US Treasury awards $3.5 billion in New Markets Tax Credit allocations
87 organizations will receive tax credit allocations from the 2013 program
TAX ALERT |
On June 5, 2014, the U.S. Department of the Treasury's Community Development Financial Institutions Fund (CDFI Fund) announced the community development entities (CDEs) that were selected to receive the $3.5 billion in New Markets Tax Credit (NMTC) allocations awarded for the program's 2013 round. A total of 87 organizations across the country will receive these tax credit allocations.
Businesses or developers with projects that could qualify for NMTC allocation dollars should act quickly to negotiate terms with the CDEs that were awarded the $3.5 billion before it runs out.
The NMTC program was established by Congress in 2000 to incentivize investment in businesses and real estate projects located in low-income communities. Pursuant to the NMTC program, the CDFI Fund awards NMTC allocation authority to select CDEs. Investors in such CDEs are then entitled to claim a new markets tax credit on their qualified equity investment (QEI) in such CDEs. Each dollar of QEI by an investor generates a $0.39 NMTC, which is earned over a period of seven years. For example, a $10 million QEI generates $3.9 million in NMTCs, which are taken over a seven-year period.
The CDEs, in turn, invest or loan substantially all of their QEI proceeds to select qualifying projects via qualified low-income community investments (QLICIs). By using a leveraged structure, selected qualifying projects can net a significant subsidy from such QLICIs (i.e., generally 20 percent of the NMTC allocation allotted to the qualifying project).
There are very few requirements for a project to qualify for the NMTC program. Qualifying projects must be either operating business or non-residential real estate projects located in a low-income community. Low-income communities are defined by reference to census tract characteristics and historically have included about 39 percent of all U.S. census tracts. Common examples of qualifying projects are non-residential construction projects, facility renovations, new facility construction and working capital funding of operating businesses. However, due to wide demand, obtaining a NMTC allocation for a project is highly competitive.
With the announcement of the 2013 round award winners, CDEs will be in a position to commit NMTC allocations to qualifying projects so that transactions can proceed to closing. Developers of qualifying projects will want to begin CDE negotiations in order to secure a portion of this year’s allocation.
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