A bipartisan group of U.S. senators, including Sens. Roger Wicker, R-Mississippi; Cindy Hyde-Smith, R-Mississippi; Mark Warner, D-Virginia; and Chris Van Hollen, D-Maryland, recently introduced the Community Development Tax Credit Act (S. 4418). The Act would create a tax credit of three percent of qualified investments in community development financial institutions (CDFIs) for the first ten credit allowance dates and a four percent tax credit for the following ten credit allowance dates. Investors also would receive a one percent increase for equity or equity-equivalent investments.
Under the Act, qualified investments would include:
- Equity investments
- Loans with a minimum term of ten years
- Equity equivalent investments for CDFI loan funds
The tax credit would be capped at $1 billion in 2022, $1.5 billion in 2023, and $2 billion annually after that, as adjusted for inflation.
CDFIs play a critical role in providing credit and investment to underserved individuals and communities throughout the U.S. Equity is challenging for CDFIs to raise but is necessary to support lending, investing, and expansion. The Department of Treasury’s CDFI Fund has historically been the main source of equity for CDFIs.
However, as the number of CDFIs has grown, the CDFI Fund’s programs routinely receive far more applications than they can fund. Sporadic and emergency funding of these programs is a major cause of the demand that greatly exceeds the available funding resources. The high levels of unmet demand also underscore the ability of the industry to absorb more capital.
The Act would create an incentive for private-sector funding of high-impact investments that would benefit all types of CDFIs. As a result, institutions could gain the maximum flexibility and support needed to increase wealth and development in low and moderate-income communities. In addition, private sector investment would provide more equity and long-term capital for small businesses, particularly in areas with less access to traditional banks or loans.
If the bill passes, CDFIs will apply for allocations through the CDFI Fund. The Fund would allocate the credit based on the past performance of CDFI and its ability to attract private capital. Focusing on these factors will help ensure that small CDFIs and rural areas can access the new resources along with larger CDFIs and urban ones.
Several organizations support the Act, including the Community Development Bankers Association, National Association of Affordable Housing Lenders, Community Development Venture Capital Alliance, LISC, Opportunity Finance Network, CDFI Coalition, Inclusiv, and the Enterprise Community Loan Fund.
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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. 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.