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How a Non-Profit Takes Advantage of NMTCs

The New Markets Tax Credits Program (“NMTC Program”) is an advantageous tool for nonprofit organizations. The NMTC Program provides benefits to nonprofits consistent with their exempt function. The NMTC may provide subsidy or gap financing to tax-exempt organizations that engage in real estate development, business operations, or charitable activities in qualified census tracts.

Nonprofit and other charitable organizations have several options for participating in the NMTC Program. The first option is the tax-exempt entity that acts as a QALICB that is the entity that participates in the development, business, or charitable operations that occur in the low-income community (“LIC”). Another option is as a for-profit organization that is a subsidiary of a nonprofit organization. A tax-exempt organization like a charity often will create a supporting organization under § 509(a)(3) to participate in the NMTC transaction.

A third option is a tax-exempt organization that acts as a leverage lender in an NMTC transaction. The leverage lender provides debt financing that, when combined with an investors’ equity financing, allows investors to increase the amount of tax credits it receives in exchange for the equity investment. As a leveraged lender, the nonprofit must set up a procedure that allows it to assume control if problems develop at the project/QALICB level and funds are redirected to the CDE.

A CDE that is awarded an NMTC allocation must ensure that it complies with the NMTC program at all times. It must strictly adhere to the allocation agreement it enters into with the CDFI Fund. However, as a leverage lender, the nonprofit has little control over the operations of the community development entity (“CDE”) or qualified active low-income community business (“QALICB”) during the seven years that the investor receives benefits from the tax credits.

A charitable organization acting as the leverage lender must also consider other issues in this role. First, the tax-exempt organization must ensure that the funds invested in the CDE are applied consistently with the leverage lender’s charitable purpose and community benefit. One way to address this issue is by obtaining an opinion of counsel delivered at the transaction’s initial closing. The opinion must conform to § 170(c) and conclude that the funds invested in the CDE will be used consistently with the nonprofit’s charitable purpose.

Examples of QALICBs

• *An operating business such as a grocer, manufacturer, or retailer located in a LIC.
• *A business that develops or rehabilitates retail, commercial, industrial, and mixed‐use real estate projects in a LIC.
• *A business that develops or rehabilitates community facilities, such as healthcare facilities or schools, in a LIC.
• *A business that develops or rehabilitates marketed housing units located in a LIC.

Generally, a QALICB includes any corporation, including a nonprofit corporation, partnership, or limited liability company (“LLC”) that meets the following requirements for any tax year:

(1) 50 percent or more of the organization’s total gross income originates from the activities of a qualified business within any LIC,

(2) at least 40 percent of the organization’s tangible property, whether owned or leased, is used in a LIC,

(3) at least 40 percent of the services performed by the organization’s employees are performed in a LIC, and

(4) less than 5 percent of the average of the aggregate unadjusted bases of the property of the organization is attributable to either nonqualified financial property or collectibles, other than collectibles held primarily for sale to customers in the ordinary course of the business.

Let’s Work Together to Develop our Communities

If you want to learn more about NMTCs, contact Savage & Associates at 215.880.9441 in Philadelphia, or 202.817.3941 in Washington D.C. to arrange a consultation. Dionne Savage can assist you to gain access to the benefits provided by the New Markets Tax Credits, Low-Income Housing Tax Credits, C-PACE, Historic Tax Credits, and other vital economic development tools that benefit local communities throughout the United States. Visit our website at Savage & Associates 24 hours a day, seven days a week for more information.