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).
In order to be a “CDE,” an entity must:
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-allocate” 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.