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The General Characteristics Of A Highly Ranked NMTC Application – Part Two

Part One of this blog discussed the New Markets Tax Credits (NMTC) Application Process. There are two phases to the NMTC Application process. Unfortunately, not all applications make it to the second phase. Our goal is to provide you with helpful tips to improve your NMTC application. An application must demonstrate a business strategy possessing certain characteristics when it is evaluated in Phase One to ensure that it receives a high enough score to qualify for continued evaluation in Phase Two. Today, we will discuss the characteristics that may enhance your NMTC application’s business strategy and hopefully merit an NMTC allocation.

There were 208 Allocation Applications made by various Community Development Entities (CDEs) throughout the country. The Community Development Financial Institutions Fund (CDFI Fund) received requests for $15.1 billion in NMTC allocations. One hundred CDEs, or 48.1% of the applicant pool, received allocation awards totaling $5 billion, which constituted approximately 33.1% of the total amount requested by applicants.

As would be expected, the financial health of the Applicant is of paramount importance. Factors such as the fee structure and the overall financial stability of the Applicant’s business entity are also characteristics of a potentially highly qualified application.

A good application will indicate:

1.  The Applicant possesses a track record of raising Qualified Equity Investments (QEIs).
2.  The Applicant’s past NMTC activities with prior Allocation Applications.
3. The Applicant’s proposed commitments to provide Qualified Low-Income Community Investments (QLICIs) in Non-Metropolitan Counties.
4. The Applicant’s  propensity to engage in innovative investments.

Applications are scored on a point system. An NMTC application will receive up to five additional points for demonstrating consistent service to disadvantaged businesses or communities. An application will also receive up to five additional points for committing to invest substantially all proceeds from QEIs. Applications that fail to achieve certain minimum scores in the Business Strategy section and Community Outcomes section of the application will receive no further consideration and will be deemed not to be highly qualified NMTC applications.

Because the Panel reviews information related to prior allocations in Phase Two, it is important to be prepared to explain any discrepancies that may cause questions or unfavorable conclusions related to former awards. It is also important to be prepared to provide any supplemental information requested by the CDFI Fund during the Phase One review process.

A highly ranked application will demonstrate that the Applicant has a high capacity to deploy and monitor NMTC investments. It will show a history of the Applicant’s business providing direct loans or equity investments. An exemplary application will exhibit the important relationships and consequential benefits for a Qualified Active Low-Income Community Business (QALICB). It will clearly show a healthy distribution of benefits among the investor, CDEs, and QALICBs.

A qualified application will prove that clear and meaningful community outcomes are likely to occur and benefit low-income persons or residents of low-income communities. And, that the Applicant’s investment decisions meet the needs of the communities they support and the economic development priorities of low-income communities they serve.

Further, a successful Applicant will unequivocally demonstrate that its products will be significantly more flexible than market standards. For each product, the Applicant will clearly describe the circumstances under which and how frequently the best rates and terms would be available and provide examples and comparisons to what is typically offered by the Applicant and offered by other financial institutions or investors in the Applicant’s service area. The Applicant will provide an example of how each proposed product will be used to finance a proposed  NMTC investment.

For most Applicants, the application will indicate debt with interest rates of at least 50% below-market; or debt that otherwise satisfies the relevant requirements. Applicants investing in other CDEs will demonstrate a high likelihood that they will pass favorable rates and terms along to the borrowers.

The Applicant should demonstrate that it possesses the ability to begin making NMTC investments promptly. A highly qualified application will demonstrate the Applicant’s ability to deploy QLICIs commensurate with the allocation request.

If the application proposes to fund a single or small number of projects, the Applicant must demonstrate a high likelihood that its proposed projects are feasible based on the ability to secure financing, that they will close as planned, that the risks to timely closing are limited, and clearly identified. The application should present this information in tandem with a superior risk mitigation plan.

Finally, related to demonstrating an effective business strategy, a highly qualified application will demonstrate, during each of the past five years, an excellent track record of directly providing products and services similar to those it would provide with the QEI proceeds. An application with a relatively limited record of providing QLICI-type activities could also achieve a high score if it has a very strong five-year or longer track record of non-QLICI like investments that are distinctly aligned with its current business strategy.

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 evaluate the benefits provided by the New Market Tax Credits, Low-Income Housing Tax Credits, C-PACE, Historic Tax Credits programs, and other vital economic development tools that benefit low-income communities throughout the United States. Visit our website at Savage & Associates 24 hours a day, seven days a week for more information.