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Section 45D New Market Tax Credits help you rebuild the USA - EY - United States

Section 45D New Market Tax Credits help you rebuild the USA

"These investments have financed a wide variety of projects, including charter schools, health care facilities, performing arts centers, manufacturing companies, alternative energy companies, business incubators, grocery anchored shopping centers, substance abuse treatment facilities, and facilities for the homeless."
— Donna Gambrell, Director of the U.S. Department of the Treasury’s Community Development Financial Institutions

Summary: The New Markets Tax Credit (NMTC) is a Federal tax credit and gives access to capital for projects located in low income communities. We can help you with the extensive application process. Our allocation success rate exceeds the overall program success rate.

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Enacted under the Community Renewal Tax Relief Act of 2000, the NMTC program is administered by the Treasury’s Community Development Financial Institutions (CDFI) Fund.

The program was designed to encourage private sector equity investments for economic and community development in low-income communities that are traditionally low-income by the capital markets.

After the seventh round of allocations, a total of $26 billion in tax credit allocation authority has been awarded by the CDFI Fund through the NMTC program.

What is Section 45D?

Section 45D of the Internal Revenue Code allows for a tax credit by virtue of making qualified equity investments (QEI) in a Community Development Entity (CDE), which in turn directs investment capital to qualified projects or businesses that are located in underserved communities.

Eligible communities typically must have a 20% or higher poverty rate or a median income that does not exceed 80% of the statewide median income.

Approximately 40% of US communities qualify.

How is the credit calculated?

The credit is claimed over a seven-year period, in installments equal to 5% of the qualified investment for the first three years, and 6% for the following four years, for a total of 39%.

Example:
An investor makes $100 million of QEI in a CDE which has received $100 million NMTC allocation from the CDFI Fund. By doing so, the same investor would be entitled to receive $39 million of NMTC, $5 million in years 1 to 3 and $6 million in years 4 to 7.

Who can apply for the NMTC?

To apply for a NMTC allocation, an organization must be certified as a CDE by the CDFI Fund.

To qualify as a CDE, the organization must be:

  • A domestic corporation or partnership
  • Demonstrate a primary mission of serving low-income communities
  • Maintain accountability to residents of low-income communities through representation on the board

The application to become a CDE is a relatively simple process that typically takes less than a day to complete.

How are awards determined?

The credits are awarded by the CDFI Fund via a competitive process (one cycle per year). The CDFI Fund bases its decision on four equally weighted parts of the application:

  • Business strategy
  • Community impact
  • Management capacity
  • Capitalization strategy

What’s the time frame from application to allocation?

Annual NMTC allocation authority has historically ranged from $2 billion to $5 billion. In a typical cycle:

  • The CDFI Fund announces the allocation authority and releases application materials (which vary only slightly year to year) within the first quarter.
  • Applicants are allowed 1 to 2 months to complete a comprehensive application (For example, the 2010 NMTC round was announced April 8, 2010, and applications were due on June 2, 2010.)
  • The CDFI Fund reviews and applications and announces the awardees within Q3/Q4 of the same year.

How can project owners/developers directly benefit from the NMTC?

As an important community revitalization tool, the NMTC enhances project owners/developers’ access to affordable capital that may not otherwise be available.

Through monetizing the credits, project owners/ developers are able to raise equity and/or debt financing at much lower costs and with more favorable terms. Top consideration factors for clients interested in participating in the NMTC program include:

  • Location — Only projects located in a NMTC qualified census tract are eligible to apply.
  • Timing — Based on the application and award timeline, a natural .t for the 2011 round would be project(s) scheduled to break ground in late 2011/early 2012. It is beneficial to introduce the NMTC opportunity to potential clients as soon as possible.
  • Likelihood of receiving a NMTC award allocation — As one of the most significant federal subsidies for capital projects, the NMTC program remains highly competitive and over-subscribed. The typical success rate is 25%, though our clients’ success rate over the past 10 years has approximately doubled the program’s overall rate.
  • “Good candidate” projects — Projects supported by NMTC encompass a wide range of activities. To succeed, applicants must demonstrate how the community would be improved by the proposed project and why such project could not go forward, at least not in its current state, but for the lack of access to affordable capital enabled by the NMTC.

Sample investment activities

  • Development of a medical science research park
  • Renovation of an abandoned paper mill and conversion into a mixed-use project
  • Development of an emergency worker training facility in the wake of Hurricane Katrina

We can help you prepare the NMTC applications

Our success rate exceeds the overall program success rate.

Some of the services we may provide include:
Pre-application:

  • Determine whether contemplated project(s) may qualify under the NMTC program
  • Conduct an initial feasibility analysis which helps evaluate whether contemplated project(s) may
  • constitute a good candidate based on the program criteria
  • Review NMTC business plans and suggest elements that may provide the applicant with the highest likelihood of success while maintaining their overall business strategies and stated goals
  • Establish and obtain CDE certification

Application:

  • Support entities seeking to receive an allocation of NMTCs by helping them to craft their application in a fashion that enhances their chances of competing against other applicants in the highly competitive allocation process

Post-allocation:

  • Identify the most favorable ownership structure for a NMTC transaction or series of transactions
  • Assist the CDE in monetizing the tax credits upon receipt of an allocation
  • Partner with CDEs that have received NMTC allocations from the Treasury but that have unused allocation authority
  • Establish and implement a compliance system to meet the CDFI and investor reporting requirements
  • Design an exit strategy






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Contacts

For more information, please contact your local office or one of the following federal tax credit professionals:

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