SUMMARY
The New Markets Tax Credit (“NMTC”) program provides federal tax credits that are intended to stimulate investment in qualified businesses (“QALICBs”) that operate in low-income communities. Using an optimally structured NMTC transaction, an eligible Borrower can make substantially below-market cash rent/debt service payments which, combined with the New Markets Tax Credits and other tax benefits from the transaction, still deliver a market-rate return on investment to the investors.
The property at [ADDRESS] is located in Census Tract [______________] that is eligible for the NMTC program and is characterized as “highly distressed” ([__]% poverty rate with median family income [___]% of the region’s). Therefore, New Markets Tax Credits can subsidize financing for a charter public school facility located at the site by providing a portion of the repayment of loans/equity used to financing the facility—in other words, the School repays a portion of the financing and the tax credits repay a portion. This approach reduces cash payments by the Borrower while still delivering a market-rate yield for investors.
NEW MARKETS TAX CREDITS PROGRAM
The NMTC program was enacted as a part of the Community Renewal Tax Relief Act of 2000. Since its inception, the NMTC program provides the authority for up to $60.958 billion of equity investments in low income communities—that meet specified criteria—to be designated as “qualified equity investments” for which NMTCs may be claimed by for-profit investors. The tax credit that may be claimed by the investor totals 39% of the amount of the qualified equity investment, taken as 5% at the beginning of each of the first three years and 6% at the beginning of each of the subsequent four years.
While the tax credits resulting from a “Qualified Equity Investment” are claimed by a for-profit investor, the value represented by the NMTCs may be passed on to a non-profit entity in the form of a below-market interest rate, charitable contribution, and/or debt forgiveness.
COMMUNITY DEVELOPMENT ENTITIES
NMTC Investment Authority (the ability to offer a qualified equity investment) is competitively allocated by the CDFI Fund of the Department of Treasury to designated Community Development Entities (“CDEs”). A domestic corporation or partnership may qualify as a CDE if it (i) has a mission of serving, or providing investment capital for, low-income communities or low-income persons; 2) maintains accountability to residents of low-income communities through their representation on a governing board of or advisory board to the entity; and 3) has been certified as a CDE by the CDFI Fund. The CDFI Fund has allocated $57.458 billion of the $60.958 billion authorized NMTC Investment Authority to 339 CDEs.
QUALIFIED EQUITY INVESTMENT
An equity investment that meets the following requirements1 can be designated as a Qualified Equity Investment for which the investor may claim NMTCs
- Cash investment by purchase of stock or capital interest in a for-profit corporation or partnership designated as a CDE and granted NMTC Allocation by the CDFI Fund
- Investment is designated by the CDE as a Qualified Equity Investment
- QEI remains invested for at least seven years
- CDE remains designated as a CDE for at least seven years
- CDE must continuously reinvest at least 85% of the QEI as "Qualified Low-Income Community Investments" (equity investments in, or loans to, Qualified Active Low Income Community Businesses "QALICBs")2 for at least seven years
It is common for the Qualified Equity Investment to be directly traced as a cash membership interest in a CDE LLC that makes a single loan to a single Qualified Active Low Income Community Business.
QUALIFIED ACTIVE LOW INCOME COMMUNITY BUSINESS
A business generally must meet five key criteria3 to be considered a Qualified Active Low Income Community Business (“QALICB”). A School and/or a real estate holding company owning a school building meet the criteria because 100 percent of their business operations are conducted at a location in a census tract that is considered “low income” under NMTC guidelines.
RECAP
Charter public school facility financing payments may be subsidized under the New Markets Tax Credit program if the following minimum requirements are met:
- NMTC Investment Authority is secured from a qualified Community Development Entity ("CDE").
- A Qualified Equity Investment ("QEI") is made in the CDE that meets the requirements of the NMTC program.
- The required minimum portion of the QEI is used to make a loan or investment in the school facility.
- The terms of the loan or investment provide for the subsidy created by the NMTCs to be passed on to the School.
ENDNOTES
1 If certain of the requirements fail to be met for a full seven years following the designation of the investment as a QEI, the tax credits may be retroactively recaptured.
2 Qualified Low-Income Community Investments (“QLICIs”) also include (i) equity investments in, or loans to, another CDE (if used by the other CDE to make QLICIs), (ii) purchase of loans from another CDE if the loans are QLICIs, or (iii) financial counseling or other services to business located in, or residents of, low-income communities.
3 Criteria to be considered a QALICB the business must have: (i) at least 50% of gross income is from active conduct of a qualified business in low-income communities (“LICs”); and (ii) at least 40% of the use of tangible property of the business is in LICs; and (iii) at least 40% of the services performed by the business’ employees are performed in LICs; and (iv) less than 5% of the aggregate unadjusted bases of the property is attributable to collectibles other than those held for sale in the ordinary course of business; and (v) less than 5% of the aggregate unadjusted bases of the property is attributable to nonqualified financial property. The gross income test is deemed to be met if either the tangible property or the services test is met at 50% or higher. If a business has no employees (e.g., a real estate holding company), it can meet both the services and gross income tests if it meets the tangible property test at 85% or higher.