Billions in New Markets Tax Credits Available in 2016-17
The end of 2016 and the first half of 2017 are shaping up to be one of the biggest years ever for New Markets Tax Credit (NMTC) activity. The credit is designed to encourage investors and developers to build projects in low income communities. But it’s the congressional action at the end of 2015 that should get the attention of developers.
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Congress extended the credit through 2019, which releases some $7 billion in funding for 2016 and 2017 alone. That is double the allocated money from 2015 and may make the next 12 months one of the biggest for new market activity that we’ve ever seen.
I learned this first hand at a recent NMTC conference, where two administers of the fund (Bob Ibanez and Annie Donovan) gave an update on the credit. Conference attendees also heard that more projects will be awarded than in the recent past, and that larger deals may happen. There will be a push to award funds to applicants who have not previously received an award. All of which points to a wealth of activity for new projects in the coming months.
How the NMTC funding works
- Those awarded the credit get favorable, below-market financing and a forgivable loan after seven years. That means savings on debt service payments and a significant equity benefit at the end of the seven year compliance period.
- Investors then receive 39 percent of the federal income tax credit based on the amount invested into the project (loans and equity combined). Investors receive five percent of the credit in years one to three, and 6 percent in years four to seven.
- Investor equity generally reverts back to the developer after the seven year period.
A hospital example
A hospital wants to break ground on a mixed-use building in a designated new markets location in the fall of 2017. Their plan is to build an outpatient physical therapy clinic on the first floor and senior living apartments above.
The hospital applies for the credit and receives $10 million in new markets financing. That money will generate a tax credit of $3.9 million (39 percent) over the seven year compliance period. With nearly $4 million in their pocket, the hospital can start negotiating a sale of these credits. The sale to a new markets tax credit investor will bring approximately $3 million to help finance the building. In 2024, seven years from the project start date, the $3 million in investor equity typically reverts back to the hospital.
Country clubs and liquor stores need not apply
If your development is an office, retail space, nonprofit, manufacturing operation, medical facility, hotel, community center, school, theater, housing development, restaurant, or mixed-use it may be a good candidate for the NMTC. But if it’s a golf course, liquor store, or gambling center, those projects are prohibited.
Best practices and positioning your project
With billions of dollars at stake, the credits will be competitive and demand greater than the amounts available. So positioning your application will be critical. NMTC administrators want to see both quantitative and qualitative information in your application, so make sure you show the selling points. Pay close attention to the following areas:
- Capital — Paint the complete picture of your financing, including loans secured from conventional lenders and your own financial contributions, so that credit administrators see that your funding streams are real and in place.
- Jobs — Detail what jobs will be created, how many are construction-related, and how many are permanent. Describe the types of permanent jobs and whether they are low-skilled or career-oriented.
- Community support — Demonstrate that the community council or neighborhood association has been engaged in your plan and supports the project.
- Permits — Show that all necessary permits (building, site, electrical, plumbing, city) are ready and in place.
- Show that your project is shovel-ready — That means your legal, consulting, and accounting personnel are in place so that if you receive funding, you are ready to start digging.
- Do not overstate your project — At the same time, don’t overstate your readiness; be transparent on where you are in the planning process.
- Designated community — Be sure your project is located in a qualified census tract or is serving a targeted population. There are various formulas for determining this, but you can start exploring geographies on your own, using a census-driven online tool.
Frequently asked questions about NMTC
I get a lot of questions about project specifics and what makes a successful NMTC project. Here are some commonly asked questions in my inbox.
Q: What is the minimum sized project?
A: Typically around $5 million. Projects below that threshold are suitable for a different credit program: loan fund financing. While loan fund financing comes at a very low rate, the loan is not forgivable at the end of seven years, so you will have to refinance at the end of the seven-year period.
Q: Can I use a credit if I’ve already started a project?
A: The new market credit is a gap financing tool. So if you already have a project started, you can use the NMTC as a gap-financing after construction is already started, however it is much more difficult to do.
Q: Which states are the most underserved states for new market financing?
A: Arkansas, Florida, Georgia, Idaho, Kansas, Nevada, Tennessee, Texas, West Virginia and Wyoming are the most underserved states for NMTC financing, so it may help your application if your project is located in one of these regions. This doesn’t mean projects in other states won’t get funded, but if you have a project in one of the aforementioned states, you may have an especially good opportunity in the next year or two.
Q: Would a nonprofit organization have additional benefits under the NMTC compared to for-project developers?
A: Yes, nonprofits would not have to go through the cancellation of debt, so they would receive an even greater benefit under NMTC.
Q: Do you have a breakdown of previously funded projects?
A: In 2016, 27 percent of projects were manufacturing and industrial, 13 percent where health care, and 10 percent were mixed use real estate projects. However, this doesn’t mean projects outside these industries won’t work. Financing has been secured by industries ranging from car dealers to schools to grocery stores.
How we can help
Taking advantage of this credit requires preparation and determination and there is no magic formula for what projects get funded. However, there are more than 150 community development entities (CDEs); some are national in scope and some are local. Since CDEs have a specific mission (e.g., health care projects, manufacturing projects, or projects in a specific state) we can help you align your mission with the right CDE. We can also look back at past projects to get an understanding of what a particular CDE likes to see in a credit application.