NMTC Allocation is Expected Soon – Are you Shovel Ready? If Not, Savage & Associates Can Help You
I always advise my clients that being “shovel-ready” is essential to attract qualified community development entities (CDEs) to deploy their NMTC allocation into their projects. Simply put, CDEs have a timetable to manage and deploy their NMTC allocation. It is expected that the CDFI Fund will announce the next round of allocation recipients very soon.
After the CDE receives its NMTC Allocation and closes out its NMTC Allocation Agreement with the CDFI Fund, it will be prepared to make equity investments or loans to QALICBs. No matter how impactful your project is, other projects are just as impactful and may be closer to closing than your project. Therefore, you need to be as prepared as possible. As we inch closer to the announcement, my role as a New Market Tax Credits attorney is to prepare my clients for the process ahead while working with them every step of the way until we achieve a successful NMTC closing. To receive an equity investment or a loan from a CDE, you must be a QALICB.
The NMTC Program assists businesses in low-income communities by providing them access to financing with loan terms that are flexible and affordable. Typically, 94 to 96% of NMTC investments involve more favorable terms and conditions than those usually offered on the market. These flexible terms may include longer maturities with lower interest rates, origination fees, and debt coverage ratios.
Once you confirm that you are indeed a QALICB next you need to place yourself in the best position possible so a CDE will consider you as the potential recipient of its precious NMTC allocation. Being “shovel ready” will have significant weight when a CDE makes its final decision on how to deploy its NMTC allocation. You may think that you are prepared but it is my job to ensure that you are fully prepared.
Show CDEs that you are “Shovel-Ready” with the following actions recommended for optimum success:
Finalize All Term Sheets
All project financing should be reflected by a signed term sheet. Any term sheet should contain a detailed summary of the fees and expenses of the proposed financing. Because different lenders will require different types of collateral, the term sheet should describe the type of collateral sought by the lender. The most crucial term sheet is the NMTC Allocation term sheet that shows your project may receive NMTC allocation.
Hire an NMTC Accountant and Prepare Draft Projections
The CDE, lenders, and investors will request a draft of your NMTC accountant-prepared projections before closing calls begin. These projections provide an overall summary of your transaction from a financial perspective. Along with other relevant financial information, the projections provide the CDE and lenders with reasonable assumptions about the project. The projections also outline the projected net operating income and the debt of the QALICB (including the NMTC loan and any other debt of the QALICB) and whether the NMTC loan is capable of being repaid or refinanced upon maturity.
File and Seek Approval of Your Architectural Plans & Obtain Your Permits
The local authorization to proceed with construction is essential. A CDE will typically not close an NMTC transaction without a building permit. Remember, obtaining the necessary building permits is not a one-step process. Typically, there are multiple steps and other permits that must be acquired before the building permit application may be submitted and obtained. Working with architects and engineers that are knowledgeable about the process for obtaining permits in your area will help expedite the overall process. The procedures for any sign-offs or approvals that require the longest lead time should be initiated as soon as possible.
Organize Pre-Incurred Expenses
The efficient and comprehensive organization of all pre-incurred expenses cannot be overemphasized. A spreadsheet of all the expenses incurred to date should be kept with expenses categorized by the entity incurring the expense, the date the expense was incurred, and the purpose of the expense.
Only expenses that have been incurred 24-months before the NMTC closing are acceptable for reimbursement from NMTC loan proceeds. Thus, any significant closing delays may cause expenses to lose their status as compensable and they will no longer be available for reimbursement. Time is therefore of the essence since you want to preserve the maximum amount of reimbursable expenses.
It is an excellent idea to create a dropbox file to organize and maintain expenses and other organizational documents. This provides a well-organized collection of information that will be easy to share with lenders. Canceled checks may be kept here.
Because the actual borrowing entity may not yet have been formed while you are seeking NMTC allocation, it is acceptable that expenses may be incurred by the sponsoring entity. This will require a Reimbursement Agreement to allow the expenses to be attributable to the QALICB and reimbursed at the NMTC closing.
Focus on Your Community Impact and Benefits
NMTCs are all about the impact the credits have on the community. Demonstrating the number of new full-time, part-time, and construction jobs that will be created by the project is critical. You should also highlight unique programs that will be provided to the community. For example, a youth cooking program or a nutritional eating class once per month. At closing, you will be required to execute a Community Benefits or Community Impacts Agreement that will hold you accountable for the community impacts, i.e., benefits, that you intend to provide over the term of the NMTC loan.
Whether you are “shovel-ready” or still have a few more items to finalize, we can help. Please contact us with any questions regarding your NMTC transaction, Savage & Associates is here to help you.
Let’s Work Together to Develop our Communities
Savage & Associates is an Economic Development Law Firm. We provide sophisticated legal and business advice to those who seek to be agents of change and develop disfranchised communities. Whether you are a developer, investor, nonprofit, or entrepreneur, in tandem with our legal expertise, we can transform low-income communities. While passion is a requirement of success, so is capital. Our firm negotiates creative, cutting-edge transactions to help you obtain the resources 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. At 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.