Forgiven NMTC Loan Test

Depending on the sizing of the overall financing (generally an industry required $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 $5 million (the “Forgiven NMTC Loan Test”).

Note: The Forgiven NMTC Loan Test doesn’t require that the Forgiven NMTC Loan be over $5 million but rather the overall financing must be over $5 million.

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

  • the Forgiven NMTC Loan Test is not satisfied; and
  • the Financial Gap is between $500,000 and $5 million.

Note:  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 $5 million NMTC industry threshold?

Answer:  Transaction costs and the amount of time to close a NMTC financing generally sufficiently offsets the NMTC Program subsidy of the Forgiven 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 transaction participants; and
• other typical fees and costs associated with any other comparable type of financing.

Non-Forgiven Loans:

Typically, NMTC financings less than $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 $500,000 and $5 million; (b) a below-market interest-only payments during the 7-year NMTC compliance period (although such interest rate is generally higher than the approximate 1.5% interest rate on the Forgiven Loan, it is still well below market); 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 $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 $5 million, it is generally 33% of the NMTC financing  based on assumed market pricing and NMTC transaction costs, as previously discussed.

Sizing of New Markets Tax Credit Financing

As previously discussed, the Forgiven Loan is approximately 33% of the total NMTC financing/QEI, which is based on an assumed market pricing of $0.84 per $1.00 NMTC. For example, if the NMTC financing/QEI is $10 million, then the 39% NMTCs are $3.9 million (i.e., $10 million NMTC financing/QEI x 39% NTMCs).  Thus, the Investor effectively “purchases” the $3.9 million NMTCs for $3.3 million (i.e., $3.9 million NMTCs x $0.84 assumed market pricing).

The borrow must provide the remaining $6.7 million from its other sources of funds which are run through the IRS Approved Leverage Structure as “Leverage Loan(s)” (as discussed and illustrated in the “Economics and Basic NMTC Financing Structure” tab at the bottom of this page.

Ultimately, the Leverage Loan(s) run through the structure and the CDE ultimately provides a “Senior NMTC Loan” to the borrower, the terms of which match the Leverage Loan(s).

In addition to the Forgiven Loan, the CDE also provides a “Senior NMTC Loan,” the terms of

The following 6 examples provide various scenarios for which sizing of the NMTC financing is determined.

EXAMPLE #1:

The financing is $10 million and there is a $3.3 million (i.e., 33%) gap in financing.

The NMTC financing (i.e., the “Qualified Equity Investment” (the “QEI”)) is $10 million, which provides a $3.3 million Forgiven NMTC Loan.

The borrower will need to secure $6.7 million of Leverage Loan(s) to be run through the IRS Approved Leverage Structure (which will provide the proceeds for the $6.7 million Senior NMTC Loan).

EXAMPLE #2:

The financing is $10 million but there is only a $2.5 million (i.e., 25%) gap in financing.

The NMTC financing/QEI is $7.6 million because the $2.5 million gap is 33% of such amount, which provides a $2.5 million Forgiven NMTC Loan.

The borrower will need to secure $5.1 million of Leverage Loan(s) to be run through the IRS Approved Leverage Structure (which will provide the proceeds of the $5.1 million Senior NMTC Loan). 

Therefore, the remaining $2.4 million of the $10 million overall financing is closed outside of the $7.6 million NMTC financing.

EXAMPLE #3:

The financing is $6 million and there is a $3 million (i.e., 50%) gap in financing.

The borrower does not qualify for the Forgiven NMTC Loan (because there is a 50% gap); however, it does qualify for the Non-Forgiven NMTC Loan in the amount of $3 million (because it is less than the $5 million industry threshold).

If the borrower were able to secure an additional $1 million so that the gap is then $2 million, the borrower qualifies for the Forgiven NMTC Loan in the amount of $2 million because the gap in financing would be reduced to 33% of the $6 million financing.

The borrower will then need to secure $4 million of leverage funds to be run through the IRS Approved Leverage Structure (which will provide the proceeds for the $4 million Senior NMTC Loan).

EXAMPLE #4:

The financing is $4 million and there is a $4 million (i.e., 100%) gap in financing.

The borrower does not qualify for the Forgiven NMTC Loan (i.e., because there is a 100% gap and the overall financing is less than $5 million threshold); however, it qualifies for a $4 million Non-Forgiven NMTC Loan (because such amount is less than $5 million industry threshold).

EXAMPLE #5:

Total financing is $50 million and there is a $6 million gap in financing (i.e., 13%).

The borrower qualifies for a $6 million Forgiven NMTC Loan (because $6 million divided by 33% is $18 million, which is above the $5 million industry threshold).

The borrower will then need to secure $12 million of Leverage Loan(s) to be run through the IRS Approved Leverage Structure (which will provide the proceeds for the $12 million Senior NMTC Loan).

Therefore, the remaining $32 million of the $50 million overall financing is closed outside of the $18 million NMTC financing.

EXAMPLE #6:

Note (a) in Example 1 and 2, the borrower qualifies for a $3.3 million and $1.5 million Forgiven Loan, respectively, and (b) in Example 3, the borrower qualifies for a $2 million Forgiven NMTC Loan (if it obtains­­ an additional $1 million of financing).

If the applicable borrower is not able to obtain sufficient Leverage Loan(s), it can apply for a Non-Forgiven NMTC Loan because the gap in financing is less than the $5 million industry threshold).

The borrower in Example 5 can also apply for a $5 million Non-Forgiven Loan but it will otherwise have to  secure the remaining $1 million shortfall in financing.