This article is part of Sharing Connexion’s Education Spotlight series, periodic news and learning opportunities for affordable housing and community-focused real estate projects. In this edition, Ed Briscoe, Managing Director at Weave Social Finance LLC, explains the recent $95 million New Markets Tax Credits allocation to Colorado. New Markets Tax Credits can be a great way to provide financing to nonprofit led and/or social impact focused projects in low-income areas.
On Friday, October 28th, 2022, the eighteenth round of the New Markets Tax Credit (“NMTC”) allocation awards was announced. The goal of the program is to provide additional incentives for capital investments to businesses and real estate development projects in low-income communities.
For this round, Colorado is one of ten designated “underserved” states, which means that there will be more opportunity for Colorado based ventures and projects to benefit from NMTCs perhaps than ever before from both state based and national organizations. A subsidiary of the Colorado Housing Finance Authority and Colorado Enterprise funds received allocation awards totaling $95 million, which is the most Colorado dedicated allocation awarded in the program’s history.
The NMTC program is deployed via a unique two-tiered competitive process. Through a competitive application process, certified Community Development Entities (“CDEs”) [affiliates of non-profits, government related entities, corporations, banks, and small financial groups or their subsidiaries] apply on a roughly annual basis for an allocation of NMTCs to the Community Development Financial Institutions Fund, an arm of the Treasury Department.
CDEs that receive a NMTC allocation are responsible for identifying and closing qualifying investments in line with their application commitments, community benefit metrics, and goals. They must also deploy the allocation within the deployment timing goals of the program with many CDEs seeking to deploy all of their allocation in as soon as six months or a year after the awards.
Qualification and Competition for NMTC Financing
Technical qualification for NMTCs is based on the location of the project. Qualifying areas are census tracts with either a median income level of 80% or less of area AMI or a poverty rate of over 20%. Over the past several years, the great majority of allocation has been targeted to “highly distressed” areas which must have a median income level of 60% or less of AMI, a poverty rate of 30% or greater, or an unemployment rate of 1.5x the national rate or higher. Additionally, there are a number of area designations (brownfields, TIF, etc.) that can qualify an area as “highly distressed”.
If qualified for NMTC allocation, the primary driver of a project’s ability to benefit from the NMTC program is competition with other qualifying projects to be awarded with allocation from CDEs. Alongside financial underwriting and the level of certainty around timing and executability of the project, NMTC eligible projects compete based on the number and quality of jobs they will help create and to what degree those jobs are accessible to lower income people. For non-profits or other community service projects, alongside the job creation numbers, projects compete based on the type of services and number of people that will be served by the project and/or its tenants.
Key Aspects of Strong NMTC Projects:
• Located in “highly distressed” census tracts
• $8 million to $30 million more more in total costs
• 75% to 80% of total capital identified/committed/already invested
• Creates quality jobs accessible to lower income people
• Provides services to low-income people (medical, education, training, or healthy food)
• Strong local support
• For some groups, environmental impacts (LEED, solar, alternative energy)
Weave’s successful clients have included early stage and established manufacturing businesses expanding their operations and team, real estate developments that include community serving tenants, and non-profit’s building new facilities for their offices and operations.
Benefits of New Markets Tax Credits
An allocation of NMTCs means that an investment in a low-income community can generate $0.39 in tax credits over years for every dollar invested in a qualifying project. In most cases, the seven-year stream of tax credits are sold to large banks at a discount at the time of the initial investment. Current tax credit pricing ranges between $0.75 per credit and $0.80 per credit. After the discount to the tax credit buyer, legal, consulting and accounting fees, reserves, and fees paid to the CDE, the net NMTC subsidized financing equals 20% or more of the total allocation amount.
In many cases, the NMTC loans are structured to not be fully paid back after the seven-year compliance
period. The loan will typically require a 2% to 4% interest only payment over the compliance period, but will mature and may not require full repayment if the terms of the loan and targeted community impacts are successfully met.
For the next six months to a year, businesses and projects in Colorado will have a unique opportunity for this source of subsidized funding to fill gaps in their capital stack and accelerate projects that will help create jobs and serve needs in low income communities across the state.
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