An Analysis of New Markets Tax Credits
Hardin, J. Russell, Noland, Thomas G., Real Estate Issues
CONGRESS ESTABLISHED THE NEWMARKETS 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.
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 the most recently completed Decennial Census published by the U.S. Bureau of the Census):
a) the poverty rate for such census tract is at least 20 percent; or;
b) 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.
USE OF QEI PROCEEDS
A CDE that is awarded an allocation of NMTCs by the CDFI Fund has five years from the date of notification of its allocation to close QEIs with its investors. The CDE has 12 months to place "substantially all" of the proceeds from the QEIs into Qualified Low Income Community Investments (QLICIs), which generally are:
* loans to, or investments in, qualifying businesses (including certain real estate projects);
* loans to, or investments in, other CDEs;
* the purchase of qualifying loans originated by other CDEs;
* counseling to low-income community businesses.
CDEs have used NMTC proceeds to finance a variety of activities in distressed urban and rural communities throughout the United States, including alternative energy companies, charter schools, health care facilities, affordable housing, timberlands, childcare providers, supermarkets, restaurants, museums, hotels, performing arts centers, manufacturers, processors, distributors, business incubators, office buildings, shopping centers, substance abuse treatment facilities and facilities for the homeless. …