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November 21, 2016Client Alert

New Market Tax Credit Award Update

On Thursday, November 17, 2016, the Community Development Financial Institution Fund (CDFI Fund) announced 120 Community Development Entities (CDEs) received $7 billion in New Market Tax Credit (NMTC) allocation authority for the 2015-2016 award round. For investors, this means $2.73 billion in available federal tax credits.

Under the NMTC program, CDEs use capital investments provided by investors to make loans to qualified businesses located in distressed and low-income communities. The investors receive equity in the CDEs and the borrowers receive loans with better rates and terms and more flexible features than the market. Through their equity in the CDEs, the investors receive the NMTCs and can claim federal tax credits equal to 39% of their equity in the CDEs. The federal tax credits are claimed over a seven year period in which the investors claim a portion of the credits each year. The NMTC program is intended to provide investors with an incentive to invest in distressed and low-income communities that they may otherwise consider too high of risk. In addition to the federal tax credit, investors have the benefit of entering into potentially new markets before their competitors.  

While the NMTC program requires CDEs to make loans to qualified businesses located in distressed and low-income communities, such distressed and low-income communities can be in major urban, minor urban, or rural areas. For the 2015-2016 award round, CDEs have committed to loaning approximately $4.157 billion to major urban areas, $1.410 billion to minor urban areas, and $1.271 billion to rural areas. The CDFI Fund provides a searchable map to determine whether a property address is located within an area considered to be a distressed or low-income community and therefore eligible for the NMTC program. The CDFI Fund map can be found here: https://www.cdfifund.gov/Pages/cims3.aspx

Now that the NMTC allocation authority has been announced for the 2015-2016 award round, investors should waste no time in contacting a CDE to get a commitment of NMTC allocations.  Unlike other tax credit programs, an investor cannot use the federal tax credits until a CDE agrees to commit a portion of its NMTCs to the investor and the CDE has made a loan to a qualified business. A CDE will typically try to make commitments for NMTCs received in an award as soon as possible. The 2015-2016 NMTC program award book lists all of the CDEs that received NMTC allocation authority and can be found here:  https://www.cdfifund.gov/Documents/FINAL%202015%202016%20NMTC%20Award%20Book%20Nov2016.pdf

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