On June 15, 2015, the U.S. Treasury Department’s Community Development Financial Institution (“CDFI”) announced the awarding of more than $3.5 billion in New Markets Tax Credits. The Federal New Markets Tax Credit (“NMTC”) was created by Congress in 2000, to encourage financial investment and economic development in lower-income communities throughout the United States. A total of 76 organizations received the credit in 2015.
The NMTC Program provides tax credit incentives to investors for equity investments in certified Community Development Entities (“CDE”), which invest in low-income communities. The credit equals 39% of the investment paid out (5% in each of the first three years, then 6% over the final four, for a total of 39%) over seven years. A CDE must have a primary mission of investing in low-income communities and persons. CDEs are domestic corporations or partnerships.
How a CDE Can Contribute an NMTC Allocation Into a Project:
- Provide a low-interest loan, typically 200-400 basis points below market rates to the project sponsor, or
- Provide a forgivable loan to the project sponsor. For this type of investment, the funds essentially become an equity investment in the project.
The program has become extremely competitive with many projects competing for each CDE’s allocation. The 76 organizations receiving awards this year were selected from a pool of 263 applicants that requested approximately $19.9 billion in allocation authority.
Since the program’s inception, New Markets Tax Credit investments are estimated to have created nearly 600,000 new jobs and supported the construction of more than 160 million square feet of retail, manufacturing and office space.
“Every community deserves a chance to succeed, and the New Markets Tax Credit Program is an economic development tool that spurs growth and breathes new life into neglected, underserved low-income communities”, said Treasury Secretary Jacob J. Lew in a statement. “The tax credit allocation authorities announced today will go to community development organizations that will make much needed private sector investments in businesses and real estate projects located in the nation’s distressed urban and rural communities. Along with these investments come jobs, vital services, and opportunities where they are needed the most.”