New Market Tax Credit

New Markets Tax Credit

In December 2000, Congress enacted the New Markets Tax Credit (NMTC) as part of the Community Renewal Tax Relief Act of 2000.  Over the next 7 years $15.0 billion in tax credits will be allocated by the U.S. Treasury: $1.0 billion in the first year; $1.5 billion in the second and third years; $2.0 billion in each of fourth and fifth years; and $3.5 billion in each of the sixth and seventh years.

The term of the credit is seven years.  Investors will be able to claim a tax credit of5% for each of the first three years of the credit, 6% for each of the last four years, for a total of 39% over seven years.  The net present value of the credit is estimated at 30% over the seven years.

It is important to note that NMTC investors will likely expect a return from the credit above and beyond the federal tax subsidy.  So NMTC deals should make good economic sense and hold out realistic prospect of returns beyond the credit.

Certification

Organizations will apply to the Community Development Financial Institutions Fund (CDFI) of the Treasury Department both to be certified as a Community Development Entity (CDE) and to receive an allocation of New Market Tax Credits.

In order to be certified as a CDE:

• An organization must be a corporation or partnership,
  
• Have a primary mission of serving or providing investment capital for low-income communities or individuals, and
  
• Maintain accountability to residents of low-income communities through representation on governing or advisory boards.
  

Requirements for Allocation of the Funds

The CDFI Fund will issue a yearly notice including application requirements, as well as, the criteria by which applications for Credit allocations will be evaluated.  Based on applications, the CDFI Fund will allocate credits to “qualified CDE’s”.

Both nonprofit entities, such as PGFSC and for-profit entities may be certified as CDE’s.  For most non-profit entities, it will be necessary to set up a for-profit Subsidiary or affiliate to receive the credits, since non-profit corporations cannot offer equity to investors.  CDE’s will use their credit allocations to attract Qualified Equity Investments from individual or corporate investors.  An equity investment may be any stock in a corporation or any capital interest in a partnership.

To be of “economic benefit” the recipient of the Tax Credit must have Federal Income Tax liability.  Since the initial recipient of the New Market Tax Credit is the CDE, which may or may not have Federal income Tax liability, it is essential to create a corporate structure that permits the transfer of the “economic benefit” of the tax credit to the investors in the CDE, who do have Federal Income Tax liability.   It is for this reason that a non-profit such as PGFSC may apply for and receive a NMTC allocation, but must transfer such allocation to its “for-profit Subsidiary or Subsidiaries”.

Qualified Low-Income Community Investments

CDE’s will have 5 years to place credits with investors and secure cash for equity in the CDE.  The CDE will have 7 years to use these funds for Qualified Low-Income Community Investments.

With funds derived from NMTCs, CDE may make available a range of financial and technical assistance to private business enterprise in low-income communities. 

Such products and services, termed Low Income Community Investments may include:

• Loans, equity investments, or capital to businesses;
  

• Purchase of certain loans made by other CDEs;
  

• Financial counseling and related services to business; and
  

• Equity investment, loans, and counseling to other CDEs.
  

• Low-Income Community and Target Areas

The NMTC is targeted to low-income communities.  In general, a Low-Income Community is defined as a Census tract or community within a census tract (Target Area) with a poverty rate of at least 20% or with median income of up to 80% of the area or statewide median, whichever is greater.

In 2005, FSC First received a New Market Tax Credit allocation of $10 million to invest in low-income communities.  In collaboration with the Gateway CDC, FSC First fully deployed the credits to Siena Corporation, owner/developer of the ezStorage Corporation – Brentwood.  The property is a mixed use development project targeted at the revitalization of the Brentwood Arts District of Prince George’s County.  

The ezStorage Corporation – Brentwood serves the needs of both residential and commercial customers and is located on a 1.45 acre site located at 4301 -4305 Rhode Island Avenue.  The sis-story 149,000 square foot infrastructure is comprised of 10, 500 square feet of retail/artist studio space, 92,000 square feet of storage space (consisting of 1, 027 storage units ranging in size from 5’ x 5’ to 10’ x 30’), a rental office and a resident manager’s apartment.  The retail/artist studio space is located on the street level.  Artists, such as Melissa Glasser Bruzera use the space to create beautiful works such as the murals seen below.

The project’s impact on the city of Brentwood can be summed up perfectly in the following comment from Todd Manganaro, president of Siena Corporation : ‘…this is a success for both the community and ezStorage’.

If you are ready to apply for the New Market Tax Credit now, please click here or call 301-883-6900.