On July 15, 2020, the Community Development Financial Institutions (CDFI) Fund announced the 16th round of the New Markets Tax Credit (NMTC) allocations. Seventy-six Community Development Entities (CDEs) received shares of $3,548,485,000 in tax credit allocation authority.
About the New Markets Tax Credit program
Enacted in 2000 to infuse investment dollars into low-income communities, the NMTC program can provide forgivable financing to projects where capital is generally more difficult to obtain. Each year, the CDFI Fund uses a competitive process to award CDEs allocation for supporting targeted projects. Through the use of third-party investors, CDEs make these funds available to help businesses and projects that are located within qualifying low-income communities.
Benefits of New Markets Tax Credit financing
The NMTC financing structure offers 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. Funds can be used 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 includes Florida, Georgia, Idaho, Kansas, Nevada, Tennessee, Texas, Virginia, West Virginia and Wyoming. Businesses with projects in these geographies may be of particular interest to CDEs.
Takeaways
The NMTC program was originally scheduled to sunset at the end of 2019, but received a one-year extension. Projects located in designated eligible areas may be able to take advantage of the attractive benefits offered under the NMTC program. This incentive provides financing for a variety of project needs and is designed to encourage investments that create significant community benefits such as job creation, 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 this program and whether it can be used to close financing gaps for these projects, especially during a distressed economy.
