New Market Tax Credits: Could your small business benefit?

New Market Tax Credits: Could your small business benefit?

Businesses generally need debt and equity financing whether it be for startups, recapitalization, expansion or relocation.  Many government programs assist on the debt side. The Small Business Administration can assist smaller businesses in filling this void. New Market Tax Credits (NMTC) are another government program to assist businesses. The Community Development Financial Institutions Fund, Inc. (CDFI) recently awarded $7 Billion in New Market Tax Credit (NMTC) Allocation in late 2016. This award ultimately will result in qualified low-income community investments (QILICIs) in underserved and impoverished communities throughout the country. Business owners in such communities will receive loan proceeds for new and existing qualified low-income businesses (QALICBs) in return for, among other things, payment of below market interest rates on the debt. The loans come with very specific terms, but through advancements and flexibility in the marketplace, a greater number of lenders and beneficiaries are participating in this market.

The CDFI is a division of the US Treasury Department. At the direction of Congress in 2000, a program to jump start private investment in communities of need has its roots. Over time, the program has been extended and evolved to meet market needs.  Most recently, Congress through the PATH Act, enacted in December 2015, extended the NMTC program for five (5) years from 2015 to 2019 agreeing to issue 3.5 billion in annual credits. The 2015/2016 years were ultimately combined and resulted in the $7 billion award. The next three (3) years will result in allocations of $3.5 Billion each.  Many are working hard to have the NMTC become a permanent part of the tax code.

“Allocations” are the awards made by the CDFI to a Community Development Entity (CDE). A CDE is a domestic corporation or partnership that is an intermediary vehicle for the provision of loans, investments, or financial counseling in low-income communities.  A CDE generally always must first become certified by the CDFI. Once a CDE is certified, it may apply to the CDFI once it receives certification. As you might expect in any program administered by the Federal Government, the application is thorough. There are many more applicants than allocates, and most CDEs most always apply for more than they receive.  CDEs who have received allocations in the past and have a strong record of performance in key areas of concern, are often repeat allocatees.  In the most recent allocation, the CDFI made investment in operating  businesses a point of interest. This has led some to shy away from straight real estate investments, but the commentary and results still indicate there is a place for QILICI in real estate deals.

One of the first things a proposed borrower must do is determine whether its project or business is located in a qualifying census tract. Fortunately, this information is readily available on various websites by simply typing in an address. Many are surprised to learn that they are in qualifying census tract, much less a severely depressed area. The current data relies upon the 2010 Census. This census data is scheduled for update in August 2017. Expect to see some changes in the qualifying tracts.

Many borrowers and investors will hear about NMTC and wonder how to access these valuable credits. For those familiar with NMTC, they are aware that the program comes with high transaction costs. As a result, many borrowers are quick to turn away under the belief that to make the program worthwhile, the project must involve a loan in the neighborhood of $5 million.  However, the CDFI has made a recent point to emphasize the importance of the smaller QILICIs, which involve deals less than $2,000,000.00.  As a result, CDEs who emphasized smaller QILICIs in their applications reaped the benefits by receiving larger allocations. Expect to see smaller QILICIs in the coming months and year. The flexibility of a large loan pool distributing smaller QILICs is a reality.  As a result, the end user is reaping the rewards with lower transaction costs, and the avoidance of the upper tier complicated documentation necessary to close a NMTC transaction. With this in mind, the program comes with certain caveats regarding timing and scale all of which must be weighted against the project.

To discuss your unique situation and to gain greater understanding of NMTCs, contact Clark Partington Shareholder, Charles F. James.  Charles is a shareholder in our transactions department where he focuses on real estate and business matters in Florida and Alabama. He has experience in representing QALICBs, CDEs, and Lenders, as well as closing NMTC transactions.  Charles can be contacted at (850) 436-6466 or cjames@clarkpartington.com.

This publication should not be construed as legal advice.  Its applicability is dependent upon specific facts and circumstances and is provided for informational purposes only.  You should not act upon this information without seeking advice from a lawyer licensed in your own state.