More New Markets Tax Credits Available Nationwide

By now, many are aware that the New Markets Tax Credit (NMTC) program exists and that it is a useful tool to obtain below market rate financing for facilities and operations. In fact, several projects in Indiana have been financed over the last few years using NMTC financing. Examples of such projects include commercial office space, retail space, a community center, charter school facilities, a telecommunications center, a parking garage near affordable housing, and manufacturing facilities. These projects and others have been financed by community development entities (CDEs) based in Indiana and by CDEs based outside the state.

Although Indiana-based CDEs have not fared well in the most recent allocation rounds, another $3.5 billion allocation round has been announced. On December 28, 2007, the U.S. Treasury Department's Community Development Financial Institutions Fund published its notice of allocation availability in the Federal Register, inviting applications for the sixth round of funding in 2008. Applications are due in March 2008 and awards are expected be made in October 2008. Qualified businesses seeking funding should start a dialogue now with CDEs in order to have their projects included in a CDEs' pipeline or projects. Each CDE serves a self-defined specific geographic area (for example, national, regional, statewide, or local). Many CDEs consider other specific criteria, such as green building development or charter schools, when investing in projects.

The NMTC program allows CDEs to compete for NMTC allocations which can be used to provide below-market financing to qualified businesses. Once a CDE receives an allocation award, it raises private equity dollars from banks and other institutional investors. The equity investment typically is leveraged with loan proceeds to maximize the amount of credits generated by the investment. In exchange, the tax credit investors receive NMTCs to offset their federal income tax liability (along with other benefits which may include cash flow, capital appreciation or guaranties). The lender receives payment of interest, return of capital, and any necessary security interests. Under the program requirements, the CDE uses substantially all (i.e., at least 85%) of the investor’s cash investment to provide equity contributions and/or loans to qualified businesses. The businesses must, among many other things, be located in a “low-income community” as defined by U.S. census tract data. In sum, NMTCs allow qualified businesses located in these communities to obtain below market financing with more favorable terms than conventional financing (for example, lower interest rates, interest only arrangements, etc.).

Paul Jones is an associate in Ice Miller's Tax Group focusing his practice on federal and state tax law, including New Markets Tax Credits financing.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice.  The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.