Frequently Asked Questions
What is the New Markets Tax Credit (NMTC) Program?
How does the NMTC Program work?
What is a CDE?
How do I find out what census tracts in my area qualify?
Who benefits from NMTCs?
Since CHFA is a Non-Profit Organization, how can it apply for an allocation of NMTCs?
What kinds of development activity will the CGR Fund pursue with funds secured through NMTC investments?
Can the NMTC be used for housing?
What businesses qualify as Active Low-income Community Businesses for purposes of the New Markets Tax Credits?
Who can invest in a CDE?
What triggers potential recapture of the credit?
What is the time limit for making NMTC investments?
Who will ensure compliance with NMTC regulations?
What is the New Markets Tax Credit (NMTC) Program?
Part of the Community Renewal Tax Relief Act of 2000, the New Markets Tax Credit Program will spur approximately $15 billion in investments into privately managed investment institutions. In turn, these privately managed investment institutions, or Community Development Entities (CDEs), will make loans and capital investments in businesses in underserved areas. By making an investment in a CDE, an individual or corporate investor can receive a tax credit worth 39 percent (30 percent net present value) of the initial investment, distributed over 7 years, along with any anticipated return on their investment in the CDE.
How does the NMTC Program work?
The NMTC Program permits taxpayers to claim a credit against Federal income taxes for Qualified Equity Investments (QEIs) made to acquire stock or a capital interest in designated Community Development Entities (CDEs). These designated CDEs must use substantially all (defined as 85 percent) of these proceeds to make Qualified Low-Income Community Investments (QLICIs).
The investor, or a subsequent purchaser, is provided with a tax credit claimed over seven years. The investor receives a tax credit equal to five percent of the total amount paid for the capital interest or stock purchase over the first three years. For the final four years, the value of the tax credit is six percent annually.
The Community Development Financial Institutions Fund (CDFI Fund) certifies CDEs on an ongoing basis, and allocates NMTC Allocations annually to select CDEs through a competitive application process.
What is a CDE?
The CDFI Fund has the following requirements for qualification as a CDE. A CDE is any duly organized entity treated as a domestic corporation or partnership for federal income tax purposes that: (a) has a primary mission of serving, or providing investment capital for, low-income communities or low-income persons; (b) maintains accountability to residents of low-income communities through their representation on any governing board of the entity or any advisory board to the entity; and (c) has been certified as a CDE by the CDFI Fund of the US Department of Treasury.
How do I find out what census tracts in my area qualify?
Investors or business owners interested in determining what census tracts qualify as Low-Income Communities should use the Community Development Financial Institutions Fund online New Markets Tax Credit Help Desk or call John Plakorus at CHFA, 303.297.7494.
Who benefits from NMTCs?
Businesses, investors, and communities will benefit from NMTCs. The NMTC program was designed to make investment capital available to businesses in qualifying low-income communities, to create jobs and spur additional economic development. The Federal Government created the NMTC as an inducement to private investors to open the flow investment capital into these communities. These tax credits, when considered along with the potential return on their investment in the CDE, create a substantial financial benefit for the investors as well.
Since CHFA is a Non-Profit Organization, how can it apply for an allocation of New Markets Tax Credits?
Because NMTCs can only be offered to investors that purchase stock or capital in a CDE, only for-profit CDEs may facilitate NMTC transactions. However, a non-profit entity may apply for a NMTC allocation with the intention of transferring the allocation to one or more for-profit subsidiary CDEs. CHFA, in partnership with the City of Denver and Colorado Enterprise Fund, has formed a for-profit subsidiary known as the Colorado Growth and Revitalization Fund LLC, which is the CDE making NMTC transactions.
What kinds of development activity will the CGR Fund pursue with funds secured through NMTC investments?
The Fund will finance a wide range of private business enterprises in Qualifying Low-Income Communities with funds secured through NMTC investments. Examples of qualifying activities include: loans, equity or capital investments; purchase of certain loans made by other CDEs; financial counseling and related services to businesses. The focus of the CGR Fund’s program is commercial real estate, commercial mixed-use and other real estate development and redevelopment projects. Additionally, the fund will target its funds to finance community development projects such as community facilities, and non-profit organizations.
Can the NMTC be used for housing?
As in the above question, the law requires that the NMTC be used to make loans or investments, or to provide counseling for businesses, not to develop affordable housing. In certain circumstances, NMTC may be used to finance mixed-use projects, where less than 80% of the gross rental income comes from dwelling units. In cases such as this, the Low-Income Housing Tax Credits and New Markets Tax Credits may NOT be used to subsidize the same square foot.
NMTC funds MAY be used to finance businesses that purchase, rehab and sell single family homes by investing in businesses that are involved in affordable housing.
Which businesses qualify as Active Low-income Community Businesses for purposes of the NMTC Program?
Businesses eligible to receive NMTC financing are corporations, partnerships, sole-proprietorships and non-profits that are active and located in a low-income community, as defined by the NMTC regulations. In general, a Low-Income Community is defined as a Census tract with a poverty rate of at least 20%, or with median income of up to 80% of the area or statewide median, whichever is greater. For a non-metropolitan census tract, 80% of the statewide median is acceptable.
Furthermore, a Qualified Active Low-Income Community Business must derive at least half its gross income from business in the eligible area and must have a "substantial portion" (40%) of its tangible property located in a low-income community. Finally, the business must perform a substantial portion (40%) of its services in any low-income community. Banks, Credit Unions and other financial institutions are excluded from the definition of Qualified Active Low-Income Community Business.
Who can invest in a CDE?
Anyone with a U.S. income tax obligation – including an individual, a company, or an investment fund – can invest in a CDE to receive the NMTC. Investors of all types may be interested in NMTC, including banks and thrifts, insurance companies, investment banks, venture capital and other investment funds, insurance companies, individuals, corporations, and others.
It is understood that investors in a CDE will expect a return from the credit above and beyond the federal tax subsidy.
What triggers potential recapture of the credit?
According to the IRS regulations, there is a recapture event with respect to an equity investment in a CDE if (i) the entity ceases to be a CDE; (ii) the proceeds of the investment cease to be used in a manner that satisfies the substantially-all requirement outlined above; or (iii) the investment is redeemed by the CDE. Bankruptcy of a CDE is not a recapture event. In this event, the IRS will recapture all credits allowed to the taxpayer who purchased the equity investment from the CDE at its original issue and to all subsequent holders of that investment. Those taxpayers will also owe non-deductible interest on the amounts so recaptured.
A CDE may apply for a waiver or extension on recapture, and such a waiver or extension may be granted in specific circumstances. If such a waiver or extension is granted, then the CDE may be required to adjust its policies in order to rectify the situation in the future.
What is the time limit for making NMTC investments?
CDEs successful in receiving an allocation of NMTC will have a maximum of five years to place credits with investors and secure cash for equity in the CDE. The CDE must utilize the cash received in exchange for tax credits within 12 months of receipt. If the cash is not invested in a qualified low-income community investment within 12 months of receipt, the CDE is considered to be in default.
Who will ensure compliance with NMTC regulations?
CHFA, the managing partner of the CGR Fund, has over 32 years of successful compliance with Federal government funding programs. To enhance its ability to ensure regulatory compliance performance, the Fund has partnered with industry specialists to assist with deal structuring and compliance.