New Markets Tax Credits for Dummies (#NMTC)
These tax credits (which are sold for cash) can subsidize 15%-20% of a project's budget
Qualifying projects must be in low income areas and provide a benefit to the community (housing, jobs, healthcare, education, food access etc.)
These tax credits (which are sold for cash) can subsidize 15%-20% of a project's budget
Qualifying projects must be in low income areas and provide a benefit to the community (housing, jobs, healthcare, education, food access etc.)
Here's what the process looks like: 
3. Each year the US Treasury "allocates" or awards these New Market Tax Credits (#NMTC) to Community Development Entities (CDEs).
4. CDEs compete for these tax credits and only 1/3 CDE that applies gets an award in any given year.
4. CDEs compete for these tax credits and only 1/3 CDE that applies gets an award in any given year.
5. CDEs then look for qualifying projects in which to invest their NMTCs.
6. For every 10-15 qualifying projects available, only one receives an allocation of NMTCs. So this step is very competitive and is where I spend my time.
6. For every 10-15 qualifying projects available, only one receives an allocation of NMTCs. So this step is very competitive and is where I spend my time.
7. If your project receives an allocation, a bank will come in and buy the tax credits. This sale generates the cash subsidy.
8. Technically, New Markets Tax Credits (#NMTC) are generated by a CDE when they invest capital into a project. So, all funds have to pass through a CDE.
8. Technically, New Markets Tax Credits (#NMTC) are generated by a CDE when they invest capital into a project. So, all funds have to pass through a CDE.
9. Also technically, the tax credit doesn't fully vest for seven years.
10. These constraints give rise to the New Markets Tax Credits (#NMTC) structure:
10. These constraints give rise to the New Markets Tax Credits (#NMTC) structure:
11. Upper left you see a bank (or project developer) lending funds to the structure. This is called the "Leverage Loan", but you can just consider it the money you put into the structure.
This is "Loan A" and is passed through the structure unchanged.
This is "Loan A" and is passed through the structure unchanged.
12. Upper right represents the funds that the tax credit buyer will put into the structure. You can consider this the subsidy (gross, before fees).
This is "Loan B" and it gets passed through the structure but gets beaten up by fees along the way.
This is "Loan B" and it gets passed through the structure but gets beaten up by fees along the way.
13. Both Loan A and Loan B are combined and passed through the CDE which invests the funds into the qualifying project.
14. This generates the tax credit which goes to the tax credit investor.
14. This generates the tax credit which goes to the tax credit investor.
15. The qualifying project receives both Loan A (their money in) and Loan B (investor's subsidy).
16. Loan A is market rate. Loan B is 1% interest only and...
17. After the structure has been in place for seven years, the tax credit fully vests, then the structure collapses
16. Loan A is market rate. Loan B is 1% interest only and...
17. After the structure has been in place for seven years, the tax credit fully vests, then the structure collapses
18. and Loan B is forgiven - turns into a grant.
The tax credit investor, CDE and project sponsor all walk away, but the project gets to keep the Loan B cash proceeds.
The next thread will be an outline of how to get these funds for your project - a practitioner's guide.
The tax credit investor, CDE and project sponsor all walk away, but the project gets to keep the Loan B cash proceeds.
The next thread will be an outline of how to get these funds for your project - a practitioner's guide.
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