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 $3.5 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/QEIs as entitled to NMTCs to the extent it “sub-allocatees” a portion of its NMTC Allocation Award to each NMTC financing/QEI.
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.