Forgiven NMTC Loan Test

Depending on the sizing of the overall financing (generally an industry required $4.5 million threshold), the NMTC Program subsidy is generally provided to the borrower in the form of either:

  • a Forgiven NMTC Loan, or
  • a Non-Forgivable NMTC Loan.

A borrower qualifies for the Forgiven NMTC Loan if (x) the gap in available financing (the “Financial Gap”) divided by (y) 33% is over $4.5 million (the “Forgiven NMTC Loan Test”).

Note: The Forgiven NMTC Loan Test doesn’t require that the Forgiven NMTC Loan be over $4.5 million but rather the overall financing must be over $4.5 million.

A borrower generally qualifies for the Non-Forgiven NMTC Loan if:

  • the Forgiven NMTC Loan Test is not satisfied (although if the borrower satisfies the Forgiven NMTC Loan Test, the borrower may be able to opt for the Non-Forgiven NMTC Loan); and
  • the Financial Gap is between $1 million and $2 million.

The 33% used in the Forgiven NMTC Loan Test is based on $0.84 assumed market pricing for the NMTCs and typical NMTC transaction costs. Such percent will increase or decrease depending on the actual pricing and NMTC transaction costs with respect to a specific NMTC financing.

Why is there a $4.5 million NMTC industry threshold?

Answer:  Transaction costs and the amount of time to close a NMTC financing start to begin to offset the NMTC Program subsidy of the Forgiven NMTC Loan at this particular amount of NMTC financing.

NMTC transaction costs include:

  • the Allocatee’s “sub-allocation” fees (which are generally approximately 3.5% of the Allocation “sub-allocation” to its CDE which is facilitating the particular NMTC financing);
  • legal and accounting fees of NMTC transaction participants; and
  • other typical fees and costs associated with any other comparable type of financing.

Non-Forgiven NMTC Loans

Typically, NMTC financings less than $4.5 million occur in connection with NMTC financing to a pool of borrowers.

Each borrower generally receives a single Non-Forgiven Loan with (a) a principal amount between $1 million and $2 million; (b) a below-market interest-only payments during the 7-year NMTC compliance period (which is the blended rates of the Leverage Loan and 1.0% to 1.2% of the NMTC Investors “purchase price” for the NMTCs) and (c) a longer than standard maturity date (which can be up to 40 years and well beyond any secured asset’s useful life).

However, sometimes these pool of borrowers may receive not only a Non-Forgiven Loan but also a Forgiven Loan (although the principal amount is less as a percentage of the NMTC financing compared to that of the Forgiven Loan in a $4.5 million or higher NMTC financing).

For example, if $1 million of NMTC financing is provided to a pool borrower, a Non-Forgiven Loan might be $800,000 (i.e., 80% of the NMTC financing), and the Forgiven Loan might be $200,000 (i.e., 20% of the NMTC financing).

With respect to the typical Forgiven Loan in connection with a NMTC financing over $4.5 million, it is generally 33% of the NMTC financing  based on assumed market pricing and NMTC transaction costs, as previously discussed.