy

Each of the following are good borrower operations and project candidates for the NMTC Program subsidy:

  • manufacturing facilities;
  • health care facilities;
  • grocery stores;
  • charter and independent schools;
  • qualified mixed-use projects;
  • community facilities; and
  • renewable energy and recycling facilities.

Obtaining the NMTC Program subsidy is very competitive, and important factors include whether the borrower or project:

  • benefits Targeted Populations (such “Low-Income Persons,” minorities, veterans and women);
  • is located in a “Highly Disstressed “Low-Income Community;”
  • will provide substantial community impacts to residents in “Low-Income Communities” or Targeted Populations;”
  • has strong local support; and/or
  • is located in an underserved state,” which can include: Alabama, Arkansas, Florida, Georgia, Indiana, Kansas, Nevada, Tennessee, Texas, West Virginia, Wyoming, Puerto Rico, American Samoa, Guam, Northern Mariana Islands and US Virgin Islands.

The Intent of the NMTC Program

The intent of the the NMTC Program is to provide investment capital to businesses, nonprofits and real estate projects (including the purchase of equipment and the funding of working capital) that (a) are located in “Low-Income Communities” or otherwise benefit “Targeted Populations,” and (b) otherwise cannot obtain traditional financing (including closing costs).

The NMTC Program provides gap financing in the form of a low interest-only loan, which is forgiven at the end of the 7-year NMTC compliance period.

This forgivable loan is effectively a grant equal to approximately 33% of the total project and/or operational costs of the NMTC financing (including closing costs).

NMTC Program Subsidy Facilitated by “Allocatees” and “CDEs

  • Each year, the Community Development Financial Institutions Fund (the “CDFI Fund,” which administers the NMTC Program) provides NMTC allocation authority awards (“NMTC Allocation Awards”) to “qualified community development entities (“CDEs”), after an extremely competitive process.
  • A CDE that receives such an award, it becomes an “Allocatee.”
  • Borrowers then have to compete to obtain NMTC financing from one or more Allocatees.
  • Each Allocatee (a) has a service area, which is national, regional, multi-state, or local; and (b) targets certain types of borrowers and projects, which provide substantial community impact in its service area.
  • Each Allocatee spins off a separate CDE for each NMTC financing.
  • It is important to understand the 2 loans provided by NMTC financing.

The NMTC Program Subsidy/forgivable loan is equal to the (x) size of the NMTC   financing    (i.e., the “Qualified Equity Investment”), (y) the 39% NMTCs, and (z) pricing of the NMTCs.

The other loan is equal to the (x) NMTC Financing/”Qualified Equity Investment,” less (y) the amount of the forgivable loan.

Example:  If the size of the NMTC financing is $10 million and the current market pricing is $0.82, then the NMTC Program Subsidy/forgivable loan is approximately $3.2 million (i.e., $10 million NMTC financing x 39% NMTCs x $0.82). Then, the other loan is equal to $6.8 million (i.e., $10 million NMTC financing less the $3.2 million NMTC Subsidy/forgivable loan), which is provided by the borrower’s other available financing and used in the IRS Approved Leverage Structure.

Steps to Facilitate the NMTC Program Subsidy

The steps to facilitate the NMTC Program subsidy include:

  • an Allocatee receives a non-monetary NMTC Allocation Award;

  • such Allocatee spins off a separate CDE for each NMTC financing;
  • a NMTC Investor makes a capital contribution in its wholly-owned Investment Fund;
  • such Investment Fund borrowers the remaining amount of NMTC Financing needed from one or more “Leverage Lenders;
  • using the NMTC Investor’s capital contribution and proceeds of the “Leverage Loan(s), the Investment Fund makes a capital contribution to such CDE;
  • such Allocatee “sub-allocates” a portion of its non-monetary NMTC Allocation Award to such CDE in the amount of the Investment Fund’s capital contribution;
  • such CDE designates such Investment Fund’s capital contribution as a “qualified equity investment” (a “QEI,” on which the 39% NMTCs are based); and
  • such CDE uses the QEI proceeds to make 2 loans to the borrower: (a) the SeniorNMTC Loan (the terms of which match  the  “Leverage  Loan(s)” to the Investment Fund); and (b) a subordinate forgivable loan (e., the NMTC Program  subsidy).

How the NMTC Subsidy Technically Works

The borrower does not recognize the NMTCs. Instead, the NMTC Investor effectively “purchases” the NMTCs.

The NMTCs are equal to 39% of the size of the NMTC financing/QEI over the 7-year NMTC compliance period (which are a dollar for dollar offset against federal income taxes).

As previously discussed, for example (and as illustrated in the link below, entitled “Basic NMTC Structure):

  • if a NMTC financing/QEI is $10 million, the NMTCs are $3.9 million; and
  • if the NMTC Investor “purchases” such tax credits for $0.84 (based on current market pricing), then:
    • the NMTC Program subsidy/forgivable loan would be $3.3 million (i.e., $3.9 million NMTCs x $0.84 purchase price), which is in the form of a forgivable loan to the borrower; and
    • the NMTC Investor receives a return equal to (x) 18% (i.e., $3.9 million NMTCs – $3.3 million purchase price) / $3.9 million NMTCs, as discounted by time value of money over 7 years), plus (y) a small amount of distributions, as well as credit under the Community Reinvestment Act; and therefore the NMTC Investor is able to forgive the forgivable loan (which is the NMTC Program subsidy).

How NMTC Transaction Participants Benefit

The NMTC Program subsidy (which arises from the 39% NMTCs) is shared among each of:

  • the NMTC investor:
    • receives the NMTCs equal to 39% of the QEI;
    • receives an internal rate of return on the QEI;
    • generally receives credit under the Credit Reinvestment Act; and
    • is subject to less capital risk (because it borrows a portion of the QEI from one or more “Leverage Lender(s)”);
  • the borrower:
    • receives a forgivable loan equal to the gap in available financing; and
    • such loan is forgiven at the end of  the 7-year NMTC compliance period; and
  • the Allocatee:
    • receives fees for facilitating the NMTC financing; and
    • has no capital at risk (because the QEI proceeds (rather than its own funds) are used to make the 2 loans to the borrower).

NMTC financing can be combined with state NMTCs, historic tax credit financing, and other community and economic development programs (such as opportunity zone financing, and those provided by the USDA Programs and the CDFI Programs).  However, NMTC financing cannot finance any square feet to the extent that low-income housing tax credits finance such square feet.

Although the typical NMTC financing structure is quite complex based on all of the sources of funds, the fundamental initial structure of any NMTC financing is illustrated in the following links:

For a more detailed discussion of the benefits of NMTC financing to a borrower, and applicable legal requirements and underwriting requirements, please click on the following link:

Please click the following link to watch our pre-recorded webinar:

To apply as a borrower for NMTC financing, please click on the following link:

For a more detailed discussion of the benefits of participating as a CDE in NMTC financing, and applicable legal requirements and underwriting requirements, please click on the following link:

To apply as a CDE for a NMTC Allocation Award, please click the following link: