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.
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.