2018-156 New Market Tax CreditsDate: October 26, 2018 Report No. 2018-156
INFORMAL STAFF REPORT
TO MAYOR AND CITY COUNCIL
SUBJECT: New Market Tax Credits
EXECUTIVE SUMMARY:
During its October 9, 2018, regular meeting, Council received a Citizen Report on the New
Market Tax Credit (NMTC) program from Pat Smith of Serve Denton. Staff prepared this report
to provide further information on NMTCs. It includes regulatory information, terminology, an
overview of the NMTC process, Serve Denton’s local example, and the pros and cons of using
the NMTC program.
BACKGROUND:
The New Market Tax Credits program was created in the Community Renewal Tax Relief Act of
2000. Regulations for the program fall under Section 45D of the Internal Revenue Service (IRS)
Code. The agency that is charged with overseeing and administering the program is the Certified
Development Financial Institution (CDFI), a division of Treasury Department. The credit
authority for the program is authorized by Congress.
DISCUSSION:
The NMTC Program was created to encourage private investment in low-income communities
through the use of federal income tax credits. The annual allocations are awarded on a
discretionary basis and are very competitive. The program was designed to grant individual and
corporate investors a tax credit against their federal income tax.
Definitions
A number of terms are necessary to understand the NMTC Program and the roles of the different
entities involved in the process. The main ones are included below.
Certified Development Financial Institution (CDFI): a division of Treasury Department with the
credit authority for the program authorized by Congress. The agency is charged with oversight of
the NMTC program.
New Market Tax Credits (NMTCs) are granted for a 7-year term. This allows for a 5% credit in
years 1-3 and a 6% credit in years 4-7 for a total credit of 39% of the investment.
Certified Development Entity (CDE): an intermediary that makes the investment or the loan. The
CDE must be certified by the CDFI. Banks, developers and local governments are eligible to
become a CDE.
Qualified Equity Investment (QEI): an investment paid to the CDE to obtain equity in the CDE.
The CDE grants this investment as a QEI.
Qualified Low-Income Community Investment (QLICI) is typically a loan or investment.
Date: October 26, 2018 Report No. 2018-156
Qualified Active Low-Income Community Business (QALICB) is a recipient of a loan; it can be
a business or a non-profit.
Low Income Community designation requires a census tract with a poverty rate which exceeds
20% or the median income is below 80% of the greater of the state or metropolitan statistical
area (Dallas-Fort Worth-Arlington) median income. The eligible NMTC 2010 Census tracts in
Denton are included in Exhibit 1.
Process
Visual depiction of the NMTC Process from Capital Impact Partners
The first step in the application process is certification. A Certified Development Entity (CDE)
intermediary must be certified by the CDFI in order to be eligible under the NMTC program.
The second step is the completion and submittal of an application. The funding cycle opens in
with the Notice of Allocation Availability (NOAA) in May and is awarded the following winter.
The application consists of five parts: Business Strategy, Community Outcomes, Management
Capacity, Capitalization Strategy and Previous Awards.
If selected, the third step in the application process is the award announcement, which is
followed by the allocation Agreement.
The final step is compliance and reporting on the measurable community impact of the NMTC
project.
Date: October 26, 2018 Report No. 2018-156
If selected for funding, a CDE identifies equity investors. The NMTCs usually are combined
with other funding sources, such as historic tax credits, in order to make the projects work.
Examples of projects CDEs invest in are: manufacturing, retail, or healthcare facilities.
NMTCs are subject to recapture if the QEI does not pass the “substantially-all” requirement.
This involves a failure to: invest 85% of the original QEI, meet QALICB requirements, or meet
the one-year investment requirement.
A table with the six Texas CDEs that received NMTC allocations in 2016 and 2017 is included
in Exhibit 2. Please note that the table has active links for more information on each project.
Exhibit 3 provides a link to a video which does a good job of explaining the NMTC process.
NMTC Example
Pat Smith of Serve Denton spoke to Council on October 9, 2018, regarding the nonprofit’s use of
NMTC’s as a portion of the funding for its new facility. Staff contacted Mr. Smith to discuss
how Serve Denton structured its NMTC project. Serve Denton engaged an NMTC consultant, a
law firm specializing in NMTCs, and an accounting firm specializing in NMTCs to vet the
project and guide them through the process. They used a bank in Washington, D.C. called
Capital Impact Partners as the CDE. Mr. Smith said that one of the key elements with an NMTC
project is that all of the components (funding, permitting, etc.) have to be in place at closing – in
other words, it has to be a “shovel ready” project. He added that NMTCs, while difficult to
establish, were easier to administer in the long term than other federal grant programs.
Pros and Cons
Some of the advantages and disadvantages of the NMTC program are included in the table
below.
Advantages Disadvantages
Mixed use projects can be a qualifying business
Residential rental property not considered a qualifying
business
Tax credits can be claimed in 7 years
Tax credit claims are 5% each year for the for the 1st 3 years
and 6% each year for the next 4 years for a total of 39%,
usually need to be combined with other funding
Can be combined with historic rehabilitation tax
credits Cannot be combined with low income tax credits
QALICB (business) generally receives favorable
terms or equity, but need to provide collateral to the
CDE
Local government and quasi-governmental CDEs were
awarded less often and for smaller allocations, 2% of
projects in 2013 were associated with governmental or tribal
organizations2
Leveraging of the equity investment and the loan
allow for a return that is closer to a conventional
loan1
Credit allocation process is very complicated and
competitive (25% of applicants receive the allocation)
NMTC administration is easier to administer in the
long term than some federal grant programs.
The tax credit equals 39% of the Qualified Equity
Investment (QEI). Investor may have borrowed to make the
equity investment
A CDE may be able to provide a grant and/or a
bridge loan to assist with closing
The initial program is difficult to establish and requires
funding and permitting components to be in place at closing
Date: October 26, 2018 Report No. 2018-156
1 Holland and Knight's Leveraged Model
2Source: Tax Policy Center Briefing Book "A Citizen's Guide to the Fascinating (though often Complex) Elements of the Federal tax
System," 2016
CONCLUSION
While NMTCs present an alternative avenue for project funding, local government projects
typically make up under 5% of the project awards in a given year. When considering the use of
NMTCs, careful consideration must be given to the benefits and drawbacks of this federal
program.
ATTACHMENT(S):
Exhibit 1 – NMTC Map by Baker and Tilly
Exhibit 2 – NMTC Awardees in Texas 2016-2017
Exhibit 3 – NMTC Video Link
STAFF CONTACT:
Erica Sullivan, Economic Development Analyst
Economic Development Department
940-349-7731
Exhibit 1
Denton’s NMTC Eligibility Map
Exhibit 2
NMTC Allocatees in Texas 2016-2017
Awardee City State Year Program Amount Service
Area
Dallas Development Fund Dallas TX 2017 NMTC $55,000,000 Local
Pacesetter CDE, Inc.
Fort
Worth TX 2016 NMTC $35,000,000 National
PeopleFund NMTC LLC Austin TX 2017 NMTC $30,000,000 State
PeopleFund NMTC LLC Austin TX 2016 NMTC $30,000,000 Statewide
Texas Mezzanine Fund, Inc. Dallas TX 2016 NMTC $75,000,000 Statewide
TransPecos Development Corp
San
Antonio TX 2017 NMTC $65,000,000 State
Source: CDFI
Note: Awardee column has active links for more details on each award
Exhibit 3
Baker Tilly’s “New Market Tax Credit program: how it works” video link:
https://www.bakertilly.com/insights/new-markets-tax-credit-program-how-it-works