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

Each year the Community Development Financial Institutions Fund (the “CDFI Fund,” which is a division of the U.S. Treasury Department) awards $5.0 billion to applicants, which are “qualified community development entities” (“CDEs”).

If a CDE receives a NMTC allocation authority award from the CDFI Fund, then the CDE becomes an “Allocatee” and:

  • can provide NMTC Financing up to the amount of the NMTC Allocation Award, which does not require the use of its own capital (i.e., the NMTC investor provides a “qualified equity investment” (a “QEI”) in an affiliate CDE of the Allocatee, which entitles the NTMC investor to NMTCs equal to 39% of the QEI);
  • will receive upfront fees of approximately 4% of such NMTC Allocation Award and ongoing fees over the 7-Year NMTC Compliance Period (which can be reserved);
  • will have its closing and transaction fees paid by the Borrower; and
  • will be able to further its purpose by providing financing to Borrowers and projects that have substantial community impact in the Allocatee’s service area.

Typical NMTC Allocation Awards are between $10 million and $80 million. Such fees arise without the Allocatee or its affiliate CDEs using any of their own funds (i.e., there is no risk of loss of capital to the Allocatee or its affiliate CDEs).

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).

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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-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 “Qualified Equity Investment.” Typically, a NMTC allocation authority award will be “sub-allocated” for a few or several separate NMTC financings (generally between $5 million and $20 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

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:

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

For a discussion of the legal requirements which apply to Borrowers and projects of a NMTC financing, please click on the following link:

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 $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/“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 Tax Credit Purchaser 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 a “Sub-Allocation Fee” for each NMTC Financing, and a portion of Borrowers’ Forgiven Loan interest payments permit the Allocatee to pay ongoing asset management and monitoring fees as well as overhead costs 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 Loan or the Non-Forgiven Loan.

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 Loan or the Non-Forgiven 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 of “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.

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, revenues (as opposed to net income) are reasonably expected to be generated within 3 years;
  • 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.

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


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

  • at least 1 of 4 “primary distress criteria” (such as a poverty rate 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 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 a Sub-Allocation of its NMTC Allocation Award for the NMTC Financing. In fact, as reported by the U.S. Treasury Department in 2017, 75% of NMTC financings involved “highly distressed” “Low-Income Communities.”

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 building or reducing blight).

The Project or Operations Must Have Strong Local Support

A Borrower must qualitatively and quantitatively provide support of substantial community impact 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 impact includes any of the following:

  • 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.

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 Loan or the Non-Forgiven Loan is available to a Borrower based on the “Forgiven 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 to be a CDE and for a NMTC Allocation Award, please click the following link: