Category: NMTC Application

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.

If you want to receive a New Markets Tax Credits (NMTC) allocation, your organization must be an eligible community development entity (CDE), which is a domestic corporation or partnership that is an intermediary vehicle for loans, investments, or financial counseling in low-income communities (“LICs”).

 The Community Development Financial Institutions (CDFI) Fund certifies domestic corporations or partnerships as CDEs if their applications meet the requirements. While only CDEs may apply for an NMTC allocation, CDEs or organizations with a pending CDE certification application are eligible to apply for an NMTC allocation.

Organizations may submit CDE Certification Applications at any time, except when specific deadlines apply to an open application period for the New Markets Tax Credit Program (”NMTC Program”). Entities designated as a Specialized Small Business Investment Company (SSBIC) by the Small Business Administration automatically qualify as CDEs.

A primary portion of the application determines whether an area served by the development is low-income, or underserved. Basic eligibility requires project development in a census tract with income at or lower than 80 percent area median income or poverty to be greater than 20 percent.

The application must demonstrate that the applicant meets each of the following requirements to become certified:

• *At the time of application, the organization is a legal entity;
• *The organization has a primary mission of serving low-income communities (LICs); and
• *The organization maintains accountability to its targeted LICs.

Once a certified CDE is awarded an allocation of NMTCs, it may offer these NMTCs for sale to investors.

An Example of How the Tax Credit Works

*The CDFI Fund awards a tax credit allocation of $1 million to a CDE.

*The CDE offers the tax credit to a single investor in exchange for a $1 million equity investment.

*This generates a $50,000 credit annually for the first three years and a $60,000 credit annually for the final four years. The total credit value over 7 years is $390,000.

Let’s Work Together to Develop our Communities

If you want to learn more about NMTCs, contact Savage & Associates at 215.880.9441 in Philadelphia, or 202.817.3941 in Washington D.C. to arrange a consultation. Dionne Savage can assist you to gain access to the benefits provided by the New Markets Tax Credits, Low-Income Housing Tax Credits, C-PACE, Historic Tax Credits, and other vital economic development tools that benefit local communities throughout the United States. Visit our website at Savage & Associates 24 hours a day, seven days a week for more information.

The New Markets Tax Credits Program (“NMTC Program”) is an advantageous tool for nonprofit organizations. The NMTC Program provides benefits to nonprofits consistent with their exempt function. The NMTC may provide subsidy or gap financing to tax-exempt organizations that engage in real estate development, business operations, or charitable activities in qualified census tracts.

Nonprofit and other charitable organizations have several options for participating in the NMTC Program. The first option is the tax-exempt entity that acts as a QALICB that is the entity that participates in the development, business, or charitable operations that occur in the low-income community (“LIC”). Another option is as a for-profit organization that is a subsidiary of a nonprofit organization. A tax-exempt organization like a charity often will create a supporting organization under § 509(a)(3) to participate in the NMTC transaction.

A third option is a tax-exempt organization that acts as a leverage lender in an NMTC transaction. The leverage lender provides debt financing that, when combined with an investors’ equity financing, allows investors to increase the amount of tax credits it receives in exchange for the equity investment. As a leveraged lender, the nonprofit must set up a procedure that allows it to assume control if problems develop at the project/QALICB level and funds are redirected to the CDE.

A CDE that is awarded an NMTC allocation must ensure that it complies with the NMTC program at all times. It must strictly adhere to the allocation agreement it enters into with the CDFI Fund. However, as a leverage lender, the nonprofit has little control over the operations of the community development entity (“CDE”) or qualified active low-income community business (“QALICB”) during the seven years that the investor receives benefits from the tax credits.

A charitable organization acting as the leverage lender must also consider other issues in this role. First, the tax-exempt organization must ensure that the funds invested in the CDE are applied consistently with the leverage lender’s charitable purpose and community benefit. One way to address this issue is by obtaining an opinion of counsel delivered at the transaction’s initial closing. The opinion must conform to § 170(c) and conclude that the funds invested in the CDE will be used consistently with the nonprofit’s charitable purpose.

Examples of QALICBs

• *An operating business such as a grocer, manufacturer, or retailer located in a LIC.
• *A business that develops or rehabilitates retail, commercial, industrial, and mixed‐use real estate projects in a LIC.
• *A business that develops or rehabilitates community facilities, such as healthcare facilities or schools, in a LIC.
• *A business that develops or rehabilitates marketed housing units located in a LIC.

Generally, a QALICB includes any corporation, including a nonprofit corporation, partnership, or limited liability company (“LLC”) that meets the following requirements for any tax year:

(1) 50 percent or more of the organization’s total gross income originates from the activities of a qualified business within any LIC,

(2) at least 40 percent of the organization’s tangible property, whether owned or leased, is used in a LIC,

(3) at least 40 percent of the services performed by the organization’s employees are performed in a LIC, and

(4) less than 5 percent of the average of the aggregate unadjusted bases of the property of the organization is attributable to either nonqualified financial property or collectibles, other than collectibles held primarily for sale to customers in the ordinary course of the business.

Let’s Work Together to Develop our Communities

If you want to learn more about NMTCs, contact Savage & Associates at 215.880.9441 in Philadelphia, or 202.817.3941 in Washington D.C. to arrange a consultation. Dionne Savage can assist you to gain access to the benefits provided by the New Markets Tax Credits, Low-Income Housing Tax Credits, C-PACE, Historic Tax Credits, and other vital economic development tools that benefit local communities throughout the United States. Visit our website at Savage & Associates 24 hours a day, seven days a week for more information.

The review of an NMTC application is an arduous, painstakingly meticulous process. Two sections of the application are not only evaluated but scored, by reviewers. The sections that are both reviewed and scored include the “Business Strategy” and “Community Outcomes” sections of each application. In a past blog, we discussed the “Business Strategy” section and how to complete it so that it and your NMTC Application is highly qualified to receive an NMTC award.

Community Outcomes has always been a significant section of the application since the inception of the program. Simply, it addresses the impact of the project on the community. Older applications included a section entitled “Community Impact.” This section requires more diligence to articulate what projects will be in the CDE’s pipeline.

In “Community Outcomes,” the CDFI Fund first looks to see that the applicant’s methods are clear and sound. In turn, the Fund looks at the metrics that support these methods. Metrics from a third party are more valuable than any that are derived from the applicant’s track record. Showing more than one level of impact is valuable. Some outcomes may not always be obvious to a CDE and its partners.

It’s important for CDEs to understand their projected outcomes and to articulate their track records for achieving similar effect projects. How a CDE’s track record compares with its projected outcomes is of critical importance. Some secondary impacts of the project may be overlooked. Unfortunately, any outcome that is difficult to quantify is often overlooked in this situation.

While job and real estate production tend to be among the most commonly measured outputs and outcomes of community and economic development programs, the following outcomes are also very relevant: (1) creation of amenities, services, and facilities; (2) support for small businesses and organizations; and (3) enhancement of local tax bases.

On a project-by-project basis, consideration is given to which, if any, of the following potential outputs or outcomes are associated with each early-year project: increased employment; developed real estate; improved environment; reduced neighborhood distress; increased community amenities, services, or facilities; new or expanded businesses; attraction of new investors; or provision of advantageous financing.

To receive a score in the highest range in each of the two scored sections for the CY 2020 application and receive the maximum Priority Points, an Applicant generally needed to demonstrate the following specific characteristics related to Community Outcomes:

1. Targeting Areas of Higher Distress (Question 24).

The Applicant must indicate that it will commit to providing at least 75% of its Qualified Low-Income Community Investments (QLICIs) in specified areas of severe distress and/or areas characterized by multiple indicators of distress. The Applicant also must show that its strategy for locating and prioritizing QLICIs in highly distressed communities is highly likely to be effective.

2. Community Development Outcomes (Question 25).

For each outcome selected in Question 25, the Applicant must show that its planned investments are likely to result in significant community outcomes that would clearly benefit Low-Income Persons and/or residents of Low-Income Communities (LICs). All the Applicant’s projected community outcomes must be quantified and supported by sound and clearly explained methods. The Applicant must demonstrate that it validated the reasonableness of the quantified projections with metrics obtained from or informed by third-party source(s), where required based on the outcomes selected. In addition, the Applicant must demonstrate a strong track record of achieving outcomes similar in type and quantity to the projected outcomes.

3. Tracking Community Outcomes (Question 25b).

The Applicant must describe a thorough track record and robust methodology for tracking all projected community outcomes.

4. Community Accountability and Involvement (Question 26).

The Applicant must demonstrate that proposed investments are supported by and beneficial to the communities it serves by outlining an effective process, including a significant role for LIC representatives on its Advisory and/or Governing Board, to ensure planned investments align with LIC priorities. The Applicant also must show an extensive track record of project-specific community engagement in past investment decisions and how its proposed investments will contribute to broader (local, regional, or state-wide) community or economic development strategies or plans.

5. Other Community Benefits (Question 27).

The Applicant must demonstrate a high likelihood that its proposed investments will result in additional non-NMTC related private investment in LICs beyond the initial NMTC investment, as supported by specific track record examples of financing catalytic projects that have spurred additional private investment.

Let’s Work Together to Develop our Communities

If you want to learn more about NMTCs, contact Savage & Associates at 215.880.9441 in Philadelphia, or 202.817.3941 in Washington D.C. to arrange a consultation. Dionne Savage can assist you to gain access to the benefits provided by the New Markets Tax Credits, Low-Income Housing Tax Credits, C-PACE, Historic Tax Credits, and other vital economic development tools that benefit local communities throughout the United States. Visit our website at Savage & Associates 24 hours a day, seven days a week for more information.

Part One of this blog discussed the New Markets Tax Credits (NMTC) Application Process. There are two phases to the NMTC Application process. Unfortunately, not all applications make it to the second phase. Our goal is to provide you with helpful tips to improve your NMTC application. An application must demonstrate a business strategy possessing certain characteristics when it is evaluated in Phase One to ensure that it receives a high enough score to qualify for continued evaluation in Phase Two. Today, we will discuss the characteristics that may enhance your NMTC application’s business strategy and hopefully merit an NMTC allocation.

There were 208 Allocation Applications made by various Community Development Entities (CDEs) throughout the country. The Community Development Financial Institutions Fund (CDFI Fund) received requests for $15.1 billion in NMTC allocations. One hundred CDEs, or 48.1% of the applicant pool, received allocation awards totaling $5 billion, which constituted approximately 33.1% of the total amount requested by applicants.

As would be expected, the financial health of the Applicant is of paramount importance. Factors such as the fee structure and the overall financial stability of the Applicant’s business entity are also characteristics of a potentially highly qualified application.

A good application will indicate:

1.  The Applicant possesses a track record of raising Qualified Equity Investments (QEIs).
2.  The Applicant’s past NMTC activities with prior Allocation Applications.
3. The Applicant’s proposed commitments to provide Qualified Low-Income Community Investments (QLICIs) in Non-Metropolitan Counties.
4. The Applicant’s  propensity to engage in innovative investments.

Applications are scored on a point system. An NMTC application will receive up to five additional points for demonstrating consistent service to disadvantaged businesses or communities. An application will also receive up to five additional points for committing to invest substantially all proceeds from QEIs. Applications that fail to achieve certain minimum scores in the Business Strategy section and Community Outcomes section of the application will receive no further consideration and will be deemed not to be highly qualified NMTC applications.

Because the Panel reviews information related to prior allocations in Phase Two, it is important to be prepared to explain any discrepancies that may cause questions or unfavorable conclusions related to former awards. It is also important to be prepared to provide any supplemental information requested by the CDFI Fund during the Phase One review process.

A highly ranked application will demonstrate that the Applicant has a high capacity to deploy and monitor NMTC investments. It will show a history of the Applicant’s business providing direct loans or equity investments. An exemplary application will exhibit the important relationships and consequential benefits for a Qualified Active Low-Income Community Business (QALICB). It will clearly show a healthy distribution of benefits among the investor, CDEs, and QALICBs.

A qualified application will prove that clear and meaningful community outcomes are likely to occur and benefit low-income persons or residents of low-income communities. And, that the Applicant’s investment decisions meet the needs of the communities they support and the economic development priorities of low-income communities they serve.

Further, a successful Applicant will unequivocally demonstrate that its products will be significantly more flexible than market standards. For each product, the Applicant will clearly describe the circumstances under which and how frequently the best rates and terms would be available and provide examples and comparisons to what is typically offered by the Applicant and offered by other financial institutions or investors in the Applicant’s service area. The Applicant will provide an example of how each proposed product will be used to finance a proposed  NMTC investment.

For most Applicants, the application will indicate debt with interest rates of at least 50% below-market; or debt that otherwise satisfies the relevant requirements. Applicants investing in other CDEs will demonstrate a high likelihood that they will pass favorable rates and terms along to the borrowers.

The Applicant should demonstrate that it possesses the ability to begin making NMTC investments promptly. A highly qualified application will demonstrate the Applicant’s ability to deploy QLICIs commensurate with the allocation request.

If the application proposes to fund a single or small number of projects, the Applicant must demonstrate a high likelihood that its proposed projects are feasible based on the ability to secure financing, that they will close as planned, that the risks to timely closing are limited, and clearly identified. The application should present this information in tandem with a superior risk mitigation plan.

Finally, related to demonstrating an effective business strategy, a highly qualified application will demonstrate, during each of the past five years, an excellent track record of directly providing products and services similar to those it would provide with the QEI proceeds. An application with a relatively limited record of providing QLICI-type activities could also achieve a high score if it has a very strong five-year or longer track record of non-QLICI like investments that are distinctly aligned with its current business strategy.

Let’s Work Together to Develop our Communities If you want to learn more about NMTCs, contact Savage & Associates at 215.880.9441 in Philadelphia, or 202.817.3941 in Washington D.C. to arrange a consultation. Dionne Savage can assist you to evaluate the benefits provided by the New Market Tax Credits, Low-Income Housing Tax Credits, C-PACE, Historic Tax Credits programs, and other vital economic development tools that benefit low-income communities throughout the United States. Visit our website at Savage & Associates 24 hours a day, seven days a week for more information.

Applying for New Markets Tax Credits (NMTC) allocation is complicated. At Savage & Associates, we strive to support this process for our clients. We can help you realize your dreams to help your local communities. The best way to accomplish this is to ensure that you submit a thorough NMTC  application. This first blog on this topic discusses the application process and several characteristics of a highly ranked NMTC application.

The Community Development Financial Institutions Fund (CDFI Fund) received 208 Allocation Applications from Community Development Entities (CDEs), requesting a total of just over $15 billion in allocations. The CDFI Fund made allocation awards totaling $5 billion, or about 33.1% of the total amount requested by applicants, to 100 CDEs which was almost half (48%) of the total applicant pool.

The Application Process – Phase One

There are two phases to the review of an NMTC application. Applicants receive points for demonstrating certain attributes. In Phase One, two reviewers independently evaluate and score the Business Strategy and Community Outcomes sections of the application.

An Applicant will receive additional points for demonstrating a track record of serving disadvantaged businesses or communities and committing to invest substantially all proceeds from Qualified Equity Investments (QEIs) in unrelated entities.

For an Applicant to receive further consideration in Phase Two of the application process, an application must achieve certain minimum scores in the Business Strategy section and Community Outcomes section of the NMTC application. Failure to receive the minimum score in each section will cause the application to be considered not highly qualified. Therefore, it will receive no further consideration.

At the end of Phase One, all applications that achieve minimum scores in the Business Strategy section and Community Outcomes section of the NMTC application and are considered highly qualified will be sent to the Panel for further review in Phase Two.

The Application Process – Phase Two

The Panel will also review information related to prior allocations, including the CDFI Fund’s Awards Management Information System. This data may also include audited financial statements and other supplemental information requested by the CDFI Fund.

In determining allocation award recommendations, Panelists in Phase Two consider the following list which is not all-inclusive:

• *Any issues noted by the Phase 1 reviewers.
• *The Applicant’s capacity to deploy and monitor NMTC investments.
• *The Applicant’s record of providing direct loans and/or equity investments.
• *The existence of notable relationships and their benefits (cost savings, lower fees) for Qualified Active Low-Income Community Business (QALICB) or unaffiliated end-users.
• *Whether clear and meaningful community outcomes are likely to occur and benefit Low-Income Persons and/or residents of Low-Income Communities, based on the Applicant’s pipeline projects, including the Applicant’s ability to track community outcomes.
• *The Applicant’s investment decisions aligning with community priorities.
• *The financial health and feecompensation structure of the Applicant.
• *The distribution of benefits among the investor, CDEs, and QALICBs.
• *The Applicant’s track record of raising QEIs. Panelists also considered the consistency of the Applicant’s past NMTC activities with prior Allocation Applications, if applicable, as well as the Applicant’s proposed commitments to provide Qualified Low-Income Community Investments (QLICIs) in Non-Metropolitan Counties and engage in innovative investments.

The CDFI Fund also reviews compliance, due diligence, eligibility, and regulatory matters including:

• *Whether an Applicant or its affiliates were previously awarded funds through other CDFI Fund programs and maintained compliance with the  award agreement.
• *Whether prior-year Allocatees successfully issued the minimum requisite QEIs and made the minimum requisite QLICIs from prior NMTC Allocations as specified in the Notice of Allocation Availability (NOAA).
• *Whether prior-year Allocatees were compliant with the requirements of past Allocation Agreements.
• *For regulated financial institutions, information from the Applicant’s primary federal regulator. 
• *Information related to the Assurances and Certifications section of the application.

Next, as provided for in the NOAA, the NMTC Program staff reviews the initial allocation determinations to ensure that:

(i) the proportion of Allocatees that are Rural Community Development Entities (Rural CDEs) was, at a minimum, equal to the proportion of highly qualified Applicants that were Rural CDEs; and

(ii) at least 20% of all QLICIs made by Allocatees under the 2020 allocation round would be invested in Non-Metropolitan Counties, based upon commitments made in their applications.

In our next blog, Part Two, we will examine the business strategy characteristics of a highly qualified NMTC application.

Let’s Work Together to Develop our Communities

If you want to learn more about NMTCs, contact Savage & Associates at 215.880.9441 in Philadelphia, or 202.817.3941 in Washington D.C. to arrange a consultation. Dionne Savage can assist you to gain access to the benefits provided by the New Markets Tax Credits, Low-Income Housing Tax Credits, C-PACE, Historic Tax Credits, and other vital economic development tools that benefit local communities throughout the United States. Visit our website at Savage & Associates 24 hours a day, seven days a week for more information.