Category: NMTCs

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.

The New Markets Tax Credit (NMTC) program offers investors an incentive to invest in “low-income communities” or LICs. Communities must meet specific primary and secondary eligibility requirements to qualify as LICs for NMTC program funding.

LIC: Primary Eligibility Requirements

A U.S. census-designated neighborhood or census tract must be located in a LIC that meets at least one of the following criteria:

• A poverty rate of at least 20%
• If within a metropolitan area, the median family income is no more than 80% of the statewide median income
• If within a metropolitan area, the median family income is no more than 80% of the greater of the statewide median income or the metropolitan area median income
• A population under 2,000 is contiguous to one or more low-income communities and is within an empowerment zone
• A “high-out migration rural county,” or a tract within a county with a net out-migration of at least 10% when compared to the last census to two decades before and not greater than 85% of the statewide median income
• Consists of a targeted population, or certain individuals or an identifiable group of individuals, including an Indian tribe, who are low-income persons or those who otherwise lack adequate access to loans or equity investments
• Consists of a “GO Zone Targeted Population,” or individuals, or an identifiable group of individuals, including an Indian tribe, who otherwise lack adequate access to loans or equity investments and that were displaced from their principal residences and/or principal source of employment as a result of Hurricane Katrina

LIC: Secondary Eligibility Requirements

The NMTC program also gives higher application scores to applicants whose investments cover areas with greater investment needs. These census tracts meet secondary eligibility requirements and the primary eligibility requirements for LICs. Applicants can receive these enhanced scores if more than 75% of their NMTCs are allocated to at least one of the following targets:

• “Severely distressed” tracts, or tracts with one of the following:
  • A poverty rate of at least 30%
  • An unemployment rate of at least 1.5 times the national average, or
  • Median family income that is at or below 60% of the statewide median family income (for nonmetropolitan-area projects) or the greater of the statewide or metro area median family income (for metropolitan area projects)
• Census tracts in a nonmetropolitan area that meet the regular eligibility criteria
• Projects that serve “targeted populations,” which are those that are:
  • 60% owned by low-income persons
  • At least 60% of employees are low-income persons, or
  • At least 60% of the qualified active low-income community business’s gross income comes from customers who are low-income persons

Other designated areas also can lead to higher scores for NMTC project applications, such as Small Business Administration HUB zones, brownfield sites, Indian reservations, Colonias areas, and State Enterprise Zone areas, to name a few.

Allow Savage & Associates to Help You Develop Your Vision

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.

The New Markets Tax Credit (NMTC) Coalition is a national membership coalition that advocates on behalf of the NMTC program. The NMTC Coalition issued its 2021 New Markets Tax Credit Progress Report, which details the types of projects that NMTCs funded in 2020. Overall, NMTC financing helped fund 272 projects in 48 states, the District of Columbia, and Puerto Rico in 2020. In addition, NMTC allocation provided $2.9 billion in funding to Community Development Entities (CDEs) to deliver $5.5 billion in project investment to low-income communities.

Types of Projects Financed with NMTCs

NMTC funding can be used to finance a wide range of projects. These projects can include:

Popularity of Project Types

While some projects have a single focus, many of the projects funded by NMTCs are multi-faceted. For instance, a project may create jobs and housing or education and childcare. Approximately 43% or 118 projects in 2020 incorporate multiple components and strategies for improving the quality of life for residents of distressed communities.

According to the NMTC Coalition Progress Report, manufacturing was the most popular type of project that NMTCs funded, consistent with past findings. Approximately 32% of the 2020 projects, or 87 individual projects, involved the funding of manufacturing. The next most popular projects that used NMTC funding in 2020 were as follows:

• Healthcare – 12.5% or 34 projects
• Nonprofit hubs and social services campuses – 12.5% or 34 projects
• Mixed-use – 9.5% or 26 projects

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 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.

President Biden recently released his proposed fiscal year (FY) 2023 budget, which includes provisions to make the New Markets Tax Credit (NMTC) program permanent. Currently, the NMTC program is in place through 2025 with $5 billion per year in allocation. Under the President’s proposal, the NMTC program would become permanent in 2026, with annual adjustments for inflation after 2026. The estimated costs of the NMTC proposal would be $5.46 billion from 2023 to 2032.

The proposed budget does not include an explicit request to allow the NMTC to offset alternative minimum tax (AMT) liability. However, the New Markets Tax Credit Extension Act (H.R. 1321/S. 456) and the September 2021 House Ways and Means version of the Build Back Better Act would allow this offset.

Additionally, the proposed budget includes an increase of $6.2 billion for the U.S. Department of Housing and Urban Development (HUD) over FY 2022, for $71.9 billion for FY 2023. Likewise, the proposed budget includes an increase of $25 million for the Community Development Financial Institutions (CDFI) Fund to $331 million for FY 2023.

The proposed budget contains a $7.9 billion low-income housing tax credit (LIHTC) proposal. This program would allow allocating agencies to give nongeographic selective basis boosts for bond-financed affordable housing properties if required to make them financially feasible. The 4% LIHTC pairing only would be available for new construction or substantial rehabilitation that adds new net units to the property. This proposal is modeled after the state discretionary basis boost proposal in the Affordable Housing Credit Improvement Act.  

Next Steps in the FY 2023 Budget Process

The typical next step in the budget process would be for Congress to consider an FY 2023 budget resolution. However, during an election year, Congress often delays budgetary proceedings so that vulnerable members do not need to vote on certain amendments to the budget. Bipartisan members of the Senate Appropriations Committee have vowed to work toward negotiating an FY 2023 discretionary budget amount to facilitate the drafting of the 12 yearly spending bills. However, whether they can reach a deal is uncertain.

As a result, it is unlikely that Congress will enact all 12 of the annual spending bills before FY 2023 starts on October 1, 2022. Instead, Congress will likely pass a continuing resolution to fund the government past September 30, 2022, into a post-election lame-duck session.

Call Savage & Associates Today

If you want to find out 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 the extensive range of services that we can offer you. 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 the dreams that you have for your community.

The Internal Revenue Code (IRC) generally requires entities involved in the transaction to meet certain criteria throughout the seven-year NMTC compliance period. The entities must meet these requirements for investors to successfully participate in the New Markets Tax Credits (NMTC) program and retain their tax credits.

However, the IRC has created an exception to this general rule called the “reasonable expectations test.” This test permits the entities to remain eligible for the NMTC program as long as they reasonably expect to continue to meet all requirements throughout the seven-year compliance period.

NMTC Entity Requirements

Section 45D of the IRC authorizes community development entities (CDEs) to designate equity contributions from investors as qualified equity investments (QEIs), thus making the investors eligible for NMTCs. The CDEs then must use the QEIs to make qualified active low-income community investments in (QLICIs) in qualified active low-income community businesses (QALICBs).

An entity must remain a QALICB during the seven-year NMTC compliance program. The eligibility requirements for a QALICB are as follows:

1. At least 50% of the total gross income of such entity is derived from the active conduct of a qualified business within any low-income community;
2. A substantial portion of the use of the tangible property of such entity (whether owned or leased) is within any low-income community;
3. A substantial portion of the services performed for such an entity by its employees are performed in any low-income community;
4. Less than 5% of the average of the aggregate unadjusted bases of the property of such entity is attributable to the collectibles (as defined in IRC §408 (m)(2)) other than collectibles that are held primarily for sale to customers in the ordinary course of such business; and
5. Less than 5% of the average of the aggregate unadjusted bases of the property of such entity (as defined in IRC §1397C(e)) is attributable to nonqualified financial property.

So, if the QALICB fails to meet any of these tests during the seven-year compliance period, it ceases to be a QALICB, and the NMTCs would be subject to recapture. However, under the reasonable expectations test, if the CED reasonably expects that the QALICB will remain a QALICB during the seven-year compliance period, it will be treated as a QALICB. This is the case even if it later fails one of the eligibility tests.

The Reasonable Expectations Test

Implementing the reasonable expectations test usually requires a two-step inquiry by the Internal Revenue Service (IRS):

The applicable standard typically is whether the CDE acted reasonably and in good faith in light of the overall facts and circumstances.

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.

Defining Recapture

The recapture of a tax credit occurs when you must pay back a tax credit to the government you have claimed in prior years because you are no longer eligible to claim the credit. For instance, you may have claimed a tax credit for a particular type of business investment, such as a New Markets Tax Credit (NMTC). However, a recapture event has occurred, which means that you no longer qualify for the tax credit. As a result, you must retroactively pay back the tax credit you already claimed on your taxes. Essentially, you’re paying the taxes that you would have owed and paid in the past had you not claimed the tax credit for the business investment or NMTC.

When NMTCs May Be Recaptured from Investors

NMTCS may be subject to recapture from investors during the seven-year NMTC compliance period under selected circumstances. The events that trigger recapture include the following:

Unlike other tax credits, if there is a recapture event during the seven-year NMTC compliance period, all NMTCs from previous years are subject to recapture and NMTCs from the year of recapture and the remainder of the seven years also are subject to recapture. In other words, 100% of the NMTCs are recaptured.

Total recapture means that the investor must repay the federal government the full amount of tax credits previously claimed by the investor, plus interest and penalties. This provision of the NMTC program creates a unique element of risk that investors must understand and account for as they structure their transactions. As a result, avoiding recapture is critical to avoid these unwanted consequences.

Allow Savage & Associates to Help You Develop Your Vision

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.