Building Blocks 2004
Coastal Enterprises Inc. (CEI) and Bethel New Life were two of 66 organizations awarded $2.5
billion from the first round of New Markets Tax Credits (NMTC) in the Spring of 2003. i Ron
Phillips, President of CEI and Mary Nelson, President of Bethel New Life were part of the
original advocacy group that met with Michael Barr, an official in the Department of Treasury in
the Clinton Administration in 1998. At the meeting, Barr proposed expanding a pilot national
credit program by proposing a multi-billion dollar tax credit to Congress to encourage private
sector investments to support community development financial institutions. “After we left the
meeting, “I asked Mary, he did say billions right?” said Phillips. Five years earlier, Nelson and
Phillips had each won $2 million in tax credits through the pilot program to encourage private
sector investments in nonprofit community development corporations working in low- income
Over a 7 year period NMTC will provide $15 billion for community economic development
investments. For example, the NMTC will enable CEI to provide a $30 million below market
loan to a paper mill in Northern Maine. This loan from CEI, a community development financial
institution (CDFI) and community development corporation (CDC), will help sustain the mill’s
operations, preserving 400 jobs for its forestry-dependent community. The NMTC will allow
Bethel New Life, a faith-based CDC, to provide equity investments to its franchise tenants to
help them obtain bank financing for a commercial retail development in the Garfield
neighborhood in West Chicago.
What is NMTC and how does it work?
The NMTC is a federal tax credit designed to encourage investors to provide long-term
capital to community economic development activities in distressed areas. The NMTC
provides $15 billion of eligible investment credits over seven years to certified
community development entities (CDEs), which "trade" those credits for equity from
private investors. In return for acquiring an ownership investment in the CDE or an
eligible community development activity , the investor is allocated tax credits over a
seven- year period equal to 5 percent of his/her equity investment for each of the first
three years and 6 percent per year thereafter. The total credits equal 39 percent of the
The NMTC is expected to be the largest new source of subsidy for community development
activities in this decade. “Traditional grant money has been increasingly harder to access; the
NMTC is a “new door of opportunity” for community development corporations and financial
institutions,” observed Anna Ginn formerly of CEI iii.
NMTC equity investments and/or loans benefit businesses by enabling them to obtain flexible
debt or capital that otherwise may not be available in the marketplace. CDEs have to invest these
funds in businesses and business developments in low- income census tracts for seven years and
then return the funds to the investors. (Figure 1) The Community Development Financial
Institutions Fund (CDFI Fund) manages most components of the NMTC: It certifies CDEs,
allocates the credits and monitors compliance with program regulations. In addition, the Internal
Revenue Service is involved in defining many of the tax requirements of the program.
Figure 1: NEW MARKETS TAX CREDIT- How it Works
Tax Credit Loans /
Application Equity Qualified
Fund CDE /
Allocation CDE Community
Community other CDEs
t Loan /
Tax Credits / Entity Equity
ROI / Equity Payments
What are the different ways to use NMTC?
As of March 8, 2004, 29 organizations that had been allocated NMTC reported that they have
issued qualified equity investments (QEIs) from investors for a total of $473 million, according
to testimony before the House Appropriations Subcommittee by Wayne Abernathy, Treasury
Department Assistant Secretary for Financial Institutions.
Local groups in rural and urban areas, national organizations, and for-profit firms recognize that
NMTC can spur community reinvestment in diverse and significant ways. Kentucky Highlands
Investment Corporation (KHIC), a CDC and CDFI in Eastern Kentucky, will use its $2 million
allocation to expand the reach of its New Markets Venture Capital Fund to five states. As a
certified CDE, KHIC will encourage individual and institutional investors to buy stock or equity
interests. Using these tax- favored equity investments, KHIC will re- invest the funds in the form
of loans or direct equity investments in “qualified active low- income community businesses” or
“qualified active low- income community activities.”iv KHIC also plans to provide financial
counseling using the NMTC. CEI’s plans to provide loans and equity investments to businesses,
details are provided in Case 1.
Urban groups have prioritized real estate development, including commercial real estate, mixed
use housing/retail buildings, or developing and selling homes for sale to individuals. Bethel New
Life is using its $4 million NMTC allocation for several projects in Chicago. “We are focused on
place-based strategies,” says President Mary Nelson. Besides providing equity investments for
its franchise tenants, this faith-based CDC is also making a million-dollar investment in the Lake
Pulaski Commercial Center building. The Columbus Association for the Performing Arts plans
to use its $6 million NMTC allocation to expand its strategy that links theater renovation and
residential housing development, to other cities. v
A 60,000 square foot mixed- use project on the waterfront in Tacoma, Washington was financed
with the NMTC. The Local Initiative Support Corporation used $10,8 million in NMTC debt to
close the Albers Mill project. Using a senior debt model, LISC lowered rates on senior mortgage
loans by 150 to 250 bases points or more below conventional sources to turn the historic flour
mill into a residential rental and commercial facility.
The City of Phoenix, Arizona won the largest NMTC award. Its CDE is led by a five- member
board of directors including representatives from Chicanos por la Causa, The Urban League, and
the Phoenix Community Alliance. The CDE is dividing its $170 million allocation into three
funds including $20 million for small business investment fund, $120 million for business
development and revitalization loan fund, and $30 million to a venture capital fund. Possible
projects include the development of homes for sale, shopping centers, manufacturing firms, and
small business expansion.
National organizations plan to make community economic development investments through
nonprofits in a variety of states. Seedco, a national nonprofit organization plans to use its $10
million NMTC allocation to support small business incubators and other businesses in seven
states Alabama, Florida, Louisiana, Michigan, New York, Tennessee, and Texas. The National
Trust for Historic Preservation will also focus on real estate in historic areas. Its activities are
outlined in Case 2.
Community based-development organizations can also access NMTC through national banks
such as Key Bank. Key Bank’s subsidiary, Key Community Development Corporation (KCDC)
plans to use its $150 million primarily for small business loans in 12 primarily “rust belt” states.vi
KCDC will also invest in real estate, mezzanine business loans, and a brownfields
redevelopment revolving loan fund. JP Morgan Chase Community Development Group plans to
provide debt, equity, or both in leveraged deals for commercial revitalization projects, loans, and
Case 1: In rural Maine, CEI’s $65 million allocation will help it deliver a variety of community
development finance programs. A major feature of CEI’s program is partnership with other
CDFIs in Maine, Northern New England and upstate New York. With a total of $110 million
under management, CEI will be able to provide a continuum of capital from micro-loans to
venture capital for a range of businesses, as well as support for affordable and special needs
housing. CEI manages a pool of bank funds for affordable housing and manages Low Income
Housing Tax Credit developments. Over the years, CEI has received funding from public and
private sources, such as the Office of Community Services, Rural Businesses Enterprise Grants,
Small Business Administration, Ford Foundation and others.
Despite CEI’s success in attracting a broad spectrum of capital providers, it has had difficulty in
attracting traditional sources of investment capital in its service area. “We hope the NMTC
award will be a useful tool to create access to new sources of capital for important projects in
low-income rural communities in Maine, Vermont, New Hampshire, and upstate New York,”
In its initial NMTC application, CEI identified a variety of project types and specific deals,
consistent with its mission, history and expertise. “We looked for solid opportunities with a
direct tie to low income communities in need of additional capital,” said Ellen Golden, senior
vice president for development. An example is a planned $30 million loan to a timberlands
company whose forests are integral to the successful resurrection of two vitally important paper
mills in north central Maine. This investment will retain 400 jobs and help the mill adapt to a
global economy, by ensuring the timberlands are retained for industrial use while being
managed on a sustainable yield basis with a limited cut and ecologically-sensitive forestry
practices under a conservation easement. To reach these objectives CEI is working with a new
publicly-traded Canadian company vii and The Nature Conservancy.
“We hope that the NMTC provides us a chance to expand its investors’ base so it can make
additional investments in other programs areas,” said Steve Weems, manager of CEI’s NMTC
program. “Over the years, CEI has developed a strong working relationship with banks and
other financial institutions operating in its service area, but another attractive tool to mobilize
additional capital will make it possible to do “hard” projects,” he added. CEI staff spends time
with bankers to help them understand they can get Community Reinvestment Act credit from the
deals and it can help them with their traditional loan products also.
CEI will be compensated for its NMTC program activities via fee income, at one or more of three
stages of an individual transaction: up-front, during the term of the deal, and at the back-end. In
the aggregate CEI plans to cover its full program costs plus generate funds for mission-related
program initiatives, such as business counseling services. Many of these programs help the
same investors [banks] who will be providing the majority of the capital for NMTC deals.
Case 2: The National Trust Community Investment Corporation (NTCIC), the for-profit
subsidiary CDE of the National Trust for Historic Preservation (the Trust), received a $127
million allocation of NMTC in 2003. This award, the sixth-largest in the country, significantly
expands the Trust’s resources for revitalizing older and historic commercial districts nationwide.
For more than fifty years, the Trust, a private non-profit organization, has worked for the
preservation of America’s historic resources.
Richard Moe, president of the National Trust, said, "The New Market Tax Credits will enhance
our ability to become more deeply committed and involved in low income communities where so
many of our historic resources are located. By investing in the Main Streets and historic
neighborhoods that are at the heart of our cities, we can bring new vitality to those communities
that historically have had poor access to capital."
John Leith-Tetrault, director of Community Partners, added, “An estimated 38 percent of
national historic districts in census tracts having a poverty rate of 20 percent or more so much of
the Trust’s preservation efforts are closely tied to revitalizing low-income communities that are
rich in historic resources but poor in capital.”
Two of the four NTCIC lines of business address the opportunity to combine the federal and state
historic rehabilitation credit (RTC) with the NMTC. The Historic Tax Credit Fund makes direct
investments in historic rehabilitation projects that qualify for new markets enhancement while
the Historic New Markets Conduit Fund enables tax credit investors/syndicators who do not
possess an allocation to earn the NTMC on their RTC investment. Under this “twinned” tax
credit approach, investors will be able to achieve a higher rate of return and commit more equity
Two projects that have benefited from NTCIC twinning the two credits are the Arthur Flemming
Center in Washington, DC and Dia:Beacon in Beacon, New York. These historic rehabilitation
projects will receive a combined $1 million in NMTC equity from NTCIC’s Banc of America
Historic Tax Credit Fund. Emmaus Services for the Aging recently completed a $3 million
rehabilitation of three vacant residential townhouses in the Shaw neighborhood, the District’s
most historically significant African-American community and also one of its neediest. The
Arthur S. Flemming Center, as it is now known, serves as the headquarters for Emmaus’ senior
citizen assistance programs, allowing the organization closer proximity to the population it is
most trying to help. For example, the Center offers computer, art, language, movement and
music classes for the elderly as well as a communal space for them to congregate. A host of
other public welfare non-profit organizations rent office space from Emmaus at below-market
rates, making this historic 9th Street address an important resource for citizens in need and those
working to help them.
The Dia Art Foundation utilized a combined $5.4 million in historic tax credit and new markets
tax credit equity to help transform an abandoned factory into a breathtaking contemporary art
museum in the struggling riverside city of Beacon, New York. “Following a $30 million
rehabilitation, this 292,000 square foot former Nabisco printing factory has become a stunning
showroom for the Manhattan-based foundation’s world-class contemporary art collection,”
explained Leith-Tetrault. He added, “The industrial steel, concrete and glass structure—a “one-
of-a-kind” in Beacon—is the perfect environment in which to exhibit the huge sculptures and
multi-panel paintings by masters such as Andy Warhol, James Beuys and Donald Judd.” No
longer a symbol of Beacon’s stagnant economy, this property is expected to draw thousands of
tourists each year, and stands as a source of hope for continued economic recovery of the
Hudson River Valley
The NMTC can be used to support housing development in mixed-use residential/retail projects
and the development of homes for sale. Fannie Mae has announced plans to invest in single-
family housing and mixed-use projects. To qualify, the mixed-use property must derive no more
than 80 percent of its gross rental income from the rental of dwelling units. viii For depreciation
purposes, the whole building would be depreciated as a nonresidential property. The credit
would apply to the whole mixed-use deal, not just the commercial component.
The NMTC also may be used in single-family homeownership developments through bridge
financing, although this could be tricky. Any tax credit allocation must have at least 85 percent
("substantially all") invested during the seven-year life of the credit. Thus, a CDE must invest in
-- or operate -- a housing business with substantial long-term housing flow to ensure compliance.
The CDE can make loans to or equity investments in a company that builds and/or develops
single- family homes for sale. The company must meet the criteria for a qualified active low-
income community business. A CDE could provide pre-construction bridge loans to builders
and developers with two, three, or four-year paybacks, which must be reinvested in qualified
investments within a twelve- month period to avoid recapture of the tax credits.
Under the NMTC program rules, there are a number of specific exclusions to the definition of
“qualified business,” including golf courses, massage parlors, liquor stores, collectibles, etc.
Residential rental property does not qualify, nor do single- family residential mortgages. The
NMTC cannot be used with the Low-Income Housing Tax Credit.
NMTC, the initial years
Groups have participated in the program in a variety of ways. More than 1,362 CDEs took the
first step and received their certification from the CDFI Fund. ix Of those, 345 applied for the
credit in the first round and requested $24.5 billion in funding (nearly ten times what was
available), and 66 organizations received awards. First round NMTC allocations were
announced in March 2003 with awards ranging from $500,000 to $170 million. In that pool
nonprofit parent CDEs won 41.7 percent of the total allocation. x CDEs with a for profit parent
such as Wachovia Community Development LLC and CFBanc Corporation, received 44.6
percent of all allocations. xi
In the second round, the Fund received 271 applications for awards of $3.5 billion. The CDFI
Fund combined its 2003 and 2004 allocations ($1.5 billion and $2 billion) to make $3.5 billion
available in 2004. The Notice of Allocation Availability was announced on July 18, 2003 in the
Federal Register. Applications were due September 30, 2003. The annual NMTC allocation
amount will increase to $3.5 billion for the year of 2007.
CDEs who won allocations are finalizing their allocation agreements with the CDFI Fund and
investing in community development businesses and activities. The CDFI Fund tracks the
activities of the awardees on its community investment impact system (CIIS). All awardees are
required to use this system to report their compliance with the Fund. So far, it appears for the
fear of the recapture requirements, the majority of the credits will be invested in construction
projects instead of more difficult to monitor lending and equity investments.
Who can access NMTC?
Only CDEs can receive a NMTC allocation. Community development organizations have several
options to access the NMTC. They can:
1) become certified CDEs and apply for tax credits directly. KHIC’s Vice President and Chief
Financial Officer, Brenda McDaniel said, “We had already received commitments of $5 million
from our investors so we knew we would have a pretty strong application.”
2) become certified CDEs and receive investments from CDEs with credits. Arlen Kangas,
president of Midwest Minnesota CDC chose this approach: “Since the program is in its
inaugural year, we wanted to know more about the process and the program before taking the
risk to market to investors and comply with all the regulations.”
3) promote financing opportunities to CDEs with allocations. CDCs are promoting their
development projects or loan portfolios to investment entities. AceNET Ventures in Athens,
Ohio is relatively new to working with the CDFI Fund. It received its CDFI designation in 2000
and has $1 million available for lending. “We do not have existing bank relationships,”
explained Director Rick Krieger, “So we are looking to go with other organizations collectively
to access credits perhaps as part of a “fund of funds” group or partnership.
The NMTC program requires that organizations wanting to participate in the NMTC Program
first apply to the CDFI Fund for CDE designation. To become a CDE, an entity must be a duly-
organized legal body and meet both a primary mission test and an accountability test. See
definitions below for more information
While government-controlled entities, nonprofit and for-profit organizations can be CDEs, only
for-profit CDEs can receive an allocation directly from the CDFI Fund. Similarly, only for-
profit CDEs are eligible to issue qualified equity investments to investors. Nonprofits can
receive investments from for-profit CDEs or assign the tax credit allocation to a for-profit entity
that the nonprofit CDE controls.
CDCs with successful track records in community development financing and the ability to
complete a strong application, manage a complex multi- year commitment and recruit investors
are more likely to consider becoming a CDE and applying for credits directly. Those CDCs with
a strong track record but no real interest in complying with a long-term federal commitment may
apply to the CDFI Fund to become CDEs and ask other CDEs with allocations that serve their
state to invest in specific projects or to invest in their CDE. Even if a CDC does not have CDE
certification, it can promote projects to CDEs with allocations.
Limited Partnerships (LP) and Limited Liability Companies (LLC) a re types of ownership of for-
profit entities. They are also the recommended corporate form of CDE ownership for
participation in the NMTC program. xii A for-profit (i.e. taxable) CDE is necessary under the
NMTC Program in order to pass tax credits through to investors. Additionally, a for-profit LP or
LLC provides its owners with a degree of liability protection and the ability to allocate cash flow
benefits in a sharing ratio different from the tax benefits. A subsidiary CDE does not have to be
formed at the time an application is submitted to the CDFI Fund.
CDEs must carefully budget their administrative and management costs when using the NMTC.
The NMTC program allows a safe harbor amount of up to 15 percent of the invested capital to be
retained by the CDE to cover administrative and overhead costs. This is in addition to an amount
up to 5 percent of the invested capital that can be utilized to fund a loan loss reserve. Since these
are not grant funds, any investor capital that the CDE uses for administrative and overhead costs
and/or to cover losses will have to be reimbursed to the investor at the end of the investment
period (unless the agreement negotiated with the investor provides otherwise).
The application process is expensive: groups reported it cost between $30,000 and $100,000 to
prepare an application. The application is extensive requiring extensive data on target areas,
proposed uses of credits, and long-term evaluation criteria. No federal funding is available to
reimburse CDEs for preparing proposals.
The Application Process
The CDFI Fund will accept applications for CDE certification at any time. However, an entity
interested in applying for a NMTC allocation must submit a CDE Certification Application
before the NMTC application deadline. An applicant CDE cannot jointly submit its certification
and allocation applications. The certification deadline probably will be four to five weeks in
advance of the annual allocation application deadline. The CDFI Fund strongly encourages
The NMTC legislation gives priority to CDEs with a proven track record in community
development. (Experience of either the CDE or its parent organization is considered.) The
CDFI Fund gives five priority points to investments not owned by the applicant CDE, although
CDE-owned enterprises are eligible. xiii
In the 2002 NMTC application, the possible score totaled 110 points, including 25 points each
for business strategy, capitalization strategy, management capacity and community impact. In
addition there are five priority points each for having a track record in serving disadvantaged
communities and investing in unrelated entities. Each of the 345 first round applicants were
scored by three reviewers, producing a maximum aggregate sco re of 300 points, plus 30 priority
points. An applicant had to score at least 48 points in each of the four key categories and receive
an overall score of 216 points to advance to the next round.
Successful applicants had strong comprehensive investment plans that included the following
• Minimum five-year strategy of investing the NMTC proceeds, including having investors
committed ahead of time
• Demonstrated financial and operational capacity
• Qualified management team
• Analysis of target market
• A plan for raising operating and investment capital
Investor expectations and CDE management
“Winning the credits is only the first step,” cautions Roy O. Priest who formerly administered
the CDC Tax Credit and is now president of the Natio nal Congress for Community Economic
Development. “The credits give you a license to fish.”
The NMTC has been heavily promoted by accountants and lawyers so financial institutions and
leading corporate firms are well aware of it. For example, Bear Stearns, a well-known
investment firm, partnered with many CDEs to provide the investment financing in their NMTC
applications. However, potential investors may have some concerns about a new program with
new acronyms and operational standards. xiv
CEI’s Ginn explained, “We have had banks and credit union loan officers balk at participation
with the NMTC. They are evaluated on how many loans they close annually. Since NMTC is an
equity investment, not a loan, it is important to talk to a “higher up” in the bank that can make
decisions on equity investments.” She adds, “The tax credit can be used by the bank for CRA
Investors participating in the NMTC Program will expect CDEs to have a successful track record
in business investments. CDEs will need to have :
* A strong investment plan that includes strict underwriting, investment monitoring and
reporting policies and procedures.
* A board of directors or advisory board that includes members with experience in community
development and business investment, as well as residents or representatives of the low-income
community to be served.
* An ongoing asset management program to provide investors further protection from risks
related to the economic performance of the CDE’s investments and tax c redit recapture.
Investors in the NMTC receive two benefits: the tax credit and any income derived from the
investment. . xv A CDE can distribute profits, capital gains, interest and other profits at any time
during the investment period. In promoting a particular incentive, the CDE must use after tax
return when comparing a NMTC to other investments. Investor expectations for return-on-
investment (ROI) will vary based on the type of investor, maturity and investment risk. For
example, socially motivated investors generally will accept a lower ROI. In addition to the five
or six percent tax credit, investors in equity funds might receive 6 or 8 percent return, while loan
funds or real estate transactions may only earn an additional 3 or 4 percent return. See
contribution chart for an example of investor return.
PROJECTED VALUE OF INVESTOR EQUITY INVESTMENT
IN A S HOPPING CENTER
TAXABLE TAX ANNUAL CUMULATI
EQUITY INCOME S AVINGS NEW MARKETS PRIORITY CAS H INVES TOR INVES TO
YEAR INVES TMENT <LOSS> <EXPENS ES > TAX C REDIT DIS TRIBUTIONS BEN EFIT BEN EFIT
1 $0 $0 $50,000 $0 $50,000 $50,000
2 - <135,000> 54,000 50,000 70,000 174,000 224,000
3 - <236,000> 94,400 50,000 70,000 214,400 438,400
4 - <167,000> 66,800 60,000 70,000 196,800 635,200
5 - <112,000> 44,800 60,000 70,000 174,800 810,000
6 - <70,000> 28,000 60,000 70,000 158,000 968,000
7 - <63,000> 25,200 60,000 70,000 155,200 1,123,20
8 - 1,793,000 <717,200> 0 1,200,000 482,800 1,606,00
1. Shopping Center placed in service in the first month of year two.
2. Tax savings expense assumes effective tax rate of 40 percent blending federal & state tax rate.
3. Cash distributions at a 7 percent priority return beginning in year two.
4. In year eight assume refinance and a return of capital plus $200,000 and taxable inco me at an effective rate
of 40 percent.
5. In year eight assume refinance at a 9 percent cap rate and interest rate of 6 percent and 80 percent loan -to-
value (assumes 3 percent appreciation factor).
6. Investors cumulat ive net investment in year eight upon exiting LLC results in a 13.15 percent internal rate
7. Equity investment is made Ju ly 1st of year one
8. Personal and real property depreciation exceeds cash flow to create a “loss” in years 2-7 of the investment
Some examples of how investor expectations vary from investment to investment. Debt
financing provides regular monthly payments while equity investments realize a percentage of
any profits. Thus, equity investments are riskier since the investor only makes money if the
business earns a profit. Start-up businesses will be perceived as higher risk investments and
therefore generally will require a higher ROI. A CDE’s unsecured equity investment in a
business will be deemed a higher risk investment than a secured loan investment so investors
will require a higher return
Investors tend to prefer tax credits to tax deductions. Tax deductions enable people to write off a
portion of their investment consistent with their tax bracket; investors who contribute to tax
credits receive a direct dollar-for-dollar deduction in their federal tax liability. Only investors
who pay federal taxes would benefit from the credit. xvi This excludes institutions that do not pay
taxes, such as foundations and universities, and corporations that do not earn profits in a given
year. It is also possible to leverage the credit. For example, a corporation could receive the
credit and a foundation receive the income stream from the same NMTC project.
Recapture is a serious concern for investors, which CDEs will need to mitigate. If recapture
occurs, all tax credits claimed by the investor before the date of recapture and non-deductible
interest must be repaid to the Treasury. Fortunately, recapture events are due to lack of
compliance with the program rules, not with the success or failure of any business. Failing
businesses that received investments or foreclosing on a loan are not recapture events if the CDE
quickly reinvests the proceeds in another qualified investment. Events triggering recapture
include a CDE falling out of certification, investing in non-qualified investments or redeeming
the investor’s capital earlier than seven years. The investors can get their money returned sooner
than seven years if they sell their investment to a third party. If they take the money back in less
than seven years and the CDE does not reinvest it into a qualified equity investment, recapture is
Investors, therefore, will expect a return of the capital investment and any unpaid return at the
end of the seven years or within a reasonable time thereafter. It is anticipated that investors will
expect to exit between seven and 10 years.
CDEs will want to realize a return on investment sufficient to meet the investor’s negotiated total
return expectations, including reimbursement of any investor capital used for administrative and
overhead expenses. For example, net losses sustained in the operation of a loan fund are an
element of risk that can reduce the investor’s total return. An inability to lease retail space in a
commercial building can also reduce the investor’s return.
Direct investments over time should produce returns beyond the required investor’s yield
requirements that will be retained by the CDE. These can fund operational costs or be
distributed to the CDE’s non-profit managing member or general partner (e.g., a CDC). Other
sources of funds to cover administrative expenses could include federal or state grants that
support the project including the Community Development Block Grant, Office of Community
Services CED Grants, Rural Housing and Economic Development, Economic Development
Administration Programs and CDFI Fund. xvii
The NMTC provides a significant incentive to greatly expand private sector resources for a broad
range of community development activities. National and local community development
advocates are actively involved in ensuring that the NMTC benefits low- income communities
and builds the financial strength of community development institutions. Corporate investors are
already well aware of the NMTC and are likely to expect it to lower their risk and increase their
return if they invest in eligible projects. This could result in a dramatic increase in competition
for investor dollars over the next five years. xviii
Investors will expect their community development investments to be enhanced b y 5 or 6 percent
with the credits. CDCs that avoid the NMTC could lose their targeted investors to NMTC-
enhanced investments. Community development entities are encouraged to become familiar
with the NMTC to ensure the billions of dollars it provides reach their communities.
New Market Tax Credit Terms
Community development entity (CDE) is a designation to an organization by the Community
Development Financial Institutions Fund. CDEs must meet both a primary mission test and an
accountability test. A CDE must have a defined service area (local area, multiple local area,
state, multiple state area, or national). A CDE must have a primary mission of servicing or
providing investment capital for low- income communities. At least 60 percent of its activities
must assist low- income communities. If an entity has subsidiaries or parent companies, all must
meet the mission test. (Organizational documents such as bylaws, articles of incorporation,
annual reports, etc. can be used to show compliance). A CDE must maintain meaningful
accountability to residents of the community served by the CDE through their representation on
the governing or advisory board of the CDE or its affiliate or parent entity. At least 20 percent of
the members of the governing body must be representatives of a low- income community. If an
organization serves multiple geographic areas, it can satisfy the accountability test by
establishing appropriate local advisory boards in each area. If an entity has subsidiaries or parent
companies, all must meet the accountability test.
Collateral is property earmarked as the security or guarantee for the payment of a debt or
performance of a specific act. For mortgage loans, the collateral is the real estate property.
Debt is an amount of money owed to a lender that is repaid monthly at an agreed upon interest
rate. The funds are repaid regardless of the project’s profitability.
Equity investments provide collateral to leverage debt financing. Equity investors earn a pre-
approved share of the profit if the company makes money. If the company does not make
money, the investor’s funds are at risk and he/her can earn less than expected or not earn
anything at all.
Look Back Period provides a CDE that received an allocation in the first round the ability to
apply the tax credit to an investment made after April 19, 2001 and before January 1, 2003. See
IRS Notice 2002-64 and 2003-56.
Low-income community is a census tract with a poverty rate of at least 20 percent or an area
median income not greater than 80 percent of the metropolitan area or statewide median. The
law also provides the option, at the discretion of the Secretary of the Treasury, for approval of a
defined low- income target area that has a demonstrated lack of capital investment within a
census tract that otherwise does not meet the overall poverty or income tests. (This authority
may be particularly useful for projects in “pockets of poverty” within higher income rural census
tracts.) A CDE can apply under a single application to serve more than one area, provided that
the areas are contiguous. Noncontiguous areas require separate applications.
Qualified Equity Investments (QEI) are the types of investments that investors can make in the
CDEs. These can be in the form of stock, partnership or membership interest and must meet
Qualified Low Income Community Investments (QALICI) is any capital investment (i.e.,
stock purchase in a corporation) or equity investment (i.e., ownership interest in a partnership or
LLC) in a qualified active low- income community business. QALICIs include providing loans,
equity investments, financial counseling or technical assistance to qualified active low-income
community business (QALICB) located in low- income communities; developing commercial
real estate or mixed use housing/retail buildings; developing and selling homes for sale to
individuals; purchasing loans made by other CDEs to QALICBs; and any equity investment in,
or loan to, a CDE where the proceeds are used in a manner that constitutes a qualified
investment, including capital to businesses owned in whole or part by a CDE or equity
investment in, or loan to, a CDE. xix Any loan must be a qualified low-income investment that
would be eligible under the New Market Tax Credit Program.
Qualified Active Low-Income Community Business (QALICBs) is any business executed by
an individual proprietor if the business meets the below criteria as an incorporated entity.
Likewise, any portion of a business or trade would qualify if it were separately incorporated. In
other words, a CDE can invest in a business with multiple locations if each location is treated as
a separate entity. The types of businesses are quite broad and may include commercial real
estate projects, daycare centers, retail and wholesale businesses, service providers and business
incubators. QALICBs must meet all three tests including the revenue or gross income test,
tangible property test, and the services test. The Gross-income requirement requires that at least
50 percent of a QALICBs gross income is derived from conducting a qualified business within a
low- income community. Alternatively, this test also is deemed to be satisfied if a 50 percent
standard is met in lieu of 40 percent in either the use of tangible property test or the services
performed test below. The tangible property test requires at least 40 percent of the use of the
tangible personal property of the entity is within a low- income community. The services
performed test requires that at least 40 percent of the services performed by the entity’s
employees are performed in a low- income community.
Recapture is when an investor must return all credits received with interest to the Treasury
Department. Recapture is triggered when a CDE loses its CDE certification, misuses the quality
equity investment or the CDE redeems the QEI before the end of the term and fails to reinvest it
in a QEI.
Substantially all is the requirement by the CDFI Fund that at least 85 percent of the NMTC
allocation be invested during years 1 –6 and 75 percent in year 7. The requirement will be
considered satisfied using either the direct-tracing calculation or the safe harbor calculation,
either of which must be calculated every six months.
The NMTC is part of the Community Renewal Tax Relief Act 9 Public Law 106-554 enacted
on December 21, 2000. It is Code 45D of the Internal Revenue Code.
Steinbach, Carol. The CDC Tax Credit: An Effective Tool For Attracting Private Resources To
Community Economic Development. Brookings Institution. August 1998.
Ms. Ginn is now Senior Vice President for Development at the Local Initiatives Support
The definition of a “qualified active low- income community business” is quite broad
and may include commercial real estate projects, daycare centers, retail and wholesale
businesses, service providers and business incubators.
New Markets Tax Credits To Be Used to Anchor Redevelopment with Theaters in New Haven,
Chicago. Washington, D.C.: Housing and Development Reporter. August 18, 2003. Pages
Key Bank Subsidiary Sees Huge Demand for NMTC Investments, Plans Second Round
Application. Washington, D.C.: Housing and Development Reporter. August 18, 2003. Pages
See Internal Revenue Code Section 168e2. While the NMTC legislation or regulations do not
cite this section, they do reference the empowerment zone statute at Section 1397C(d). This
section describes rental real property that is not classified as residential rental property under
IRC Section 168(e)(2).
CDFI Fund. June 2003.
New Markets Tax Credit Coalition: Rapoza and Associates.
New Markets Tax Credit Coalition: Rapoza and Associates.
See NCCED’s publication Getting Ready for the New Markets Tax Credit Program: How to
Form a CDE for guidance on setting up an LLC or LP.
The statute gives priority to unrelated entities in allocation.
The IRS expects it will require about two hours for an investor to learn about the new law and
to prepare and file the return.
In calculating the return, the investor needs to consider capital gains taxes on the amount
earned between their basis and the sales price. In addition, the basis of the investment is reduced
by the amount of NMTCs applied against their federal tax obligations. The basis is reduced by
39 percent at the end of the seven years (assuming the credit was claimed each year).
Investors will need to file IRS Form 8874.
NCCED publishes The Practitioner’s Guide to Federal Resources for Community Economic
Development and The State Community Economic Development Policy Catalogue that provide
comprehensive listings of the majority of federal and state community economic development
New Markets Tax Credit Advisors: David J. McGrady.
See IRS Notice 2003-68.
Author Biography: Carol Wayman is policy director at the National Congress for Community
Economic Development (NCCED). She is the co-author of numerous reports, including two on
the New Markets Tax Credit, Federal Practitioner's Guide to Federal Resources for Community
Economic Development, State Community Economic Development Policy Catalogue, and At
Your Fingertips: An Annotated Bibliography for CED Practitioners.