NMTC Equity Market Rebounds, Focuses on Racial Equity

Like many other businesses, markets, and sectors of the economy, the NMTC equity market took a pause during the COVID-19 pandemic. As a result, equity prices plummeted in 2020 but began to stabilize in 2021. Now, however, the market has rebounded, with NMTC equity pricing increasing almost to pre-pandemic levels, ranging between 70 and 80 cents per dollar of credit. This increase in equity market pricing has resulted in a more competitive landscape for investors, which, in turn, is good for the newly increased $5 billion in NMTC allocation awards. The previous annual allocation amount was capped at $3.5 billion.

However, the COVID-19 pandemic has had lingering effects on investment in NMTC projects. Supply chain issues and increased construction costs delay and decrease the projects that investments can provide. Nonetheless, the outlook is strong for NMTC equity pricing and investments over the next 12 to 18 months, which is highly beneficial to investors and the communities in which investments are made.

Part of the upturn in the market has come from an increased emphasis on investments focusing on racial equity. Investors see the NMTC program as a means of building wealth in communities of color. For example, U.S. Bank has launched “Access Commitment,” a program designed to redefine how it serves racially diverse customers and create more opportunities for diverse employees, particularly in the Black community.

Likewise, JPMorgan Chase had made a $30 billion commitment to close the racial wealth gap among Black, Hispanic, and Latino communities. The firm also has established a Racial Equity Initiative, which has provided $221 million in NTMC investments across 16 Black-owned or Black-led projects to assist with growth and inclusion efforts. JPMorgan Chase also focuses on projects in communities with greater income disparities, such as Chicago and Los Angeles.

Aside from racial equity investments, NMTC projects have grown in other investment types, including federally qualified health centers and other health care clinics, rural manufacturing, nonprofits to provide social services, and entities focused on food security and manufacturing.

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.

GAO Updates Policy Recommendations for NMTC Program

The Government Accountability Office (GAO) recently sent a letter to U.S. Treasury Secretary Janet Yellen with updates on policy recommendations. One of the policy recommendations addressed a 2014 recommendation concerning the New Markets Tax Credit (NMTC) program.

In its letter, the GAO stressed that the Treasury Department currently has 165 open recommendations, aside from those that involve the Internal Revenue Service (IRS). The GAO urged the Treasury Department to adopt its various recommendations and, in particular, its updated 22 priority recommendations. One of those priority recommendations involves establishing better controls and data to ensure the effectiveness of the NMTC program. This recommendation falls within the GAO’s priority area of tax law enforcement.

GAO’s 2014 Recommendation

In its 2014 recommendation, the GAO pointed out that the financial structures of NMTC-financed projects have become more complex and less transparent over time. As a result, the complexity of these projects may be overshadowing the rate of return for NMTC investors that are well above market rates. The Treasury Department lacks the controls to limit the risk of above-market rate returns.

The complexity of NMTC projects is due in part to the ability of these projects to involve multiple sources of local, state, and federal government funds in addition to NMTC program funds. According to a GAO survey of community development entities (CDEs), about 62% of NMTC projects received other federal, state, or local government assistance between 2010 and 2012. These figures raise concerns about duplicating funds by using multiple federal government sources for the same project. Again, the Treasury Department has no controls in place to limit the risk of unnecessary and duplicative federal spending.

Overall, the GAO found that the Treasury Department must collect additional data to avoid diluting the effects of the NMTC program. The data that Treasury currently collects is insufficient to truly analyze NMTC program benefits. For instance, Treasury is not collecting data on fees and other costs, such as higher interest rates. Furthermore, the data collected Treasury has collected about the equity remaining in businesses after the seven-year-credit period is unreliable. Treasury also has insufficient data on the failure rate of NMTC projects.

CDFI Response to GAO’s 2014 Recommendation

The GAO’s 2014 recommendation recommended that the Secretary of the Treasury issue guidance on how “funding or assistance from other government programs can be combined with the New Markets Tax Credit.” More specifically, the Treasury Department should explain how other government funds can be used to leverage the NMTC by including them in the qualified equity investment (QEI).

Community Development Financial Institutions (CDFI) Fund officials advised in February 2022 that they intend to solicit public comments on additional data they should collect from CDEs. The CDFI Fund would use the collected data to identify NMTC-financed properties that may have excessive public funding. By gathering this data, the CDFI Fund could produce an informed response to the GAO’s recommendation and ensure that low-income community projects are not receiving more government assistance than required for adequate financing.

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.

Comparing and Contrasting NMTC and Opportunity Zone Programs

The New Markets Tax Credit (NMTC) and the Qualified Opportunity Zone (OZ) programs are federal tax incentive programs that focus on promoting private capital investment in distressed areas throughout the country. Each of these programs aims to improve economic conditions in historically low-income areas. Nonetheless, there are important differences in these programs that may make them better options for some situations than others.

The New Market Tax Credit (NMTC) Program

Investors benefit from the NMTC program by applying the tax credit to their annual federal income taxes. In addition, they receive a direct tax credit for seven years following the investment, which results in a total tax credit of 39% on the amount invested.

Investment projects must meet certain criteria to participate in the NMTC program, as follows:

  • First, the investment project must be designated as NMTC-eligible within a qualified census tract. The more economically distressed the area is, the more likely the community development entity (CDE) will receive the tax credits.
  • Additionally, investors must obtain the tax credits through a certified CDE. Due to this stipulation, investors cannot directly apply for the tax credits.    

Furthermore, Congress must decide periodically to renew the NMTC, as it is not a permanent part of the Internal Revenue Code. As a result, investors cannot necessarily depend on the NMTC program for the long term, as it could expire at some point. Currently, the program is set to expire at the end of 2025.

The Opportunity Zone (OZ) Program

Unlike the NMTC Program, the OZ program is a permanent part of the Internal Revenue Code, so it is not subject to Congressional approval. Therefore, investors can rely on the program for federal tax incentives in the future.

The OZ program provides various tax benefits, including:

  • Temporary deferral of previously earned capital gains by placing assets in Opportunity Funds, or corporations or partnerships organized to invest in Opportunity Zone property
  • Capital gains placed in an Opportunity Fund for at least five years increase the basis in the investor’s original investment by 10%, or if for seven years, by 15%
  • After ten years, any additional appreciation on the initial investment is tax-free

One eligibility criterion that differs significantly from the NMTC program is that only investors with a net worth of $1 million or more who meet certain guidelines can participate. The buy-in for OZ program participation is also high, typically requiring a minimum $100,000 investment.

Investors also may encounter certain risks with the OZ program that do not necessarily exist with the NMTC program. The OZ program model is still relatively untested, as it only launched in 2017 and has no established track record.

Let’s Get Together to Talk About Your Next Deal

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 the opportunities that may be available to you. You can also find Savage & Associates online 24 hours a day, seven days a week, for more information about our services.

CDFI Launches an NMTC Program Native Initiative

As promised in 2021, the Community Development Financial Institutions (CDFI) Fund has launched a New Markets Tax Credit (NMTC) Program Native Initiative. This initiative aims to spur greater investment in Federal Indian Reservations, Off-Reservation Trust Lands, Hawaiian Home Lands, and Alaska Native Village Statistical Areas.

These NMTC Native Areas historically have lacked representation in the NMTC program. For instance, in the latest round of NMTC funding, only one native entity received NMTC funding. The NMTC program also has historically favored investment in urban rather than rural environments, which leads to disadvantages for the inherently rural settings of most Indian areas.  

How Tribes and Tribal Organizations Can Participate

Tribes and organizations that serve tribal interests can participate in and benefit from the NMTC Program Native Initiative in two different ways:

  • Tribes and tribal organizations can apply to become certified as qualified community development entities (CDEs), seek NMTC allocation, and make loans to projects in NMTC Native Areas. There already are 69 Native CDFIs that automatically could qualify for CDE status. The NMTC Program Native Initiative looks to facilitate the application and allocation process for native CDFIs and other tribal organization applicants.
  • Organizations that serve tribal interests can seek NMTC financing as qualified active low-income community business (QALICB) borrowers. QALICBs then use the NMTC loan funds for real estate development projects in NMTC Native Areas.

CDFI Fund Selects Contractor to Conduct NMTC Program Native Initiative  

The CDFI Fund recognizes that barriers exist for tribes and organizations promoting tribal interests participating in the NMTC program. As a result, the CDFI Fund has contracted with Big Water Consulting, LLC (“Big Water”) to conduct the work of the NMTC Program Native Initiative. Big Water will produce a survey of historic NMTC lending practices in NMTC Native Areas, create a self-assessment guide for native-owned or controlled entities, and conduct technical workshops for those entities that wish to participate in the program.

NMTC and the NACA Program

Many NMTC participants also participate in other tax credit programs and funding sources, such as the federal historic rehabilitation tax credit, the Low-Income Housing Tax Credit (LIHTC), the Opportunity Zone Program, and state tax credit programs. Native CDFIs can participate in the Native American CDFI Assistance Program (NACA Program), which offers financial assistance and technical assistance grants to Native CDFIs. These entities can use NACA funds for projects that also qualify for NMTCs.  

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.

Bank Regulatory Agencies Issue Joint Proposal to Modernize Community Reinvestment Act Regulations

The three major bank regulatory agencies include the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Fed), and the Federal Deposit Insurance Corporation (FDIC). Recently, these three agencies jointly issued a notice of proposed rulemaking that would strengthen and update regulations concerning the Community Reinvestment Act (CRA). For instance, the CRA would contain modernized definitions to reflect the current community’s reliance on internet-based and mobile banking.

The purpose of the CRA is to encourage covered banks to help meet the credit needs of their local communities, including low-income and moderate-income neighborhoods. The proposed revisions would be the first significant changes to the CRA in over 25 years; the last substantial revision to the CRA occurred in 1995. The OCC issued its notice of proposed rulemaking to update the CRA in June 2020, but the agency rescinded that rule in December 2021 in favor of issuing a joint rule.

The CRA and Community Development Activities

The rule will clarify eligible CRA activities focused on low and moderate-income, rural, and underserved communities, including affordable housing. The agencies propose using a “primary purpose” standard in determining the eligibility of these activities. Measuring “primary purpose” involves consideration of:

  • Whether a majority of the dollars, applicable beneficiaries, or housing units of the activity are identifiable to one or more of the defined community development activities, or
  • Where the measurable portion of any benefit bestowed or dollars applied to the community development purpose is less than most of the entire activity’s benefits or dollar value, the activity may still have a valid primary purpose if:
    • the express, bona fide intent of the activity, as stated, for example, in a prospectus, loan proposal, or community action plan, is primarily one or more of the enumerated community development purposes;
    • the activity is specifically structured to achieve the expressed community development purpose; and
    • the activity accomplishes, or is reasonably certain to accomplish, the community development purpose involved

The rule also would give “pro-rata” consideration for certain affordable housing activities. More specifically, if the affordable housing is developed in conjunction with Federal, state, local, or tribal government programs that have a stated purpose or bona fide intent to promote affordable housing, it would get some CRA credit, even if fewer than most of the beneficiaries of the housing were low or moderate-income individuals. In this situation, the activity would have a primary purpose of affordable housing only for the percentage of total housing units in the development that is affordable. However, in the case of low-income housing tax credits (LIHTCs), a bank would receive CRA credit for the entire amount of the loan or investment in the LIHTC-financed project, no matter the number of units that are affordable.

The revised CRA also would revise the existing four categories of community development activities to include eleven categories that establish specific eligibility standards for a broad range of community development activities. These revised definitions focus specifically on activities responsive to community needs, especially those of low and moderate-income individuals and communities, as well as small businesses and farms. The new categories include:

  • Affordable housing, including:
    • Affordable rental housing developed in conjunction with federal, state, and local government programs,
    • Multifamily rental housing with affordable rents,
    • Activities supporting affordable low- or moderate-income homeownership, and
    • Purchases of mortgage-backed securities that finance affordable housing.
  • Economic development that supports small businesses and small farms (mostly evaluated under the retail lending test);
  • Community supportive services;
  • Revitalization activities (with significant changes from current regulations);
  • Essential community facilities;
  • Essential community infrastructure;
  • Recovery activities in designated disaster areas;
  • Disaster preparedness and climate resiliency activities;
  • Activities with minority depository institutionswomen’s depository institutionslow-income credit unions, and Treasury-certified community development financial institutions;
  • Financial literacy; and  
  • Qualifying activities in Native land areas

Review of Community Development Activities

If the rule is finalized, the revised CRA regulations will provide a metrics-based approach to CRA evaluation of retail lending and community development financing, including public benchmarks. The proposal also better delineates facility-based assessment areas for banks. As a result, banks would receive CRA credit for any qualified community development activities, regardless of location, but with an emphasis on activities within the facility-based assessment areas.

The agencies proposed an evaluation framework that would consider bank size and business model differences. Even within the bank size categories, banks would have the opportunity to further tailor their evaluation frameworks.

For example, a large bank’s current CRA examination score is based on a lending test (50%), an investment test (25%), and a services test (25%). Under the new joint proposed rule, that score would be based on the following criteria:

  • Retail lending test (45%)
  • Retail products and services test (15%)
  • Community development financing (investments and lending) test (30%)
  • Community development services test (10%)

Impact on LIHTC and NMTC Programs

The proposed assessment area changes would benefit the LIHTC program, especially for community development activities outside facility-based areas. These changes could lead to more widespread LIHTC use in terms of improved equity pricing in rural and other areas with less CRA demand. Although the NMTC program does not have the same geographic disparities as the LIHTC program, it would still benefit from the assessment area changes.

Separating the lending and investment considerations in the CRA evaluation process could affect the LIHTC and NMTC programs. For example, many large banks must reserve less capital for community development loans than for equity investment, which arguably could deter the banks from participating in these programs.

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.

Where Are the NMTC Projects Located?

The Urban Institute released a 2021 report entitled “Where Do New Markets Tax Credit Projects Go?” This report analyzes the census tracts where NMTC-funded projects are located to determine if the funds are being utilized to benefit the intended populations. Overall, the Urban Institute concluded that most NMTC project dollars go to the most disadvantaged neighborhoods throughout the United States.

Census Tract Location Requirements

Census tracts, or U.S. census-designated neighborhoods, must meet certain requirements to be eligible for investment via the NMTC program. Specifically, census tracts must lie within qualified low-income communities. About half of U.S. census tracts qualify by meeting at least one criterion under the NMTC definition of a low-income community.

Location of NMTC Projects by State, City, and County

According to the Urban Institute, most NMTC projects are concentrated in the Northeast, the Northwest, and some northern Midwestern and Southern states. The District of Columbia received the highest level of total project cost per person in eligible communities. In contrast, Puerto Rico received the lowest level of total project cost per person in eligible communities.

The 50 largest cities in the U.S. received 41% of the total NMTC investments and 33% of the projects, despite having only 20% of the eligible population. Baltimore was the city receiving the most NMTC investment in total project cost per eligible population. Larger counties receive the most NMTC investment in total project cost per eligible population, followed by smaller counties. Mid-size counties received the least NMTC investment.

Location of NMTC Projects by Neighborhood

Census tracts that receive NMTC-funded projects tend to be more economically distressed than those tracts that do not receive projects. For example, their poverty rate is 26% compared to the 19% poverty rate of the tracts that do not receive NMTC-funded projects or an average income of $41,000 instead of $50,000. Individuals living in census tracts with NMTC projects also were less likely to have college degrees, lower homeownership rates, lower median rents, and fewer home sales.

Neighborhoods with NMTC projects also tend to have more black residents and fewer white residents than neighborhoods without NMTC projects. These neighborhoods also tend to be in commercial areas with higher numbers of jobs available for which people from outside the neighborhood travel.  

Let’s Get Together to Talk About Your Next Deal

Savage & Associates is an economic development law firm designed to provide 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 the opportunities that may be available to you. You can also find Savage & Associates online 24 hours a day, seven days a week, for more information about our services.