Finding financing for projects in low income and rural communities is never easy, even in the best economic times. When given the choice between investing in businesses located in vibrant, thriving urban markets or making investments in distressed or remote areas, the choice is pretty clear. In good times, there is generally more than enough opportunity in thriving markets to make your banker happy. In tough times, it’s hard to find a lender that’s comfortable with any extra risk.
The New Market Tax Credit Design
With that in mind, Congress developed a tax credit program to help level the playing field. It’s called New Markets Tax Credits, or NMTCs. The NMTC program specifically targets low income and rural communities. Unlike other tax credits such as Historic Tax Credits and Low Income Housing Tax Credits that are project driven, NMTCs are awarded based on the profile of the census tract where the investment is made, not just the parameters of the project.
The tax credits are designed to benefit Qualified Active Low Income Businesses (QALICBs) within a qualifying census tract. These may be for-profit or not-for-profit businesses. To qualify, either at least 20% of the population in a given census tract must live below the poverty line, or the median income within the tract must be at 80% or below the state or metropolitan area average.
The benefit to the NMTC investor is pretty straight-forward — they receive a better return on investment than they would normally receive on other like-kind investments. The benefits to the end users, the qualified businesses, are also significant. First, the program opens up new sources of capital due to the enhanced returns available to the investor. Second, borrowers can access capital at greatly reduced borrowing costs. Recently, Washington Federal worked with Island Hospital on a NMTC project to build a new medical center in Anacortes, Washington. From our standpoint, it sounded like higher returns for investors plus lower capital costs for borrowers was an easy win-win. So what did we learn?
- First, the project must qualify by meeting the requirements of the low-income community investment standards. Over 6,000 census tracts qualify, but many great projects likely will fail to meet some criteria of the program, so do your homework.
- Second, the program is extremely complex. (Translation: expensive and time consuming.) For a project to achieve returns that make sense, it generally needs to be big enough in scale to offset the extensive legal and consulting fees that go into putting the financing in place. Generally, projects less than $10 million in size won’t see enough benefit to outweigh the costs.
- Finally, the tax credits allocated to the program are limited. Demand for the program usually outstrips supply. So a qualified business may identify a worthy investment opportunity, but still have a hard time finding NMTC capital for the project.
Using New Market Tax Credits
Using New Market Tax Credits is a complex process. If you’re considering NMTC financing, spend some quality time with advisors who can walk you through an evaluation, and find a lender or investor willing to learn along with you. For additional information on the program, start with the Department of the Treasury website: http://www.cdfifund.gov/what_we_do/programs_id.asp?programID=5.