An Introduction to New Market Tax Credits

Buckingham attorney Neil Bhagat provides the following introduction to New Market Tax Credits:

            New Market Tax Credits (NMTCs) are an increasingly utilized strategy for encouraging economic development in struggling areas.  At its core, the program allows investors to receive a tax credit in return for making qualified equity investments in groups designated as Community Development Entities (CDEs).  The CDEs must then use these investments in low-income communities that are located throughout the United States.  For organizations that need access to capital, NMTCs are a valuable tool for getting a commercial project from the planning stages to the building stage.  While not meant to be a lead source of financing, NMTCs can provide the edge in making a project market worthy.

            NMTC investments are used to finance a variety of activities, including: loans or equity investments in businesses, loans or equity investments in real estate projects, and capitalization of other CDEs.  NMTCs have been utilized to create community health care centers, charter schools, community facilities, public markets, factories, commercial developments, and more throughout the United States.  Among the thousands of projects successfully financed with NMTCs, some specific examples include a grocery-anchored shopping center in San Diego, a charter school in Newark, the development of a high-tech business incubator in Detroit, and a manufacturing facility in rural Iowa.  The possibilities for developers are limitless, provided the development will occur in what qualifies as a low-income community.

            In December of 2010, Congress extended the NMTC program for two years, making $3.5 billion available in tax credits each year.  Ohio has a smaller NMTC program making $10 million available in tax credits to those who have already been allocated federal NMTCs.  Despite the success of NMTCs, with the political uncertainty surrounding 2012, now is the time to investigate and examine whether utilizing NMTCs is right for your organization.

            It is important to remember that the NMTC process can be both lengthy and competitive.  It is estimated that the dollar amount of credits requested is 12 times greater then the number of credits awarded.  As a result, you will need to ensure compliance with the many regulations surrounding NMTCs.  With appropriate guidance, your NMTC application can be targeted to increase your chances of successfully receiving credits.

            The application process for New Market Tax Credits can be complicated, so please consider the following a general introduction.  A developer must first create a CDE, certified by the Community Development Financial Institutions Fund at the United States Department of Treasury.    Provided the CDE is certified, the CDE can then apply for the right to receive tax credits, which in turn are sold to investors.  This provides equity to the CDE to place in community development projects while the investor receives a tax write-off.  CDEs are evaluated on the following criteria: business strategy, community impact, management capacity, and capitalization strategy.  The investor receives a credit totaling 39 percent of the cost of the investment which is then claimed over a seven-year period.  As you can see, there are a variety of areas in which one can get involved with NMTCs.  Loans for development and reducing tax liability jump to the top of the list.  Should you choose to utilize NMTCs, know that beyond acquiring extra capital for your project, you are helping to create infrastructure and jobs in areas that need them.

Helpful Resources

The following are some resources to learn more about the New Market Tax Credit program.  Remember that consulting with an advisor or attorney specializing in New Market Tax Credits will help to ensure you are getting advice that is relevant to your situation.

The Community Development Financial Institutions Fund is a part of the Department of Treasury and provides a wealth of information regarding frequently asked questions and the application process.

Ohio also has a New Markets Tax Credit Program designed to help leverage the federal version of the NMTC program.

The New Markets Tax Credit Coalition provides helpful information and highlights some success stories of the program.

If your project needs that final boost of financing to ensure its viability, New Market Tax Credits may be the answer.