An Analysis of New Markets Tax Credit

By Hardin, Russell J.; Noland, Thomas G. | Real Estate Issues, Fall 2011 | Go to article overview

An Analysis of New Markets Tax Credit


Hardin, Russell J., Noland, Thomas G., Real Estate Issues


INTRODUCTION

Congress established the New Markets Tax Credit (NMTC) Program as part of the Community Renewal Tax Relief Act of 2000 to encourage investors to make investments in impoverished, low-income communities that traditionally lack access to capital. Conventional access to credit and investment capital for developing small businesses, creating and retaining jobs, and revitalizing neighborhoods is often limited in economically distressed communities or in communities with large low-income populations. The NMTC provides investors (individuals, financial institutions, other corporations, etc.) with a tax credit for investing in communities that are economically distressed or consist of low-income populations. (1)

OVERVIEW OF THE FEDERAL PROCESS

The NMTC Program is intended to spur the investment of private sector capital into low-income areas by permitting taxpayers to receive a credit against federal income taxes for making qualified equity investments (QEIs) in designated Community Development Entities (CDEs).

The credit provided to the investor totals 39 percent of the investment in a CDE and is claimed over a seven-year credit allowance period. In each of the first three years, the investor receives a credit equal to five percent of the total amount paid for the stock or capital interest at the time of purchase. For the final four years, the value of the credit is six percent annually. Investors may not redeem their investments in CDEs prior to the conclusion of the seven-year period.

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CDE CERTIFICATION

To qualify as a CDE, an entity must be a domestic corporation or partnership that:

* has a 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 a governing board of, or advisory board to, the entity;

* has been certified as a CDE by the Community Development Financial Institutions (CDFI) Fund.

Applicants may submit CDE certification applications to the CDFI Fund throughout the year.

A low-income community (LIC) is any population census tract that meets the following criteria (as reported in a) the most recently completed Decennial Census published by the U.S. Bureau of the Census):

b) the poverty rate for such census tract is at least 20 percent; or; the Median Family Income (MFI) of such census tract does not exceed 80 percent of:

* the statewide MFI, if the tract is not located within a metropolitan area, or;

* the greater of statewide MFI or the metropolitan area MFI, if the tract is located within a metropolitan area.

ALLOCATION OF NMTCS

The CDFI Fund allocates NMTCs to CDEs through an annual competitive application process. Throughout the life of the NMTC Program, the CDFI Fund allocates tax credit authority to support investment in CDEs. See Figure 1 for a list of the largest 2010 allocatees. A complete list of allocatees and more details concerning each allocatee is available at www.cdfifund.gov.

Figure 1
Largest Federal New Market Tax Credit Allocatees - 2010
(in alphabetical order)

Allocatee      Headquarters  Predominant  Allocation
Name                           Markets      Amount

Capital One    McLean, VA    DC, LA, MD,  $63,000,000
Community                    NJ, NY, TX,
Renewal Fund,                VA
LLC

City First     Washington,   DE, DC, MD,  $70,000,000
New Markets    DC            PA, VA
Fund II, LLC

Coastal        Wiscasset,    ME, MA, NH,  $77,000,000
Enterprises,   ME            NY, OR, VT,
Inc.                         WV

Community      Placida, FL   FL, KY, MD,  $63,000,000
Hospitality                  NC, PA, VA,
Healthcare                   WV
Services,
LLC

ESIC New       Columbia, MD  CA, DC, LA,  $62,000,000
Markets                      MD, NY, OH,
Partners LP                  WA

HEDC New       New York, NY  CT, IL, NY,  $63,000,000
Markets,                     OH, TN, TX,
Inc. … 

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