There Cannot be a Recapture Event During the 7-Year NMTC Compliance Period
The 39% 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:
- However, to date, there has never been a “Recapture Event” in connection with approximately $42 billion of NMTC financings because these transactions are carefully underwritten and monitored, and there are cure periods to remedy certain Recapture Events, depending on the facts and circumstances.
Subject to certain cure periods, with respect to a borrower, a “Recapture Event” includes, but is not limited to, each of the following:
- failure to maintain a “Qualified Business;”
- failure to be a “Qualified Active Low-Income Community Business;”
- using NMTC financing proceeds for a “Prohibited Use;”
- prepayment of any portion of the NMTC financing (including foreclosure proceeds, subject to a cure period);
- if “Targeted Populations” are used in lieu of the borrower or the project being predominantly located in a “Low Income Community,” such “Targeted Populations” do not receive the community benefits as committed to by the borrower; and/or
- participation in an abusive transaction in connection with the NMTC financing.
A borrower must execute a recapture guaranty with the NMTC investor and the CDE, pursuant to which the borrower indemnities the NMTC investor and the CDE for the recapture the of the NMTCs. However, to date, there has never been a Recapture Event after $42 billion of NMTC financings.
- A Recapture Event does not include a foreclosure under the NMTC loan/financing documents unless the CDE does not timely redeploy the foreclosure proceeds for another project or to another borrower predominantly located in a “Low-Income Community.”
- Each of the NMTC Investor and the CDE is motivated to work with a borrower during the 7-year NMTC compliance period because:
- the NTMC Investor has “purchased” the NMTCs (which is the source of the forgivable loan; therefore, the NMTC Investor does not expect a return of its capital); and
- the CDE merely facilitates the NMTC financing without using its own funds.