On Sept. 4, 2019, the Community Development Financial Institutions (CDFI) Fund opened the application submission period for the calendar year 2019 New Markets Tax Credit (NMTC) allocation. Certified Community Development Entities (CDEs) must submit completed applications by Oct. 28, 2019 for consideration.
The NMTC program is scheduled to expire on Dec. 31, 2019, with a final $3.5 billion round of allocation for calendar year 2019 anticipated in the summer of 2020. Federal legislators have proposed both permanent and short-term extensions to the program. Although those proposals are currently under consideration, Congress has previously extended the program past prior sunset dates.
About the New Markets Tax Credit program
Enacted in 2000 to infuse investment dollars into low-income communities, the NMTC program can provide resources to projects for which capital is generally more difficult to obtain. Each year, the CDFI Fund awards credits to CDEs through a competitive application process. Third-party investors receive the credits for making qualified equity investments into these CDEs. The CDEs then invest the capital raised into projects and businesses located in low-income communities.
On May 23, 2019, the CDFI Fund announced the 15th round of the NMTC allocations. Seventy-three CDEs received shares of $3.5 billion in tax credit allocation authority.
Benefits of NMTC financing
The NMTC financing structure offers third-party interest-only forgivable loans to projects in severely distressed census tracts across the United States. The NMTC loans are added to the capital stack, reducing the overall investment needs for projects in these distressed areas. After seven years, the NMTC loans are forgiven, resulting in significant back-end benefits to these projects. Recipients can use these funds for real estate, construction, machinery and equipment, and even operating costs. NMTC financing is available to both for-profit and not-for-profit businesses.
Types of projects financed
The NMTC program can help close the funding gap in commercial, mixed-use or community facilities, and can assist existing businesses in acquiring, rehabilitating or expanding current facilities. CDEs look to finance projects that are shovel ready or have just begun the initial phases of construction. Many CDEs prioritize projects with strong community benefits focused on health care services, senior services, education, healthy foods, non-profits, community centers and manufacturing.
Additionally, each year the CDFI Fund releases a list of states that have historically received fewer NMTC project dollars. The current list of underserved states for the calendar year 2019 allocation includes Florida, Georgia, Idaho, Kansas, Nevada, Tennessee, Texas, Virginia, West Virginia and Wyoming. Businesses with projects in these states may be of particular interest to CDEs.
Program extension efforts
The New Markets Tax Credit Extension Act of 2019 (H.R. 1680 / S. 750), a bipartisan proposal introduced in Congress in March, would make the NMTC program permanent. The bill would also allow an inflation adjustment for allocation limitations after 2018, and provides an Alternative Minimum Tax offset to NMTC investors. As of the date of this alert, the proposal had 96 cosponsors in the House and 30 in the Senate.
Legislators also proposed a short term extension of the NMTC program as part of the Taxpayer Certainty and Disaster Tax Relief Act of 2019 (H.R. 3301), introduced in June. The proposal would provide a one-year extension of the program through 2020 and increase the allocation limitation from $3.5 billion to $5 billion.
Takeaways
RSM continues to monitor the status of legislative actions that would help extend this valuable incentive tool. Even without an extension, projects located in designated eligible areas may be able to take advantage of the attractive benefits offered under the NMTC program through 2020. The NMTC program provides financing for a variety of project needs and is designed to encourage investments that create significant community benefits, including job creation and access to healthy foods or medical care. Entities considering investments that create community benefits should reach out to their RSM tax advisors to learn more about the program and whether they can use it to close financing gaps for projects located in distressed areas.
