New Markets Tax Credits Are Good for Our Community

The New Market Tax Credits program was enacted by Congress under the Community Renewal Tax Relief Act of 2000, and is currently approved through 2025 with a $5 billion annual appropriation. Several legislative attempts have been made to make the program a permanent part of the tax code. 

The structure of the program is best equated to an economic-development tool. The program gives a 39 percent federal income-tax credit to attract an investor for a new catalytic project located in a “distressed” community (low income, high poverty, high unemployment). The initial design was to bring economic catalysts to areas that typically do not receive them. Jobs are the priority, but the program is open enough to allow for multiple utilizations. It can be address development of industrial, manufacturing, retail, and health care projects, or social concerns such as food deserts, education and many others. The program is open to benefit commercial companies as well as non-profits. 

The investor is rewarded with a tax credit to be spread over a seven-year life. The project benefits from a cash infusion at the front end of a development. After some pricing discounts and fees to create the structure, the cash comes in as low-cost debt. Then at the end of the seven-year compliance period, the debt is forgiven. The value is delivered to the project at that time, creating real equity for the beneficiary. The typical front-end value a project can expect is varied due to each one being unique, but is generally in the range of 20-25 percent.

Not Easy, but Effective

The process is a complicated one. Community Development Entities apply for and receive allocation from the Community Development Financial Institutions Fund. The fund approves a limited number of entities to receive allocation. Typically, the fund receives applications amounting to around three times what Congress has appropriated. As a side note, most of the CDEs show a pipeline of over twice what they apply for, meaning that the identified potential of the program is often six times what is awarded. These facts highlight the importance of and the need for the program. Once awarded, the CDE then must choose from multiple deserving projects to deploy the allocation. 

An investor must be identified and willing to buy the tax credits. The value is 39 percent of the allocation amount which can be no greater than the project size. Most investors are large national banks with regular recurring tax liabilities each year.  The credits are typically sold in the range of 70-80 percent of the face value. 

Accountants build a forecast of how the project will do over the course of the compliance period. All the parties and their attorneys must agree on each nuance of the projections. There are multiple regulations inside the structure to ensure compliance with the IRS tax code. A Community Benefits Agreement holds beneficiaries accountable to what they promised they would do (in terms of jobs, education, social benefits, etc.).

Many CDEs in the metro area have helped in the deployment of this valuable resource: Central Bank of Kansas City, AltCap, Enterprise Bank, US Bank, IFF and LISC are often named as allocatees, consultants, or investors under this program, either directly or through one of their subsidiaries. Several of these CDEs are part of the Kansas City CDFI Coalition.

Linwood YMCA, Junior Achievement, Emmanuel Family and Childhood Development Center, Three Trails Industrial Park, the Childrens Campus of Kansas City, Academy Lafayette, Operation Breakthrough, Sioux Chief Manufacturing, Bannister Price Chopper, Truman Medical Center, Custom Truck, Swope Health, Linwood Area Ministry Place, Harvesters, Donnelly College, MERC grocery store, AB May—all have been NMTC recipients. There are many more, but you can see from those names that the program is used by many business and industry sectors as well as a wide range of non-profits. 

As of last year, the NMTC program awards have generated $8 of private investment for every $1 invested by the federal government. Through the end of fiscal year 2021, program award recipients nationwide deployed more than $62.9 billion in investments in low-income communities and businesses; with impacts such as the creation or retention of more than 857,000 jobs, and the construction or rehabilitation of nearly 239 million square feet of commercial real estate.

Speaking on behalf of all the metro CDEs, we are proud of these accomplishments, and why we believe that New Market Tax Credits are good for our community.