Recommended Regulatory Changes That Will Strengthen NMTCs – Loan Mods

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.

Benefits of Making NMTCs Permanent & Equal

In the Spring, the New Market Tax Credit Extension Act of 2021 (H.R. 1321/S. 456) was introduced in both the Senate and the House. If enacted, this Act would make the NMTC program permanent at $5 billion in credit allocation annually.

Fortunately, the federal government has attempted to support the neediest areas with the Consolidated Appropriations Act of 2021 (the “Act”). As a result, a new round of New Market Tax Credit allocations is on the way. If you are a Qualified Active Low-Income Business (QALICBs) interested in an NMTC transaction, Savage & Associates can provide all the assistance necessary to close your NMTC transaction.

Signed into law on December 27, 2020, the Act includes a five-year, $25 billion extension of the New Market Tax Credit (NMTC) program, the largest extension in the history of the program. After much success helping low-income communities, largely through bipartisan support in Congress, the NMTC program was scheduled to expire on December 31, 2020. Under the Act, the NMTC program is now scheduled to expire on December 31, 2025.

There are many benefits to making the NMTC a permanent part of the Tax Code (Internal Revenue Code). A primary benefit is the certainty and reassurance that investors would continue to receive tax benefits from their participation in the NMTC program. This would allow the dedication of more resources to the NMTC program, which would result in greater community development achievements.

The economic slide caused by the pandemic has made the financing of qualified businesses increasingly complex. At Savage & Associates, we take great pride in our ability to help our clients structure creative, cutting-edge transactions that overcome many market challenges, especially those presented by unforeseen events like the pandemic. These innovative transactions ensure that as much allocation as possible is generated from NMTCs to provide optimal effects to qualified active low-income community businesses.

The law as it currently stands requires investors to reduce the adjusted basis of a qualified equity investment by an amount equal to the number of credits taken over seven years. Investors are required to pay taxes on any capital gains or profits generated through a qualified equity investment.

Eliminating the basis reduction would make the after-tax credit percentage close to the full 39 percent after-tax credit percentage. This reduction would place the NMTC on equal footing with the Low-Income Housing Tax Credit, Housing Tax Credit, and Renewable Energy Tax Credit.

Permanence would also result in driving up NMTC equity pricing, therefore facilitating more NMTC allocation to flow to low-income community businesses for each tax credit dollar. Also, indexing annual NMTC allocation authority to inflation in the marketplace would maintain the NMTC’s value, while providing parity with the LIHTC, tax-exempt private activity bonds, as well as other important tax incentives.

Let’s Work Together to Develop our Communities

Our founder, Dionne Savage-Williams, is a frequent speaker and presenter at NMTC seminars who is readily available to inform anyone interested in New Market Tax Credits, Low-Income Housing Tax Credits, C-PACE, Historic Tax Credits, and other vital economic development tools. At Savage & Associates, we move forward hand in hand with clients so they may successfully close their NMTC transactions. We know how daunting the NMTC allocation process can be for participants. Savage and Associates inform and prepare clients so that they are in the best position possible to use the NMTC program to create positive change in our communities.

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.

NMTCs Endure Beyond The COVID-19 Pandemic

The COVID-19 pandemic has affected our communities creating a wave of unforeseen suffering and sacrifice. For low-income communities, these negative effects have had an even farther reach. As we return to normalcy, albeit however slowly, the market is ripe for new capital investment after standing still for most of 2020. Fortunately, the federal government has attempted to support the neediest areas with the Consolidated Appropriations Act of 2021 (the “Act”). As a result, a new round of New Market Tax Credit allocations is on the way.

The purpose of the NMTC program is to encourage capital investment in low-income areas that have historically had limited access to such investments. Through the NMTC program, investors receive a tax credit for making qualified equity investments in Community Development Entities (CDEs). As recipients of authority for NMTC allocations, CDEs utilize the capital they raise to make investments or loans for the benefit of businesses located in low-income communities and meet the other IRS requirements. This tax credit is 39% and generated over seven years for every $1 invested into CDEs.

The five-year extension further enables the use of NMTCs as an effective tool to rebuild those distressed communities that have especially suffered because of the COVID-19 pandemic. The extension furthers the overall economic development impact of the NMTC program. A significant amount of allocation available over the next five years makes NMTCs attractive as a mechanism to provide positive change for communities in dire need. Investment in projects that create jobs and provide essential services rebuilds communities and drives the communities’ future economic growth patterns. 

Opportunity zones (OZs) were hit hard by the pandemic. The Internal Revenue Service recently issued guidance in Notice 2021-10 providing additional relief for qualified opportunity zone businesses (QOZBs), qualified opportunity funds (QOFs), and investors due to the COVID-19 pandemic.

A summary of the effects of IRS Notice 2021-10 are as follows:

  • 30-month substantial improvement period for QOFs – Allows a QOF to disregard the period between April 1, 2020, and March 31, 2021, when calculating the 30-month period.
  • 90% investment standard for QOFs – A QOF’s failure to satisfy the 90% investment standard is considered reasonable if the last day of its first six-month period of a taxable year or last day of a taxable year falls between April 1, 2020, and June 30, 2021, and the QOF meets other requirements.
  • Working capital safe harbor for QOZBs – Any QOZB holding working capital assets intended for coverage under the working capital safe harbor before June 30, 2021, will receive up to an additional 24 months.
  • 12-month reinvestment period for QOFs – If a QOF’s 12-month reinvestment period includes June 30, 2020, then the QOF will receive up to an additional 12 months to reinvest.

Let’s Work Together to Develop our Communities

Savage & Associates provides sophisticated legal and business advice to those who perceive themselves as positive agents of change in their communities. If you are a developer, investor, nonprofit, or entrepreneur, we can work in tandem with you to rebuild low-income communities. Our firm negotiates creative, cutting-edge transactions to help you obtain the capital necessary to build businesses, leverage investments, create jobs, and spark economic activity.

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.

Specific Conditions a Qualified Active Low-Income Community Business Must Meet to Receive NMTC

Are you seeking additional capital to expand your business, or do you have a gap in your capital stack for your new development project? If you have considered New Market Tax Credits (NMTC), you must be a Qualified Active Low-Income Community Business (QALICB) to qualify for a NMTC loan or equity investment. As we anxiously await the Community Development Financial Institutions (CDFI) Fund’s announcement of the next round of New Market Tax Credit allocations later this summer, we thought a quick reminder about what a QALICB is, would be helpful.

You cannot ignore the fact that capital is necessary to bring about quantifiable quality outcomes to disenfranchised communities throughout the United States. You need a Qualified Low-Income Community Investment (QLICI) in the form of capital, an equity investment, or loan. Savage & Associates can provide the necessary answers and guidance to help you find what you need.

Before an entity is eligible to receive NMTCs it must meet specific conditions set forth by the Internal Revenue Service. Below are several points to consider determining whether your business is eligible for NMTCs:

  • Does your Business Activity Qualify?
  • Are You Actively Engaged in a Qualified Business?
  • Does Your Entity’s Income, Activities and Assets Qualify?

Issue 1 – Is your Business a Qualifying Business?

A qualifying business entity can be a corporation, including a non-profit corporation or a partnership. A sole proprietorship can also qualify if it would meet the necessary requirements had it been incorporated.

A Community Development Entity (CDE) can treat any trade or business as a QALICB if the entity would meet all the requirements if separately incorporated and maintains separate books and records specifically for that trade or business. At the time of the investment, the CDE must reasonably expect that the entity will continue to satisfy all requirements of a QALICB throughout the entire term of the investment.

Issue 2 – Does Your Business Activity Qualify?

According to the IRS rules, all types of business activities qualify except:

  • businesses that develop or hold intangible assets for sale or license
  • golf course operators
  • country clubs
  • massage parlors
  • hot tub facilities
  • tanning businesses
  • racetracks
  • gambling locations
  • alcoholic sales for off-premise consumption
  • farming operations with business assets valued more than $500,000

Also, general real estate rental does not qualify unless it is non-residential rental property, located in a low-income community, and there are substantial improvements on the property. A determination of whether the real estate property is non-residential is based on the percentages of revenue derived from residential and non-residential activity. The 80/20 Rule requires that at least 20% of the income is generated by commercial revenue and not residential rental income.

Issue 3: Are You Actively Engaged in a Qualified Business?

According to Treasury Regulation §1.45D-1(d)(4)(i), an entity is considered engaged in the active conduct of a trade or business if at the time a CDE invests, that CDE reasonably expects the entity to generate revenues within the three years following the investment.

Issue 4: Does Your Entity’s Income, Activities and Assets Qualify?

According to the IRS New Market Tax Credit circular, the following definitions apply to determine whether an entity’s income, activities, and assets qualify for the entity to be considered a QALICB:

  • Gross-income requirement – at least 50% of the total gross income of the entity must be derived from the active conduct of a qualified business within a low-income community.
  • Use of tangible property requirement – at least 40% of the use of the tangible property of such entity (whether owned or leased) is within a low-income community. The percentage is determined based on the average value of the tangible property that is used in a low-income community divided by the average value of all the property used during the year.
  • Services performed requirement – at least 40% of the services performed by the entity’s employees are performed in a low-income community. Employees need not live in the low-income community. If the business has no employees, this requirement and the gross-income requirement can be met if the use of tangible property requirement above is 85% instead of 40%.
  • Percentage of Collectibles – Collectibles must amount to less than 5% of the average of the aggregate unadjusted basis of the entity’s property. Collectibles that are primarily for resale to customers in the ordinary course of business are excepted.
  • “Non-qualifying financial property” – This property must be less than 5% of the average of the entity’s aggregate unadjusted bases. The term non-qualifying financial property refers to stock, options, debt, partnership interests, options, futures and forward contracts, annuities, and other similar property. There are a few exceptions to this requirement.

Generally, a newly formed special purpose entity designated to operate the new development project will meet the test above.

The Devil is in the Details

The team at Savage & Associates recognizes the complexity of the NMTC program. We are devoted to providing timely advice and assistance through every step of your NMTC transaction. We will also assist you with other related legal issues. Our founder, Dionne Savage is a frequent presenter at NMTC seminars and is available to speak at live or virtual events on this NMTCs and other related topics.

If you have any questions about the New Market Tax Credit program, the application process, or other development matters, call us at 215.880.9441 in Philadelphia, or 202.817.3941 in Washington, D.C. Visit us at Savage & Associates anytime for more information or to set up a consultation. Let’s improve our communities together!

Important Steps to Prepare For New Markets Tax Credit Allocations

As we anxiously await the Community Development Financial Institutions (CDFI) Fund’s announcement of the next round of New Markets Tax Credit Allocations later this summer, preparation is key. With the disproportionate impact of the COVID-19 pandemic affecting low-income communities a strong strategic NMTC plan and the ability to quickly deploy allocation has never been more urgent.

The more you understand about the NMTC program the better prepared you will be to successfully deploy new NMTC Allocation and close your deals. At Savage & Associates, we have all the answers to your NMTC questions.  We can also help you better understand the economics of NMTC deals and help you move forward confidently with your development plans.

Following these simple and prudent tips will allow you to immediately reap the benefits of the NMTC program when you receive an NMTC Allocation.

Important Steps to Prepare for a NMTC Allocation

  1. Analyze your pipeline of projects. Start your due diligence by reviewing your NMTC application and determining the status of the proposed projects to determine if the projects are “really shovel ready.” Research new high community impact projects. Contact proposed qualified active low-income businesses (QALICBs) to see if they have received:
  • commitment letters from leverage lenders, equity investors, and other debt sources;
    • necessary permits;
      • construction contracts;
      • zoning approvals; and
      • environmental reports.

Many NMTC deals can include other funding sources from state and city programs  or grants. Your proposed transaction must meet the criteria outlined in your NMTC application.

  • Hold a conference call with your advisory board. Build the community revitalization spirit with your board by hosting a call to confirm your members are still affiliated with the same organizations listed in your CDE application, update members about NMTC’s reauthorization, and explain your strategy for deploying NMTC allocation. This is a good time to discuss further relationships with investors, banks, and government agencies that can help your organization deploy NMTC Allocation.
  • Pick a point person. Once the NMTC allocations are announced, your organization will need to absorb a lot of information in a short amount of time and, when you receive an NMTC allocation, your phone will ring off the hook. Choose someone knowledgeable about the program who can provide potential investors and QALICBs with your organization’s strategy and the types of projects that will comply with your NMTC application. This person should be able to manage the organizational details of your NMTC program and develop a regulatory compliance plan as well.
  • Identify and deploy any remaining NMTC allocations. If your organization previously received NMTC allocations, be sure to review your prior awards and agreements to confirm all of your prior allocations have been deployed. Create a spreadsheet to track each allocation date, total amount received from the CDFI Fund, the projects your organization supported with the allocation, how much was used, and when. Be sure to review all reports previously submitted to the CDFI Fund and all Form 8874-As.
  • Consider forming new CDEs. If you decide to create new CDEs, be sure to promptly add them to your Allocation Agreement before you sign the final version with the CDFI Fund. For corporate liability, tax, and other important reasons you should only use one CDE for each transaction. Before finalizing your Allocation Agreement, the CDFI Fund requires a legal opinion from an attorney. Although you can amend the Allocation Agreement to add new CDEs later, you’ll need another legal opinion and you’ll incur additional legal expenses.
  • Engage an attorney and accountant. Working with knowledgeable professionals is critical. Choose an attorney and accountant who are familiar with the NMTC program and the opinions required for your Allocation Agreement and transaction closings. (Savage & Associates has extensive tax credit experience and are available to assist you with your next closing).
  • Determine your organization’s fees and expenses. CDEs are committing to invest at least 95 percent of qualified equity investment dollars in QALICBs. Therefore, clearly establishing your fees are critical. You must have a basis for your fees, whether you charge a sub-allocation fee, a back-end fee, or a structuring fee. Your fees must be reasonable and based on an objective standard.
  • Work with great partners. Find partners such as banks, municipalities, government agencies, investors, and other entities that have previously received NMTC allocations to combine your efforts.

The team at Savage & Associates recognizes the value the NMTC program offers for our clients and our communities. We are devoted to providing timely advice and assistance through the NMTC Allocation closing process along with other related legal issues. Our founder, Dionne Savage is a frequent presenter at NMTC seminars and is available to speak at events on this topic as well as other related topics.

If you have any questions about the New Markets Tax Credit program, the NMTC Allocation closing process, or other development matters, give us a call at 215.880.9441 in Philadelphia, or 202.817.3941 for our Washington DC office. Or visit us at Savage & Associates anytime for more information or to set up a consultation.

Together, we can improve our communities!

Important Enhancements to the CDFI Information Mapping System

The Community Development Financial Institutions (CDFI) Information Mapping System has been updated to a fourth version known as CIMS4. This system provides mapping and geocoding capabilities that support the certification application process for CDFIs and Community Development Entities (CDEs). The system allows these entities to assess the program eligibility of investments, and for lending, financial, and development activities in specific geographic areas for CDFI Fund programs.

The Community Development Financial Institutions Fund (CDFI Fund) helps generate economic growth and community opportunity in some of our nation’s most distressed areas. Mission-driven financial institutions work with the CDFI Fund on specific and innovative programs that invest federal dollars in conjunction with private sector funds to develop economically disadvantaged communities. 

To apply for CDFI Certification and participate in CDFI Fund programs an institution must first identify the best communities or areas that need new sources of capital and neighborhoods that lack access to financing. The CDFI Fund has created a mapping system to help pinpoint the most appropriate target areas. 

How the Upgraded CDFI Information Mapping System Works

Version 4 of the CDFI Information Mapping System (CIMS4) helps identify some of the neediest areas that are ripe for development in conjunction with the CDFI Fund. The mapping system displays geocoding addresses, census tracts, and counties, and helps determine which census tracts and counties meet the distress criteria that make them eligible for various CDFI Fund programs. 

By using the CIMS4, you can create maps and reports, save them for application purposes, formulate target market worksheets, and submit the saved documents as support for online applications or other uses. You’ll find two versions of the updated mapping system — a public version that has certain limitations, and a full version that must be accessed through the CDFI Fund’s Award Management Information System (AMIS).

What Does the CIMS4 Show?

Using the CIMS4 Controls, you can: 

  • access different layer visibility within a certain selection 
  • view a legend for the visible layers on a selection 
  • search for a location 
  • view program eligibility in specific zones, and 
  • gather demographic information for individual census tracts.

Where To Find More Information

To learn more about these mapping tools and how you can utilize them to file a successful application, take a look at the U.S. Department of the Treasury Community Development Financial Institutions (CDFI) Fund page. To enter the actual mapping tool, simply click on the Welcome to the CDFI Fund CIMS Mapping Tool page and get started. 

You can also download a pdf version of the CDFI Fund’s Award Management Information System (AMIS) instruction manual: “Getting Started – Navigating AMIS.” Also, the CDFI Fund has produced an instructional YouTube video about how to use the CIMS4 to create, analyze, and validate a Target Market.

Look No Further For Experienced Professional Assistance

At Savage Associates, our practice is focused on community development and we’re proud to assist our clients with applications for available sources to fund their dream projects. We’ll walk you through the entire process, answer all of your questions, and ensure you receive the highest quality legal services possible. 

If you have any questions about the CDFI Fund mapping tool, or other development matters, give us a call at 215.880.9441 in Philadelphia, or at 202.817.3941 for our Washington D.C. office. Or visit us at Savage Associates anytime for more information or to set up a consultation. Let’s improve our communities together!