What Role Does the Comprehensive Investment Plan Play in a CDE’s NMTC Application?

What Role Does the Comprehensive Investment Plan Play in a CDE’s NMTC Application

According to the Guidance for the New Markets Tax Credits (NMTC) program found at 66 Fed. Reg. 21846 (May 1, 2001), the comprehensive investment plan (CIP) is a document that a community development entity (CDE) must include in its application for an allocation of NMTCs. This plan provides historical information and, at a minimum, a five-year investment strategy, with details about the following issues:

  1. The applicant’s track record in making investments and promoting community development;
  2. The applicant’s financial and operational capacity, including its ability to track NMTC investment proceeds;
  3. The capacity, skills, and experience of its management team;
  4. An analysis of its target market;
  5. Its plan for raising capital with an NMTC allocation; and
  6. Its strategy for using the proceeds from such an allocation, including its financial and community development underwriting criteria.

The CIP supports an applicant’s eligibility for the NMTC program in various ways. For instance, the CIP analyzes the applicant’s target market. Under NMTC program guidelines, the target market of any NMTC investment must involve low-income communities (LICs). LICs are census tracts that have any of the following characteristics:

  1. A poverty rate of at least 20%;
  2. A median family income that does not exceed 80% of the area median family income;
  3. A median family income does not exceed 85% of the area median family income provided the census tract is located in high migration rural county; or
  4. A census tract has a population of less than 2,000, is contained within a Federally designated Empowerment Zone, and is contiguous to at least one other LIC.

NMTC investments may also serve other targeted populations, not in LICs, who are low-income. These persons have a family income of no greater than 80% of the applicable area median family income to the extent that the project is located in a census tract with a median family income at or below 120% of the median family income.

Furthermore, only CDEs may apply for NMTCs. In becoming CDEs, these organizations must demonstrate that they have a primary mission of serving or providing investment capital for low-income communities or people. They also must show that they maintain accountability to low-income communities through representation on the organization’s Governing Board or Advisory Board. These characteristics are some of the same characteristics that CDEs must describe in their CIP regarding their track record in making investments and promoting community development.

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Savage & Associates is an economic development law firm that provides clients with the legal and business insights to grow, revitalize, and build their communities. We use individualized strategies for our clients, ranging from large public companies to burgeoning entrepreneurs, to determine the best strategy for achieving their goals.

We are experienced in using New Markets Tax Credits, Low-Income Housing Tax Credits, C-PACE, Historic Tax Credits, and other investment options to help developers, investors, nonprofit organizations, and entrepreneurs change their communities. Our unique qualifications allow us to devise unique plans to carry out your objectives and work toward improving your communities. You can get started today by contacting our offices at 215.880.9441 in Philadelphia or 202.817.3941 in Washington, D.C. Set up a session with us to discuss your ideas and learn more about potential opportunities available to you. You can also find Savage & Associates online 24 hours a day, seven days a week, for more information about our services.

Benefits of NMTC Financing Over Traditional Financing

Benefits of NMTC Financing Over Traditional Financing

The New Markets Tax Credit (NMTC) program offers financing for projects for which traditional financing often is not an option. Generally, NMTC financing offers more flexible and creative terms. In contrast, traditional financing is limited to strict parameters and structures that may not meet the needs of the investors in these projects.

Investors Benefit from Tax Credits Over Seven Years

The biggest benefit for investors in NMTC programs is that they can claim tax credits against their federal tax obligations. The investors’ allotted tax credits equal 39% of the NMTC project over seven years. Traditional investments in such projects do not allow investors to claim these tax credits.

NMTCs Result in Investments in Low-Income Communities

NMTCs only are available for investments in qualifying low-income communities. In many cases, lenders and investors are wary of investing in projects located in these communities due to the level of risk involved. However, the benefits of the NMTC program outweigh the risks for investors and lenders.

NMTC Loans Have More Flexible Terms

The tax credits available due to the NMTC program provide a subsidy that can significantly reduce the interest rate for business loans or increase the business owner’s equity in the project. NMTC loans to these qualifying businesses often have more flexible terms than conventional loans, including decreased origination fees, longer interest-only payment periods, increased loan-to-value (LTV) ratios, decreased debt coverage ratios (DCR), and lengthier amortization periods.

NMTCs Can Combine with Other Financing Sources

Unlike many types of traditional financing, NMTCs can combine with many other sources of financing to fill in financing gaps where needed. As a result, investors have successfully used NMTCs in addition to historic rehabilitation tax credits, state NMTCs, and USDA loan programs, among others, to finance projects.

NMTCs Can Benefit Lenders

Using NMTCs, lenders can earn rates at or near market rates. They also can participate in transactions that would be unfeasible without NMTCs. Furthermore, lenders can help meet their Community Reinvestment Act (CRA) requirements by investing in CDEs for the purposes of the NMTC program.

We Can Work Together to Develop Communities

Savage & Associates is an economic development law firm providing sophisticated legal and business advice to clients interested in making significant changes in their communities. We advise developers, investors, nonprofit organizations, entrepreneurs, and anyone looking to effectuate change.

Contact our offices by calling 215.880.9441 in Philadelphia or 202.817.3941 in Washington, D.C., to discuss your ideas. You can also find Savage & Associates online 24 hours a day, seven days a week, to get more information about the innovative financial tools 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.

Using NMTCs to Build Affordable Housing

Using NMTCs to Build Affordable Housing

A recent Washington Post article chronicles how a St. Lous, Missouri couple has partnered with the local chapter of Habitat for Humanity to obtain $18.3 million in New Markets Tax Credits (NMTCs) to build 103 affordable homes across the city. Furthermore, they have used their innovative model to guide nonprofit community development entities (CDEs) in over 30 cities to use almost $500 million in tax credit investments to build over 4,200 affordable homes.

For instance, in Atlanta, Georgia, the use of the couple’s model resulted in $20 million in NMTCs used to renovate 133 homes. In Santa Fe, New Mexico, advocates used NMTCs to turn a blighted mobile home park into 40 homes and 13 condominiums. In addition, the city built 26 homes in Pittsburgh, Pennsylvania, using the NMTC program.

As explained in the article, the NMTC program attracts investors to distressed communities by offering them a 39 percent tax break over seven years. In addition, the CDEs use their investments to make housing affordable by offering down-payment assistance to qualified buyers or a second deferred loan to be paid off only when buyers sell the home. These techniques can result in savings ranging from $30,000 to $100,000 per home, depending on the neighborhood.

Although CDEs doubted that the highly-regulated NMTC program was usable to produce affordable housing, this couple has proved them wrong. They have created a model that others can easily replicate by developing model templates that any nonprofit can use to navigate the NMTC program process from beginning to end. The couple also points out that despite their success, the Community Development Financial Institutions Fund (CDFI) does not actively promote the NMTC program for affordable housing. Part of the scoring matrix for NMTC proposals also depends on a history of past success; as a result, organizations may be reluctant to embark upon a new approach to the NMTC program.

Affordable housing needs are on the rise. The National Low-Income Housing Coalition estimates it would take 6.8 million more rental units to house all low-income families adequately. Moreover, according to a 2021 study by the Urban Institute and Moody’s Analytics, there is less housing for rent and sale than there has been over the last 30 years. As a result, homeownership is becoming farther and farther out of reach, particularly for people of color.

Most federal support for affordable housing comes through the Low-Income Housing Tax Credit (LIHTC). However, only a small portion of those tax credits awarded went toward housing.  

We Can Work Together to Develop Communities

Savage & Associates is an economic development law firm providing sophisticated legal and business advice to clients interested in making significant changes in their communities. We advise developers, investors, nonprofit organizations, entrepreneurs, and anyone looking to effectuate change. Contact our offices by calling 215.880.9441 in Philadelphia or 202.817.3941 in Washington D.C. to discuss your ideas. You can also find Savage & Associates online 24 hours a day, seven days a week, to get more information about the innovative financial tools 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.

CDEs and State Tax Issues

CDEs and State Tax Issues

Under the New Markets Tax Credit (NMTC) program, Community Development Entities (CDEs) make qualified low-income community investments (QLICIs) into qualified active low-income community businesses (QALICBs). However, if a CDE makes a QLICI into a QALICB outside its commercial domicile, or the principal state in which it conducts business, it can face several state tax issues.

Nexus for State Tax Purposes

Nexus is the necessary connection between a state and a taxpayer that allows the state to impose a tax obligation on the taxpayer. Historically, nexus was dependent on physical presence in the state, such as the presence of a taxpayer’s office and employees in the state. More recently, nexus has more to do with economic than physical presence. Under this approach, a nexus may exist if a taxpayer has an economic presence in a state, even if the taxpayer has no physical presence. The move to economic rather than physical presence to establish nexus increases the probability that a CDE may need to file a state tax return in a state other than the one of its commercial domicile.

The definition of “economic presence” varies widely by state. For example, in some states, a certain dollar amount is necessary to trigger economic presence. Still, in other states, any amount of economic activity in the state is sufficient to establish nexus. In addition, some states have adopted multi-factor presence thresholds, which establish nexus based on certain quantitative measures, such as certain levels of property, payroll, or sales receipts within the state.

Factors that a CDE may wish to consider in determining whether it has nexus with a state based on economic presence may include:

  • Whether the QLICI in the form of a loan made to the QALICB is secured;
  • Whether the security is real or tangible personal property;
  • Where the collateral is located;
  • The QALICB’s geographical market; and
  • If the QLICI is in the form of equity investment into a QALICB, where the QALICB has nexus and filing requirements.

Apportionment for State Tax Purposes

After establishing nexus and state tax filing requirements, CDEs must determine apportionment for state tax purposes. States most commonly use cost-of-performance or market-based sourcing approaches. However, some states have special apportionment rules for financial institutions; although CDEs may not necessarily be financial institutions in a traditional sense, some state laws may still define them as financial institutions based on their lending activities for apportionment.

Under the cost-of-performance sourcing approach, a taxpayer assigns receipts to the state in which it incurred the costs associated with the performance of that service. Therefore, in the case of a loan that a CDE made to a QALICB, the CDE would source the income to the state where the activities related to the negotiation, approval, and administration of the loan occurred. However, the cost-of-performance sourcing approach has become less popular recently for the same reason as nexus based on physical presence. States want to capture tax revenue from businesses that have an economic presence but do not necessarily have a physical location or employees in their states.

On the other hand, under the market-based sourcing approach, a taxpayer assigns receipts to the state where the customer benefited from its services. For example, if a CDE makes a loan to a QALICB, it will source the income to the state where the QALICB’s geographic market is located. Along with market-based sourcing, these states also are more likely to transition to single sales factor apportionment or apportionment based solely on sales receipts within the state in relation to total sales receipts. These states tend to reject apportionment based on certain levels of the traditional three factors of property, payroll, and sales receipts.

Complexities of Multi-State Filing Requirements

Since states have varying approaches to nexus and apportionment, CDEs may find themselves in situations where some income is not properly apportioned to any state or where some income is apportioned to more than one state, which can result in double taxation. These situations can lead to more complex determinations to determine the correct methods for claiming income on various state tax returns. Furthermore, as states’ filing requirements change over time, CDEs should review those requirements annually to determine if any changes have occurred that affect them.

Call Savage & Associates Today

If you want more information about NMTCS and similar opportunities available to you, call our offices at 215.880.9441 in Philadelphia or 202.817.3941 in Washington D.C. and schedule a time to speak with us today. You also can find Savage & Associates online 24 hours a day, seven days a week, to learn more about our extensive range of services. Dionne Savage is here to help you access the benefits of economic development tools such as New Markets Tax Credits, Low-Income Housing Tax Credits, C-PACE, and Historic Tax Credits. These programs can give you the resources to revitalize and build up communities across the United States. With our legal advice and your ideas, we can work to achieve your dreams for your community.

Requirements for Targeted Populations Under the NMTC Program

A foundational requirement of the New Markets Tax Credit (NMTC) program is that Community Development Entities (CDEs) use NMTC allocations to serve eligible Low-Income Communities (LICs). LICs can fall within any of the following three categories:

  • High Out-Migration Rural County Census Tracts
  • Low-Population / Empowerment Zone (EZ) Census Tracts
  • Targeted Populations

The first two categories are based solely on geographical location. However, the third category, Targeted Populations, is based not on geographical location but income and access to loans and equity. More specifically, Targeted Populations consist of individuals, or an identifiable group of individuals, including an Indian tribe, who either are low-income persons or otherwise lack adequate access to loans or equity investments.

Categories of Eligible Targeted Populations

Under the NMTC program, there are two categories of eligible targeted populations, as follows:

  • Low-Income Targeted Populations (LITPs) – LITPS are persons or groups of persons who are low-income, which means having an income, adjusted for family size, of no more than:
    • 80% of the area median family income for metro areas; and
    • The greater of 80% of the area median family income or 80% of the statewide non-metro area median family income for non-metro areas
  • GO Zone Targeted Populations (GZTP) – GZTPs are persons or groups of persons who otherwise lack adequate access to loans or equity investment and are displaced from their principal residences and/or lost their principal source of employment as a result of Hurricane Katrina. To qualify under a GZTP, an individual’s principal residence or principal source of employment must have been located in a population census tract within the GO Zone that contains one or more areas designated by FEMA as flooded, having sustained extensive damage, or having sustained catastrophic damage as a result of Hurricane Katrina.

Requirements for Businesses Serving Targeted Populations

IRS guidance outlines how CDEs can use NMTCs to serve Targeted Populations and thus qualify as Qualified Active Low-Income Community Businesses (QALICBs). Generally, the entity can satisfy the requirements if:

  • at least 50% of its total gross income for any taxable year is derived from sales, rentals, services, or other transactions with members of the Targeted Population; or
  • at least 40% of its employees are members of the Targeted Population; or
  • members of the Targeted Population own at least 50% of the entity.

IRS guidance also provides for certain other limitations concerning entities that serve Targeted Populations, such as the following:

  • LITPs – The QALICB must generally be located in a census tract where the median family income does not exceed 120% of the applicable area median family income. However, exceptions are provided for low-population census tracts in non-metropolitan areas and low-population census tracts zoned for commercial or industrial use.
  • GZTPs – Only those CDEs with a significant mission of recovery and redevelopment in the GO Zone that received a special allocation of NMTCs pursuant to the GO Zone Act of 2005 may serve this population. Additionally:
  • The QALICB must be located in a census tract within the GO Zone that contains one or more areas designated by FEMA as flooded, having sustained extensive damage, or having sustained catastrophic damage as a result of Hurricane Katrina;
    • The QALICB must generally be located in a census tract for which the median family income does not exceed 200% of the applicable area median family income. However, exceptions are provided for low-population census tracts in non-metropolitan areas and low-population census tracts zoned for commercial or industrial use.

We Can Work Together to Develop Communities

Savage & Associates is an economic development law firm providing sophisticated legal and business advice to 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. You can also find Savage & Associates online 24 hours a day, seven days a week, to get more information about the innovative financial tools 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.

QLICI of the Year Award Winners Highlight Diversity of NMTC Projects

The Novogradac Journal of Tax Credits has announced the 2022 winners of its Community Development Qualified Low-Income Community Investments (QLICI) of the Year awards. These awards honor community development entities (CDEs) who strive for excellence in community development. CDEs may qualify for their QLICIs in properties in four areas: metro, non-metro, operating business, and real estate.

Metro QLICI

Four CDES, U.S. Bancorp Community Development Entity (USBCDE), Lendistry, Building America CDE Inc., and New Markets Support Co. (LISC LA), dedicated a combined $30 million in New Markets Tax Credits (NMTCs) to support Destination Crenshaw in Los Angeles, California. Destination Crenshaw is located on a 1.3-mile stretch of Crenshaw Avenue and consists of an outdoor art museum and culture commerce corridor. Destination Crenshaw aims to boost economic development, job creation, and environmental healing in the community while simultaneously celebrating Black art and culture.

Destination Crenshaw will contain DC Thrive, a business resiliency program for minority-owned legacy businesses, and Sankofa Park, a 40,000-square-foot area with green space and art installations. Upon its completion, Destination Crenshaw will sustain 30 local Black and minority-owned businesses and nonprofits, create jobs, showcase local artists and microbusinesses, and serve students.

Nonmetro QLICI

USBDCE used $3.3 million in NMTCs to help finance the acquisition of Ogaakaaning Wild Rice at the Red Lake Nation of Chippewa in Bemidji, Minnesota, an operating business for the production and distribution of northern Minnesota and Canadian wild rice. The NMTCs funded a loan to the Travois New Markets, which then advanced a QLICI loan to Ogaakaaning to provide almost $1 million in working capital. The funding will also help purchase additional equipment and inventory for the business and provide financing to multiple qualified low-income community businesses owned or led by Native American individuals or tribes.

Operating Business QLICI

The Rose Urban Green Fund and DV Community Investment allocated NMTCs to allow Coffee Café Bakery in Atlanta, Georgia, to create more than 100 jobs. Ninety-eight percent of those jobs will go to low-income individuals or residents of low-income communities. Using these funds, four minority business owners will renovate and outfit a warehouse into a small central baking facility to create a business in an area of the city that has poverty and unemployment rates well above the national average. The finished bakery will be able to produce an estimated 31 million baked goods each year and distribute those goods within a 100-mile radius.

Real Estate QLICI

Cinnaire, Indianapolis Redevelopment CDE, and PNC Community Partners, Inc. allocated $15.5 million in NMTCs to develop the Ivy Tech Automotive Technology Center, a new facility for Ivy Tech’s Automotive Technology Program in Indianapolis, Indiana. The 59,000 square-foot educational facility is expected to increase enrollment from 300 to 600 students, all of whom will have access to a paid cooperative education opportunity with 100% job placement at Toyota and General Motors. Graduates can expect to earn an estimated salary of $50,000 per year. In addition, the Center will help support and develop the Lafayette Square Area, which the city is revitalizing.

Call Savage & Associates Today

If you want more information about NMTCS and similar opportunities available to you, call our offices at 215.880.9441 in Philadelphia or 202.817.3941 in Washington D.C. and schedule a time to speak with us today. You also can find Savage & Associates online 24 hours a day, seven days a week, to learn more about our extensive range of services. Dionne Savage is here to help you access the benefits of economic development tools such as New Markets Tax Credits, Low-Income Housing Tax Credits, C-PACE, and Historic Tax Credits. These programs can give you the resources to revitalize and build up communities across the United States. With our legal advice and your ideas, we can work to achieve your dreams for your community.