You may be able to use both New Markets Tax Credits (NMTCs) and Tax-Exempt Bonds (TEBs) as financial mechanisms for projects under certain circumstances. A combination of these programs may not be suitable for every project. However, if the project is suitable for these types of financing and meets the requirements of both programs, the combination can be successful.
In some ways, the two programs are similar. For instance, they both have some of the same permissible uses, including:
- Land acquisition
Likewise, both programs can offer interest-only periods. Beyond these similarities, the two programs have differences that complement one another and can make the transaction more attractive.
Benefits of NMTCs
NMTCs can be attractive because the tax credit buyer receives income by claiming the tax credits. In addition, loans funded from the tax credits may be “forgiven” at the end of the seven-year tax compliance period. Therefore, 20-25% of the loan may not have to be repaid.
The NMTC program is not subject to prevailing wage requirements of Davis-Bacon, which can lend more flexibility to construction management than TEBs.
Benefits of TEBs
One advantage of TEBs is that the loan period can stretch over 30 or 35 years with no required refinancing. Nonetheless, you can refinance TEBs at the end of the loan if it is economically beneficial. Conversely, NMTCs require refinancing at least a portion of the loan after seven years.
TEBs also can provide lower tax-exempt interest rates that are fixed for the duration of the financing. Furthermore, a well-established market of investors in TEBs already exists, including mutual funds, money managers, and insurance companies.
Combining NMTCs and TEBs
Transactions combining NMTCs and TEBs can result in significant savings to the qualified active low-income business and create successful developments. For instance, in one case, an equity investor received NMTCs on the debt and equity capital received by a community development entity (CDE), in which the debt was TEBs. The CDE then used the proceeds from the capital investment to finance a charter school. An investor provided an NMTC allocation to finance a new hotel in another situation. The proceeds of TEBs were used as leveraged debt in the NMTC transaction. This allowed the project to access capital at a lower cost under circumstances in which a conventional loan was unavailable.
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We are an economic development law firm dedicated to offering complex and innovative legal and transactional advice to developers, investors, nonprofit organizations, entrepreneurs, and changemakers in society. We are not a traditional law firm. Instead, we are a small boutique law firm that focuses on what you need to develop the strategies necessary to impact communities.
We have worked with clients to obtain all types of tax credits and other government programs to finance the revitalization of communities. Savage & Associates has handled over a billion dollars in New Markets Tax Credit financing transactions and more than 300 commercial real estate closings. As a result, we know how to leverage the available tax credit tools to transform your communities. 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 also can find out more about our services online. We look forward to working with you to build your communities through traditional and alternative investment mechanisms based on your individual needs.