More New Markets Tax Credit Allocation Available for Project Financing

By: Paul M. Jones, Jr.

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 across the country (including Indiana, Illinois and Ohio) have been financed using NMTC financing. Examples of such projects include commercial office space, retail space, community centers, charter school facilities, telecommunications centers, parking garages and manufacturing facilities. These projects and others have been sponsored by a broad array of organizations (both for-profit and nonprofit) and financed by community development entities (CDEs) using NMTC equity. The financing transactions can be complex, but the benefits to developers, owners and users of facilities financed with NMTC proceeds can be significant. Benefits include interest only loans, below market interest rates and much needed equity.

CDEs serve self-defined specific geographic areas (for example, national, regional, statewide or local). Many CDEs consider other specific criteria, such as whether the property is located in an area facing high economic distress, or whether the property serves a certain purpose (such green building development or charter schools). 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. In some cases, nonprofits have raised charitable contributions and grants which serve as the leverage source.

On Thursday, Feb. 23, 2012, U.S. Deputy Treasury Secretary Neal Wolin will announce the award of $3.5 billion in NMTC allocation under the 2011 round of New Markets Tax Credit availability, which opened last summer. The announcement will be made in New Orleans at Federal City Town Center, a retail complex that benefitted from NMTCs. Competition for allocation is highly competitive and there are deadlines for the CDEs receiving an award to close a certain amount of allocation by certain dates. This, of course, drives the availability of credits for your projects if you are a developer or owner. Thus, for project sponsors, developers and owners seeking NMTC financing, the time is now to open dialogue with CDEs, lenders and investors about availability of NMTCs for your project.

Ice Miller has been active in providing legal services in connection with the NMTC program since its inception which followed the Community Renewal Tax Relief Act of 2000. When administration of the NMTC program began in 2002, Ice Miller organized and qualified several of the first Indiana-based CDEs for purposes of the NMTC program. Since then, we have represented sponsors, developers, CDEs, lenders and investors in connection with more than $150 million of economic development projects financed with NMTC proceeds.

If you would like further information about the NMTC program, please contact Paul Jones, (317) 236-5959 or paul.jones@icemiller.com.

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.