If you are interested in the revitalization of commercial development projects and are looking for ways to assist with financing, the New Markets Tax Credit (NMTC) Program may be the answer.
Obtaining certain subsidies, credits or grants in connection with commercial development projects can often be the financial difference-maker for an otherwise viable project. While NMTC transactions involve a competitive marketplace for allocation and sometimes require complicated structured finance, the net benefits are worth the hard work. In fact, NMTCs can generate as much as a 25 percent subsidy to the project after payment of fees associated with the financing.
The NMTC Program is a federal tax incentive authorized by Congress under the Community Renewal and Tax Relief Act of 2000 and most recently extended through calendar year 2019 under the Protecting Americans from Tax Hikes (PATH) Act. Jointly administered by the Community Development Financial Institutions Fund (CDFI Fund) and the Internal Revenue Service, the NMTC Program is designed to encourage commercial investment in low-income communities (LICs).
The NMTC Program attracts private investment by allowing corporate taxpayers to receive a credit against federal income taxes for making qualified equity investments (QEIs) in community development entities (CDEs). The credit received is equal to 39 percent of the QEI and is claimed over a seven-year period (5 percent annually for the first three years and 6 percent for years four through seven). QEIs may be leveraged with various types of secured debt (i.e. conventional lending or bond financing) or affiliate debt, which allows the tax credit investor to receive tax credits on the equity/debt combination. The NMTC Program has proven to be an effective means of stimulating economic growth in LICs throughout the country through the financing of high-impact real estate projects such as redevelopment and urban renewal projects, retail developments, and mixed-use and transit-oriented developments.
In most cases, the NMTC Program utilizes geographic qualifications based on the census tract location of the project. In other words, the first step to identifying if your project qualifies for NMTCs is to determine whether or not the project is located in a "qualified census tract." Qualifying LICs include census tracts with at least one of the following criteria:
(i) a poverty rate of at least 20 percent
(ii) if located in a metropolitan area, a median family income below 80 percent of the greater statewide or metropolitan area median family income, or
(iii) if located outside a metropolitan area, a median family income below 80 percent of the median statewide family income.
Investment vehicles known as CDEs, certified by the CDFI Fund, are eligible to apply to the CDFI Fund for NMTC allocation authority. Through a competitive application process, the CDFI Fund allocates tax credit authority to CDEs, which allows CDEs to raise investment capital from private investors in exchange for the right to claim a federal tax credit. In the 15 rounds to date, the CDFI Fund has made 1,178 awards totaling $57.5 billion in NMTC allocation authority.
NMTC financing can be used to pay for real estate acquisition, site prep, substantial rehab, new construction, tenant build-out, equipment and soft costs. Typically, projects need to have costs of at least $5 million in order to attract adequate interest from CDEs and investors. In a typical transaction, an investor provides an equity investment into a special purpose investment fund in exchange for 100% of the membership interests. A third-party or affiliate lender provides a leverage loan to the investment fund. This debt/equity combination generates sufficient funds for the investment fund to make its QEI as a capital contribution to a CDE. The applicable credit allowance for the benefit of the investor is calculated based upon the QEI.
The CDE(s) use the proceeds of the QEI to make loans to a qualified active low-income community business (QALICB). The loans are generally structured to mature or be refinanced in seven years and can be subordinate to senior debt as necessary. The "A" loan usually mirrors the terms of the Leverage Loan. The "B" loan (which is derived from the tax credit equity less CDE fees) is generally at a below-market interest rate with favorable terms such as full or partial loan forgiveness. Both loans are interest-only during the seven-year compliance period. The QALICB uses the proceeds of the loans to finance all or a portion of the project.
Many of the health care, manufacturing, educational and commercial development projects that have taken place in Tennessee since the early 2000s have benefited from the NMTC Program:
- The redevelopment of Memphis' historic Sears Crosstown distribution center into a 1 million square-foot mixed-use facility utilized 22 different financing sources, including federal NMTCs.
- As one of the largest food banks in the nation, the Mid-South Food Bank in Memphis was able to secure $5 million in NMTC allocation to finance the expansion of its facility.
- The Model Mill project in Johnson City utilized $16.6 million in federal NMTCs for the renovation of an existing mill building into a mixed-use development.
- In Nashville, the Explore! Community School project utilized $29 million in federal NMTC for the construction of a new school facility.
- The historic Ross Hotel in Chattanooga was developed into the mixed-use facility known as the Tomorrow Building, utilizing $6 million in federal NMTCs.
In May 2019, the CDFI awarded 73 CDEs $3.5 billion in NMTC allocation authority in the calendar year 2018 round of the NMTC Program. To date, a total of 92 businesses and revitalization projects in Tennessee have received $638 million in NMTC financing resulting in a total of $1.1 billion in project investments, as well as the creation of more than 10,000 direct and indirect jobs. Given that project financing is difficult to secure in blighted metropolitan communities, as well as rural, low-income communities, many Tennessee businesses are forced to seek a combination of various incentives to fill financing gaps.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.