We are interested in participating as a Borrower in New Markets Tax Credit Financing . . .

Generally, with respect to the Forgiven Loan:

    • it only requires approximate 1.2% to 1.5% interest-only payments during the 7-year NMTC compliance period; and
    • it is forgiven at the end of the 7-year NMTC compliance period.

Generally, the economic benefits of the Forgiven Loan) include:

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  • approximate 1.2% to 1.5% interest-only payments during the 7-year NMTC compliance period and forgiveness after such period;
  • below-market interest-only payments during the 7-year NMTC compliance period (which rate may continue through the maturity date which can be up to 40 years and beyond any secured asset’s useful life);
  • subordination to existing and subsequent debt;
  • various non-traditional and favorable terms;
  • subject to flexible financial underwriting criteria (permitting higher than standard loan to values (or not even requiring an appraisal); permitting lower than standard debt service coverage ratios; accepting lower credit scores; accepting limited business history; accepting non-traditional forms of collateral (such as inventory and limited equity requirements, if any);
  • no personal guarantees with respect to the Forgiven Loan (if certain reserves are established);
  • ability to “leverage” other sources of financing for a multiplier economic benefit using the IRS Approved Leverage Structure;
  • “softer” foreclosure and enforcement rights (because the NMTC Investor does not require a return of its purchase price for the NMTCs and the Allocatee is not using its own funds in the NMTC Financing);
  • if applicable, state NMTCs provide additional subsidy;
  • ability to obtain additional financing (based on the favorable and nontraditional terms discussed above); and
  • substantial community and economic impacts to residents in “Low-Income Communities” and “Targeted Populations.”

We identify, profile and solicit Allocatees and Tax Credit Purchasers that provide optimal nontraditional and favorable terms and flexible underwriting requirements based on current and projected demand for certain types of Borrowers (whether for-profit or nonprofit), uses of NMTC Financing (such as real estate, equipment or operations), types of communities that will benefit from the NMTC Financing (such as urban or rural or characterized by certain distress criteria (such as higher unemployment rates or poverty rates), and location in the country (based on Tax Credit Purchasers’ and Allocatees’ service areas or targeted so-called “underserved states”).

Legal Requirements of New Markets Tax Credit Financing

There are many statutory and regulatory requirements as well as specific guidance provided by the IRS and the CDFI Fund (which administers the NMTC Program).

Generally, to the extent that a Borrower and/or project does not satisfy any of the legal requirements, the NMTC Financing can generally be structured to address all of the legal issues without adversely affecting the economic benefits of the NMTC Financing.

It is critical that these issues be addressed from the outset in order to avoid complications as the NMTC Financing proceeds to closing.

As discussed in more detail below, in order to obtain the Forgiven Loan, there are several legal requirements including, but not limited to, the following:

  • the  project or operations, as applicable, must be “predominantly” located in a “Low-Income Census Tract” or otherwise benefit  “Targeted Populations;”
  • there must be a gap in available financing (the so-called “But For Test” must be satisfied);
  • the Borrower (which can be a for-profit or a nonprofit) must be a “Qualified Active Low-Income Community Business;”
  • the Borrower’s trade or business (or the nonprofit’s purpose and operations) must be a “Qualified Business;”
  • the Borrower must satisfy the “For-Profit Reasonable Expectations Test” or the “Nonprofit Reasonable Expectations Test,” as applicable;
  • the NMTC Financing proceeds must be used for “Permitted Uses” and not for “Prohibited Uses;” and
  • there cannot be a  “Recapture Event” during the 7-year NMTC compliance period.

There are many rules that must be followed in order to qualify for and maintain a new markets tax credit financing.

 Low-Income Community

The Borrower or the project, as applicable, must be “predominantly” located in “Low-Income Community,” which is defined by U.S. Census data as a census tract with:

  • a poverty rate of at least 20%, or
  • either:
    • in the case of a tract located in a metropolitan area, the median family income (“MFI”) for such tract does not exceed 80% of the greater of (x) the statewide MFI or (y) the metropolitan area MFI, or
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  • in the case of a tract not located in a metropolitan area, the median family income for such tract does not exceed 80% of the statewide MFI.

We can determine whether a particular census tract is a Low-Income Community upon request.

This requirement only has to be satisfied on the date of the funding of the NMTC Financing.  If the census tract subsequently is disqualified as a “Low-Income Community,” such fact does not matter as long as the Borrower or project, as applicable, remains in such census tract (or otherwise relocates to another Low-Income Community during the 7-Year NMTC Compliance Period).

 Targeted Populations Alternative Test

Alternatively, if a Borrower or a project is not predominantly located in a “Low-Income Community,” it can be deemed to be in a “Low-Income Community” if it otherwise benefits “Low-Income Persons” (as “Targeted Populations”) throughout the 7-year NMTC compliance period.

This “Targeted Populations Alternative Test” is satisfied if:

  • 1 of the following 3 tests is satisfied during the 7-year NMTC compliance period (the “Targeted Populations Alternative Test”):

  • at least 50% of total its gross income is derived from sales, rentals, services or other transactions with “Low-Income Persons;”
  • at least 40% of its employees are “Low-Income Persons;” or
  • at least 50% of its owners are “Low-Income Persons;” and
  • the applicable census tracts may only have MFI that is (a) at or below 120% of the statewide MFI for non-metropolitan area tracts, or (b) the greater of statewide or metropolitan area MFI for tracts located within a metropolitan area.

 A “Low-Income Person” is an individual whose family income (adjusted for family size) is not more than:

  • for metropolitan areas, 80% of such metropolitan area MFI, or
  • for non-metropolitan areas, the greater of 80% of (x) such non-metropolitan area MFI, or (y) the statewide non-metropolitan area MFI.

The Targeted Populations Alternative Test is rarely acceptable to Allocatees and Tax Credit Purchasers because the test must be satisfied throughout the entire 7-Year NMTC Compliance Period.

It is generally tedious to track the 3 percentage requirements relating to its gross income, its employees’ services, or its owners unless the Borrower already has a tracking system in place.

Additionally, unlike the requirement to be predominantly located in a “Low-Income Community” (which only requires that such requirement be satisfied on the date of the funding of the NMTC Financing), if the actual percentage(s) are lower during the 7-year NMTC compliance period than those set forth above, there would be a “Recapture Event,” which results in 100% of the NMTCs being recaptured and disallowed.

Therefore, if the Targeted Populations Alternative Test is use, Allocatees and NMTC Investors generally require that higher percentage(s) be used as an underwriting matter in order to reduce the risk of a “Recapture Event.”

“But For” Test

A Borrower must satisfy the “But For Test.”

The “But For Test” is applied as follows: “but for” the receipt of the Forgiven Loan:

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  • the overall financing will not proceed;
  • available financing is otherwise too burdensome;
  • whatever will be NMTC financed will be significantly reduced in scope;
  • whatever will be NMTC financed will be substantially delayed;
  • there will be unrealized substantial community impacts; and/or
  • the project or operations would not otherwise be located in a “Low-Income Community.”

Qualified Active Low-Income Community Business

The Borrower must be a “qualified active low-income community business” (a “QALICB”), which is a corporation, partnership, or limited liability company (or division of any of the foregoing), and has a trade or business (or, in the case of a nonprofit, any activity that furthers its charitable purpose), which is a “Qualified Business.”

Additionally, it must satisfy each of the 5 requirements during the term of the NMTC Financing.  First,

  • at least 50% of its total gross income must be derived from the active conduct of a “Qualified Business” within one or more “low-income communities” (the “Gross Income Test”);
  • at least 40% of the use of its tangible property (whether owned or leased) must be within one or more LICs (the “Tangible Property Test”); and
  • at least 40% of the services performed by its employees must be performed within one or more LICs (the “Services Performed Test”).

The Gross Income Test is also satisfied if 50% instead of 40% is used in either of the Tangible Property Test or Services Performed Test.

If the Borrower does not have employees, the Services Performed Test is satisfied if 85% instead of 40% is used in the Tangible Property Test.

Additionally, these 3 requirements are not required if the Targeted Populations Alternative Test is being used.

During the term of the NMTC Financing, the Borrower must also have:

  • less than 5% of the average aggregate unadjusted bases of its property can only be attributable to “collectibles” (such as antiques) other than collectibles that are held primarily for sale to customers in the ordinary course of business; and
  • less than 5% of the average of the aggregate unadjusted bases of its property can only be attributable to “nonqualified financial property” (such as holding cash or cash equivalents, or owning debt, stock, and partnership interests; however, reasonable working capital and construction reserves are permitted above this threshold).

Working capital and construction reserves are considered to be “reasonable” if they are reasonably expected to be expended within 12 months of the funding of the NMTC Financing.

If construction is anticipated to be longer than 12 months, there are ways in which to structure the financing to address this issue.

If any of the percentage requirements to be a QALICB are not satisfied, the overall financing can generally be restructured so that such requirements are satisfied with respect to the NMTC Financing.

Borrower’s Trade or Business Must be a Qualified Business

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A “Qualified Business” includes any business that is not specifically exempted as described below.

A Qualified Business can include manufacturing, healthcare, grocery, education, qualified mixed-use, nonprofit, and renewable energy/recycling etc; and

  • if the Borrower is a for-profit business, it must be reasonably expected to generate revenues (as opposed to net income) within 3 years of the funding of the NMTC Financing; or
  • if the Borrower is a nonprofit organization, it must be reasonably expected to engage in an activity that furthers one or more of its charitable purposes within 3 years of the funding of the NMTC Financing.

However, a Qualified Business does not include:

  • “residential rental housing” (unless part of a qualified mixed-use project);
  • farming;
  • a business that consists “predominantly” (i.e., more than 50%) of the development and holding of intangibles for the purpose of sale or licensing; or
  • any of the following so-called “Sin Businesses:”  (a) a private or commercial golf course; (b) a country club; (c) a gambling facility; (d) a racetrack; (e) a hot tub facility; (f) a suntan facility; (g) a massage parlor; or (h) any store the principal purpose of which is the sale of alcoholic beverages for consumption off premises.

These prohibited businesses are similar to those prohibited by the federal tax-exempt bond rules.  They also do not provide the types of community and economic impacts that satisfy the intent of the NMTC Program.

Additionally, if a Borrower leases a NMTC financed project, no tenant may be a so-called “Sin Business” (although the other types of businesses listed above may be tenants).  However, there are ways to structure the NMTC financing to satisfy this prohibition.

NMTC Financing cannot be used for “residential rental housing,” unless such housing is part of a mixed-use project which generates at least 20% of its gross revenue from non-residential sources (such as retail and commercial etc.).  Additionally, for underwriting purposes, “Allocatees” generally require this percentage to be higher.  However, there are ways to structure the NMTC Financing to satisfy this requirement.

Reasonable Expectations Tests

If the Borrower is a for-profit business, it must be reasonably expected to generate revenues (as opposed to net income) within 3 years of the funding of the NMTC Financing (the “For-Profit Reasonable Expectations Test”).

If the Borrower is a nonprofit organization, it must be reasonably expected to engage in an activity that furthers one or more of its charitable purposes within 3 years of the funding of the NMTC Financing (the “Nonprofit Reasonable Expectations Test.”

For Profit Reasonable Expectations Test, it is important to note that if such revenues are not generated within 3 years, that does not result in the failure of the For-Profit Reasonable Expectations Test because the test is that it must be “reasonably expected” to do so on the date of the funding of the NMTC Financing based on reasonable assumptions.

The satisfaction of the For-Profit Reasonable Expectations Test must be illustrated in financial projections, which must support that all of the debt service payments of the NMTC Financing will be timely paid based on reasonable assumptions.

We have experience in accounting, including previously practicing as certified public accountants and have similar financial certifications.  We work with our clients to provide such financial projections in the format and detail required by Investors and Allocatees.

With respect to a Nonprofit Reasonable Expectations Test, it is important to note that if such engagement in an activity that furthers one or more of its charitable purposes does not occur within 3 years, that also does not result in the failure of the Nonprofit Reasonable Expectations Test because the test is that it must be “reasonably expected” to do so on the date of the funding of the NMTC Financing based on reasonable assumptions.

The Nonprofit Reasonable Expectations Test does not require an expectation that revenues be provided (as there is for for-profit Borrowers), and the nonprofit can operate at a projected and actual loss over the term of the NMTC Financing as long as it can show that its debt service payments will be timely paid in financial projections based on reasonable assumptions. Again, we provide such financial projections.

Permitted Uses of NMTC Financing

HospitalNMTC Financing may only be used by a “Qualified Business” to:

  • acquire, construct, renovate and expand bricks and mortar projects (including those relating to healthcare, education, manufacturing, retail, qualified mixed-use, cultural, community, and renewable energy etc.); and
  • finance business and nonprofit operations (such as those in the nature, as described above), including the purchasing, refurbishing, retrofitting, or leasing of equipment, and/or funding working capital, inventory, and staffing etc.

However, there are ways to structure the NMTC Financing to address any uses that initially do not qualify.

Prohibited Uses of NMTC Financing

NMTC Financing may not be used to:

  • generally, refinance or prepay existing debt (with certain exceptions), or
  • participate in any abusive transaction.

There Cannot be a Recapture Event During the 7-Year NMTC Compliance Period

The 39% new markets tax credits (“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, then 100% of the NMTCs are:

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  • “recaptured” for all prior years (which means that the NMTC Investor must pay income taxes equal to such recaptured NMTCs as well as interest and penalties), and
  • “disallowed” for all remaining years.

Specifically, if at any time during the 7-year NMTC compliance period there is a recapture event, then all NMTCs (a) recognized in previous years are recaptured, and (b) all NMTCs that otherwise would have been recognized in the remaining years of the 7-year NMTC compliance period are disallowed.

During the 7-Year NMTC Compliance Period, with respect to a Borrower, a “Recapture Event” includes, but is not limited to, each of the following:

Underwriting Requirements

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Each year, “qualified community development entities” (“CDEs”) apply to the CDFI Fund (which administers the NMTC Program) for a NMTC allocation authority award (a “NMTC Allocation Award”), which is an extremely competitive process.

Each year the CDFI Fund awards $5.0 billion of NMTC Allocation Awards.  However, demand for NMTC Financing far exceeds such amount.

If a CDE receives a NMTC Allocation Award, it becomes an “Allocatee.”

A NMTC Allocation Award authorizes an Allocatee to designate its NMTC Financings/“Qualified Equity Investments” as entitled to NMTCs to the extent it “sub-allocatees” a portion of its NMTC Allocation Award to each NMTC Financing/“Qualified Equity Investment.”

For each NMTC Financing, an Allocatee spins off an official CDE.  The NMTC Investor then makes a “qualified equity investment” in such CDE and the Allocatee makes a nominal capital contribution to the CDE (such as $1,000).

An Allocatee facilities NMTC Financings without using any of its own funds and receives “sub-allocation fees” for each NMTC Financing, and a portion of Borrowers’ Forgiven NMTC Loan interest payments permit the Allocatee to pay ongoing asset management and monitoring fees as well as overhead during the 7-year NMTC compliance period.

To be competitive, each potential Allocatee generally commits to satisfy certain high benchmarks in order to demonstrate that the intent of the NMTC Program subsidy will be maximized (over and above the minimum standards required by the CDFI Fund, such as targeted and specific types of substantial community and economic impacts and expeditious deployment of its NMTC Allocation Award to Borrowers).

Such high benchmarks result in an Allocatee having high underwriting standards required of Borrowers and the NMTC Financing, which are applicable whether or not the NMTC Program subsidy is in the form of the Forgiven NMTC Loan or the Non-Forgiven NMTC Loan.

Borrowers must compete to obtain one or more “Sub-Allocations” from one or more Allocatees, which is also an extremely competitive process.

Once an Allocatee “Sub-Allocates” a portion of its NMTC Allocation Award to a CDE, that CDE then is authorized to designate the NMTC Investor’s “qualified equity investment” as such, which entities the NMTC Investor to NMTCs equal to 39% of such “qualified equity investment.”

Accordingly, the for-profit’s or non-profit’s operations or project should satisfy several underwriting requirements (which are applicable whether or not the NMTC Program subsidy is in the form of the Forgiven NMTC Loan or the Non-Forgiven NMTC Loan), including but not limited to, the following:

  • being “Shovel Ready;”
  • being located in not only a “Low-Income Community” but also one that is “Highly Distressed” (especially if located in a rural community);
  • providing or retaining substantial community impacts to residents in “Low-Income Communities” and “Targeted Populations” (such as “Low-Income Persons,” minorities, women and veterans);
  • having strong local support; and
  • often it is beneficial to be located in a so-called “underserved state,” which currently includes: Florida, Georgia, Idaho, Kansas, Nevada, Tennessee, Texas, Virginia, West Virginia, and Wyoming, as well as Puerto Rico.

As previously discussed, Allocatees have certain criteria for particular types of NMTC Financing, which includes the:

  • types of Borrowers (such as for-profits or nonprofits);
  • types of operations (such as manufacturing, health care, or renewable energy/recycling etc.);
  • what the NMTC Financing will be used for (such as for real estate, equipment or operations etc.);
  • types of communities that are benefited (such as rural or metropolitan);
  • types of economic distress in the “low-income community” (such as a certain minimum poverty rate or unemployment rate);
  • particular “underserved states” (which are those 10 states and Puerto Rico, which have been designated by the CDFI Fund as not receiving their proportionate share of NMTC Financings over the past few years); and
  • types of direct and indirect community and economic impacts to residents in “low-income communities,” “low-income persons,” and other “targeted populations.”

We identify and profile Allocatee’s whose criteria matches that of our Borrower clients and look for those Allocatees which will provide:

  • maximum “sub-allocation” of their NMTC Allocation Awards;
  • maximum forgiveness of the Forgiven NMTC Loan;
  • optimal economic terms;
  • optional flexible financial underwriting criteria; and
  • low “sub-allocation” fees.

The NMTC Financing Must be “Shovel Ready”

To be “Shovel Ready” Borrower must show that:

Shovel ready

  • all other sources of financing are otherwise committed (or close to being committed);
  • all other conditions are satisfied (or close to being satisfied), such as having site control, zoning approvals, permits, and good title etc.;
  • if the Borrower is a for-profit organization, satisfaction of the For-Profit Reasonable Expectations Test;
  • if the Borrower is a nonprofit organization, satisfaction of the Nonprofit Reasonable Expectations Test; and
  • substantial community impacts will be timely achieved.

However, it is important to note that once a short-fall in financing is determined (a that a short-fall could occur), it is critical to get on the “radar screens” of Allocatees in order to be high-lighted in their annual NMTC Allocation Awards applications to the CDFI Fund or become part of their pipeline of proposed NMTC Financings.

We continually update Allocatee profiles and timeline in order to provide our Borrower clients with the best opportunity to receive one or more Sub-Allocations of one or more Allocatee Allocation Awards.

If an Allocatee receives an NMTC Allocation Award and the Borrower is “Shovel-Ready,” the Borrower is more likely to receive a commitment letter from such Allocatee to provide the Forgiven Loan to the Borrower.

Project or Borrower Should be Located in a “Highly Distressed” Low-Income Census Tract

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A “Highly Distressed” census tract is characterized by having either:

  • at least 1 of 4 “primary distress criteria” (such as a poverty rate of at least 30% (compared to the statutory minimum of 20%) or being in a rural community), or
  • at least 2 of several “secondary distress criteria” (such as poverty rates of at least 25% (compared to the statutory minimum of 20%), or otherwise satisfying any of the several other secondary criteria (some of which are unique for particular types of Borrowers)).

The more distressed the “Low-Income Community,” the more likely an Allocatee will be interested in providing its NMTC allocation for the NMTC Financing. In fact, as reported by the U.S. Treasury Department in 2020, 83% of NMTC Financings involved “highly distressed” “Low-Income Communities.”

We provide a detailed distress analysis of the Low-Income Community in which whatever is being NMTC financed is located, which is supported by objective criteria.

The NMTC Financing Must Provide Substantial Community and Economic Impacts

A Borrower must qualitatively and quantitatively provide support of substantial direct and indirect community and economic impacts to the residents of the “Low-Income Community” in which the Borrower and/or project is predominantly located, surrounding communities and “Targeted Populations,” including “Low-Income Persons.”

Such community and economic impacts include any of the following:

  • direct and indirect full-time and part-time job creation, job retention and/or construction jobs;
  • jobs that provide living wages, healthcare benefits, retirement plans, life insurance, job training, and/or continuing education;
  • consumer goods and services;
  • community goods and services;
  • below-market lease rates and favorable terms to non-profit, minority-owned or women-owned tenants;
  • affordable housing (if part of a qualified mixed-use project);
  • “green” type benefits (such as LEED certified or at least qualified to be LEED certified); and/or
  • any other community benefits (such as renovating a historic structure or reducing blight).

We provide a qualitative and quantitative community impact analysis and persuasive narrative highlighting the direct and indirect community impacts to such communities and populations taking into account each Allocatee’s NMTC focus on particular types of community and economic impacts.

The Project or Operations Must Have Strong Local Support

A Borrower must be able to show that the NMTC Financing has and will receive strong local support.  For example, this can be shown by:

  • the project, equipment, or business or nonprofit operations, as applicable, being part of an economic development plan;
  • letters of support from local officials, community leaders, and/or local businesses and nonprofits;
  • receipt of governmental subsidies and private sources of capital; and/or
  • expected subsequent catalytic investment in the “Low-Income Community” and surrounding areas as a direct or indirect result of the NMTC Financing.

We provide an objective third party confirmation of local support (including interviews with local governmental officials and community stakeholders), and provide a persuasive and detailed narrative that the NMTC Financing will facilitate a true public/private partnership (including any indirect investment in the community based on our impact analysis).

Although the typical NMTC Financing structure is quite complex based on all of the sources of funds, the economics and fundamental initial structure of NMTC Financing is illustrated in the following link:

Economics and Basic NMTC Financing Structure

For a discussion and illustration of the unwind of NMTC Financing after the 7-Year NMTC Compliance Period, please click on the following link:

Unwind after 7-Year NMTC Compliance Period

For a determination of whether the Forgiven Loan is potentially available to a Borrower, please click on the following link.

Forgiven NMTC Loan Test and Sizing of NMTC Financing

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

NMTC Webinars and Educational Materials

To apply as a Borrower for NMTC Financing, please click the following link:

Apply for NMTC Financing

Contact

Community Reinvestment Associates, LLC
P.O. Box 57600
Chicago, IL 60657-7366

Phone

312.881.0966

What We Do

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