When you should start work on a New Markets Tax Credit (NMTC) financial forecast entirely depends on your unique situation, although getting started is usually a positive thing. Typically, once you receive a commitment letter for NMTC allocation, one of the parties to the transaction will start asking for a financial forecast draft.
A financial forecast is critical to assure investors in community development entities (CDEs) of meeting the reasonable expectation test for each CDE in a potential qualified active low-income community business (QALICB). With the assurance of the reasonable expectation test, no recapture event occurs if a QALICB falls out of compliance within the seven-year recapture period. Without the reasonable expectation test, however, a QALICB falling out of compliance during the recapture period would lead to a recapture event, which would be disastrous for the investor.
As a result, you need to provide, at a minimum, a financial forecast or projection that covers the seven-year holding period to demonstrate the projected satisfaction of all elements of the reasonable expectation test.
However, there are some situations in which you may find it beneficial to begin working on a draft of a financial forecast earlier in the process or before another party even asks you for a draft. Under these circumstances, you might consider starting to draft a financial forecast as soon as you have the information available to do so.
Your First NMTC Transaction
First, if this is your first NMTC transaction, and you are not working with experienced counsel, drafting a financial forecast is likely to be more challenging than you might expect. During your first transaction, you should make all efforts to include a party on your team who has extensive NMTC experience. This party can guide your team through the process, explain the process as you go along, and help properly structure the transaction. They also can ensure that you correctly draft a financial forecast concerning the transaction.
Your Transaction Involves More than One Type of Tax Credit
You can use more than one type of tax credit in your transaction in that you combine another type of tax credit with NMTCs. While using both types of tax credits is advantageous because it provides more funding for your project, it is also more complex. Drafting a financial forecast early in the process can help you determine how to best structure the transaction to make the most of both types of tax credits.
We Can Work Together to Develop Communities
Savage & Associates is an economic development law firm providing sophisticated legal and business advice to a wide range of clients interested in making significant changes in their communities. We advise developers, investors, nonprofit organizations, entrepreneurs, and anyone looking to effectuate change. You can contact our offices by calling 215.880.9441 in Philadelphia or 202.817.3941 in Washington D.C. to discuss your ideas with us. You can also find Savage & Associates online 24 hours a day, seven days a week, to get more information about the innovative financial tools that we can use to make your vision a reality. From New Markets Tax Credits to Historic Tax Credits, we can design the unique transaction best designed to achieve your objectives.