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March 16, 2011Blog

Tips To Get A New Market Tax Credit Commitment

Renewable Energy World

On February 24, 2011, the federal government announced the award of $3.5 billion in new market tax credit allocations to community development entities (or "CDEs").  A CDE is essentially an intermediary through which a bank loans funds in order for the bank to receive the 39% federal new market tax credit.  I talked about how the new market tax credit program works in a prior blog post:

 

Notably, 6 of the 99 allocatees referenced in their profile that they focus on renewable energy projects. My own personal experience with several other allocatees suggests that other allocatees are also eager to loan to renewable projects even if not highlighted in their profiles.  A full list of the recent awardees is available here.

 

Given the massive new round of allocations, a renewable energy developer should make sure it considers new market tax financing in the sources and uses.  To maximize the likelihood of securing a commitment of credits from a CDE, the following tips are recommended:

1. Timing.  A developer should talk to a CDE about a new market tax credit commitment 4 to 9 months before the developer wants to close on the financing.  On one hand, the diligence process for a new market tax credit financing can take several months (much like a commercial loan) so the discussions should start 4 months away.  On the other hand, it may be futile to talk to a CDE too far in advance.  This is because tax rules generally require CDEs to commit 85% of their new market credits within 12 months of receipt of the credit allocation.  Thus, a typical CDE wants to finance projects that can close as soon as possible.  Developers that are more than 9 months away from a realistic closing date for new market financing will have trouble getting a CDE's attention. 

 

2. Offtake.  Even more so than a commercial lender, a new market tax credit lender can not accept the possibility of a default.  This is because such a default generally can result in vicious tax penalties to the tax credit investor on top of the lost returns.  Thus, the offtake agreement needs to be ironclad – even more so than for a commercial lender. 

 

3. Gap Financing.  New market tax credit financing should be thought of as the "gap" financing that plugs the balance of finance after all other sources are accounted for.  Thus, to make a strong case to a CDE, the new market tax credit investor should have other financing sources lined up.

While new market tax credit financing is a powerful financing tool, it is not a certainty.  Careful planning and timing can make the difference in securing a tax credit commitment from a CDE.

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