Legal Requirements to be a CDE
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, an applicant may apply for certification as a “CDE” at any time. Such certification is not competitive. As long as these 4 requirements are satisfied, certification will be granted by the CDFI Fund.
These requirements are deemed to be satisfied if the entity is a “community development financial institution” (a “CDFI”) or a “specialized small business investment company a (“SSBIC”).
A “CDFI” is a financial institution (a) provides credit and financial services to underserved markets and populations; (b) has been certified as such by the CDFI Fund; and (c) may be a:
- community development bank (which is a commercial bank organized to generate economic development in low- to moderate-income geographical areas and serve residents of such areas);
- community development credit union (which is a member-owned financial cooperative, controlled by its members, and organized to assist people by providing its members credit at competitive rates to provide other financial services in connection with community development);
- community development loan fund (which provides financing and development services to businesses, organizations, and individuals in low-income communities, including microenterprise, small business, housing, and community service organizations);
- community development venture capital fund (which provides equity capital to businesses in underinvested markets, seeks market-rate financial returns, as well as the creation of good jobs, wealth, and entrepreneurial capacity);
- microenterprise development loan fund (which provides financing to individuals and small businesses in low-income communities); or
- community development corporation (which is a nonprofit corporation organized to provide programs, offer services and engage in other activities that promote and support community development, including affordable housing, education, community organizing and real estate development).
A SSBIC is any small business investment company that (a) invests solely in small business concerns that contribute to a well-balanced national economy by facilitating ownership in such concerns by persons whose participation in the free enterprise system is hampered because of social or economic disadvantages; (b) is organized or chartered under state business or nonprofit corporations statutes, or formed as a limited partnership; and (c) licensed as such by the Small Business Administration.
A CDE that receives a NMTC allocation award is an “Allocatee.” Thereafter, the Allocatee will use affiliated CDEs to facilitate each NMTC financing. For each NMTC financing, a NMTC investor will make a capital contribution in an affiliated CDE in exchange for a 99.99% limited interest, and the Allocatee will retain a .01% managing interest in the applicable affiliate CDE.
The Allocatee will then “sub-allocates” a portion of its NMTC allocation authority award to such affiliate CDE for each NMTC financing. Such affiliate CDE will designate such NMTC investor’s capital contribution as a QEI. Typically, a NMTC allocation authority award will be “sub-allocated” for a few or several separate NMTC financings (generally between $5 million and $15 million).
At the end of the 7-year NMTC compliance period, the CDE will effectively be dissolved.
There Cannot be a Recapture Event During the 7-Year NMTC Compliance Period
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 CDE, a “Recapture Event” includes, but is not limited to, each of the following:
- the CDE ceases to be a “CDE;”
- the CDE fails to timely deploy “substantially all” (i.e., 85% or such higher amount as agreed to in its “Allocation Agreement” with the CDFI Fund) of its Allocation Authority Award;
- if the borrower prepays a portion of the NMTC financing during the NMTC compliance award, the CDE fails to timely redeploy such prepayment in another “Low-Income Community” or to benefit “Targeted Populations;” and/or
- the Allocatee or the CDE participates in any abusive transaction in connection.
Legal Requirements Applicable to Borrowers and Projects
To be “Shovel Ready,” borrower must show that:
- if the borrower is a nonprofit organization, one or more of its charitable purposes are reasonably expected to be furthered within 3 years; and
- substantial community impacts will be timely achieved.
Although the typical NMTC financing structure is quite complex based on all of the sources of funds, the fundamental economics and initial structure of NMTC financing is illustrated in the following link:
For a discussion and illustration of the unwind of NMTC financing after the 7-year NMTC compliance period, please click on the following link:
For a determination of whether the Forgiven NMTC Loan or the Non-Forgiven NMTC Loan is available to a borrower based on the “Forgiven NMTC Loan Test” and the sizing of the NMTC financing, please click on the following link.
Please click the following link to watch our pre-recorded webinar:
To apply as a CDE for a NMTC Allocation Award, please click the following link: