6. New Markets Tax Credits 101: The Basics - George Nagle

New Markets Tax Credits
George F. Nagle, Esq.
Nagle Law, LLC
Radnor Financial Center
Suite F200
150 N. Radnor-Chester Road
Radnor, PA 19087
[email protected]
New Markets Tax Credit Program
 Enacted as part of the Community Renewal Tax Relief
Act of 2000
 Administered through Treasury’s Community
Development Financial Institutions (CDFI) Fund
 Provides Federal tax credits for private equity investments
in Community Development Entities (“CDEs”)
 Promotes economic development in distressed
communities – Through 2013 round, $40 Billion NMTCs
Amount of Credit
NMTCs are available for Qualified Equity Investments
(“QEIs”) in a CDE
Credits equal 39% of QEI, claimed in 7 installments
over 6 years
 5% of QEI at closing, and 1st and 2nd
 6% of QEI each year on the 3rd to 6th
QEI must remain invested for 7 years
$10 million
$3.9 million NMTCs
 To qualify as a CDE, an entity must be a domestic
corporation or partnership that:
 has a primary mission of serving, or providing investment capital
for low-income communities or low-income persons;
 maintains accountability to residents of low-income communities
through their representation on any governing board of the entity
or on any advisory board; and
 is certified by the CDFI Fund as a CDE
CDEs must use “substantially all” of the QEI proceeds within 12
months to make a Qualified Low-Income Community Investment
(“QLICI”) in a Qualified Active Low-Income Community Business
(“QALICB”) located in a Low-Income Community
“Substantially all” – 85% (75% in year 7) invested every year for 7year period – Allocation Agreement may require higher percentage
QLICIs include: (i) any capital or equity investment or loan to a
QALICB, (ii) equity investments or loans to other CDEs, (iii) the
purchase of qualifying loans from other CDEs, and (iv) counseling to
low-income community businesses or residents.
QLICIs do not include: (i) lease of property to lessee who conducts “sin
business,” or (ii) proceeds included in eligible basis of LIHTC project.
$10 million
$3.9 million NMTCs,
$10 million
QLICI loan
Interest - only
(Developer Entity)
Low-Income Community
Generally, census tract where:
 Poverty rate exceeds 20%, or
 Median family income does not exceed 80% of greater of
statewide median income or Metropolitan area median
income (for metro areas only)
CDFI Mapping System – www.cdfifund.gov
Non-designated areas can qualify:
 Targeted Populations
 Certain low-population tracts
 Certain rural areas with high out-migration
Low-Income Community
Areas of Higher Distress: The competitive allocation process has required winning allocatees to
agree to target their investments to areas of higher distress than minimally required by the
1 of the following:
Areas with poverty rate greater than 30%;
Areas with median income of less than 60% of the greater of state or metro area median income (metropolitan area);
Areas with unemployment rates at least 1.5x the national average;
Areas in counties not contained within a Metropolitan Statistical Area;
Projects serving targeted populations meeting certain requirements.
Or, 2 of the following:
Areas with one of the following: (a) poverty rate greater than 25%, or (b) median income that does not exceed 70% of
greater of statewide or metropolitan area median family income (for metropolitan areas), or (c) unemployment rates at least
1.25X the national average;
SBA designated HUB Zones;
Brownfields redevelopment areas;
Areas encompassed by a HOPE VI redevelopment plan;
Areas designated as Native American or Alaskan Native areas, or Hawaiian Homelands
Areas designated as distressed by the Appalachian Regional Commission or Delta Regional Authority;
Colonias areas designated by HUD;
Federally designated medically underserved areas;
State enterprise zone programs, or other similar state/local programs targeting economically distressed communities;
Certain counties for which FEMA has issued a major disaster declaration;
Business eligible for assistance under the TAA Program;
Certain Census tracts identified as a Food Desert.
 A corporation (including nonprofit), partnership
or proprietorship engaged in the active conduct of
a qualified business and satisfies 5 requirements:
Gross Income
Use of Tangible Property
Services Performed
Nonqualified Financial Property
Reasonable Expectations on Status:
 QALICB will continue to be treated as such for
entire term of QLICI if CDE reasonably expects
at the time it makes the QLICI that the business
will satisfy the requirements for the entire term.
 Generally, if CDE controls or obtains control of
the QALICB during the 7-year credit period, the
QALICB must satisfy the tests for the entire
period that CDE controls QALICB.
QALICB – Active Test
 For-profit business will be considered “active” if
the CDE reasonably expects that the QALICB
will generate revenues within 3 years of its
 Non-profits will be considered “active” if the
CDE reasonably expects that the QALICB will
engage in an activity that furthers its purpose as a
nonprofit corporation within 3 years of its
QALICB – Qualified Business
Generally, any business except:
 Rental of real property with no substantial improvements;
 Residential rental property (80% or more of gross rental
income from dwelling units);
 Developing or holding intangibles for sale or license;
 “Sin” Businesses – private or commercial golf course, country
club, massage parlor, hot tub facility, suntan facility, racetrack or
other facility used for gambling, or any store the principal business
of which is the sale of alcoholic beverages for consumption off
premises (lessees of property also cannot be “sin” businesses); or
 A farming business if assets exceed $500,000.
NMTC is recaptured in its entirety if, at any time during the sevenyear credit period, a recapture event occurs.
Recapture Events:
 the CDE ceases to be a qualified community development
entity; or
 less than substantially all of the proceeds from purchase of
the QEI continue to be invested in QLICIs; or
the QEI is redeemed.
Leveraged NMTCs
 Investor forms Investment Fund – typically a single-member limited
liability company.
 Investment Fund receives tax credit equity from Investor and combines it
with nonrecourse borrowing to make QEI and generate additional tax
 Leverage Lender gets 100% of cash flow from Investment Fund to pay debt
service, but is not allocated tax credits or profits and losses.
 Investor gets 100% ownership of Investment Fund and 100% of the tax
credits, profits and losses.
 Leverage Lender can be affiliate of QALICB or 3rd party source.
$6.8 million
$3.2 million
7 yrs.
$3.9 million
$10 million
Qualified Equity Investment
5% Suballocation
Fee ($500,000)
-$3.9 million NMTCs
-Distributions to pay Leverage Lender interest
$6.8 million senior loan
$2.7 million subordinate loan
7 yrs.