Those who support the NMTC program strongly believe that further guidance on certain regulatory issues, including modification of qualified low-income community investment (“QLICI”) loans, is necessary to both increase and sustain the effects of NMTCs on low-income communities. The COVID-19 pandemic has caused unprecedented change which has resulted in the necessity to modify QLICI agreements to correspond to and meet the challenges of such unexpected change.
The result of such additional guidance would make the NMTC program even more effective in providing much-needed economic growth in communities throughout America. In today’s blog, I elaborate more on these recommendations.
One recommended change is to Treas. Reg. §1.1001-3, with proponents suggesting the temporary suspension of this regulation as it applies to modifications of QLICIs during the calendar years 2020 and 2021 primarily because of the effects of the coronavirus pandemic. Also, those who work with the NMTC program believe that the IRS should issue further guidance on certain matters relevant to loan modifications.
Many industry participants and NMTC proponents believe that there is a key distinction between a significant modification under Treas. Reg. §1.1001-3 and an amount received under Treas. Reg. §1.45D-1(d)(2). The distinction is Treas. Reg. §1.45D-1(d)(2) is intended to refer to actual cash or property repayments of QLICI loans, while Treas. Reg. §1.1001-3 is intended to address deemed tax consequences when material terms of a loan are modified.
Therefore, it is further recommended that the IRS publish a notice that confirms that a significant modification to a QLICI loan does not constitute any “amounts received” related to repayment of a QLICI loan for purposes of Treas. Reg. §1.45D-1(d)(2) and, therefore, does not result in reinvestment. This suggestion applies to loans made to lessen a QALICB’s economic distress, which results in the deemed exchange of the original QLICI loan for a new debt instrument under Treas. Reg. §1.1001-3.
The result of such requested guidance would be that CDEs would have the ability to more quickly react and support borrowers when adverse economic conditions occur, such as a pandemic. This would allow CDEs to provide modifications to loan terms that effectively accommodate affected borrowers who have undergone severe changes in their economic conditions. In the absence of such guidance, CDEs must deal with two specific issues caused by the debt modification rules.
QALICBs rely on CDEs to provide loans and investments with fair below-market terms to facilitate maximum community growth and success. The modification of these loans may be required occasionally for a variety of reasons, including a “force majeure” such as a pandemic.
The first issue involves determining whether a realization event has occurred that requires the recognition of gain or loss by CDEs as lenders and QALICBs as borrowers due to a deemed exchange of the QLICI loans. The second issue involves determining whether a deemed exchange constitutes a reissuance of a QLICI loan that would require the CDE to retest the qualifications of the borrower’s business or reset the reasonable expectations of safe harbor.
CDEs may experience more concerns assisting QALICBs, as well as expend substantial time and money determining the extent of any relief that it may provide if a realization event is deemed to have occurred, or if a deemed reissuance of a QLICI loan requires retesting of a QALICB.
Treas. Reg. § 1.1001-1(a) states that a realization event occurs when property is exchanged for other property that differs materially in kind or extent. Any change in the timing of payments is a significant modification if it results in the material deferral of scheduled payments. If a realization event is deemed to have occurred, the entity must recognize exchange gain or loss.
A simple loan modification that alters a repayment schedule would constitute a significant modification and therefore be considered a taxable event under current law. Savage & Associates has the experience and expertise to help you efficiently close your NMTC transaction. We also have the know-how to help you during those difficult situations further down the road in the process, such as when you need a loan modification.
Let’s Work Together to Develop our Communities
Whether you are a developer, investor, nonprofit, or entrepreneur, the more you know and understand about the NMTC program, the better prepared you will be to close your NMTC transaction. Savage & Associates can provide the answers to your NMTC questions so that you understand all the relevant issues that NMTC transactions present so that you may move forward and provide the important development that your community awaits.
If you have any questions about New Market Tax Credits or any other development financing program, call 215.880.9441 in Philadelphia, or 202.817.3941 in Washington D.C. to arrange a consultation. You can also visit our website at Savage & Associates 24 hours a day, seven days a week for more information. Savage & Associates, we focus on innovative financing tools like New Market Tax Credits, Low-Income Housing Tax Credits, C-PACE, Historic Tax Credits, and other vital economic development tools.