New Markets Tax Credits – the Best Kept Secret in Financing Public Projects
By Ruben Duran
Right before Thanksgiving 2016, the federal government announced the release of $7 billion of tax credits aimed at spurring private equity investment into projects in low income communities. Administered through the U.S. Treasury’s CFDI Fund, the tax credits are known as “New Markets Tax Credits,” and have proven to be a flexible and powerful tool for development in underserved communities across the country.
If you’ve never heard of New Markets Tax Credits, also known as “NMTC,” don’t feel bad. Many public officials and their staffs, although they might have seen the term somewhere, don’t really know a lot about the program. That’s a shame, because under the right circumstances, NMTC can and does provide significant capital for qualified projects, ranging from community centers and sports facilities to charter schools and retail developments.
The NMTC was authorized in the Community Renewal Tax Relief Act of 2000 as part of a bi-partisan effort to stimulate investment and economic growth in low income neighborhoods and rural communities that lack access to the capital needed to support and grow businesses, create jobs, and sustain healthy local economies.
The NMTC program attracts capital to low income communities by providing private investors with a federal tax credit for investments made in businesses or economic development projects located in some of the most distressed communities in the nation – census tracts where the individual poverty rate is at least 20 percent or where median family income does not exceed 80 percent of the area median.
California public agencies, including cities, counties and special districts, can use NMTC to provide significant cash contributions to qualified projects in qualified areas, and NMTC presents a meaningful opportunity to leverage funding and assets that public agencies already own or anticipate receiving for individual projects.
Public agencies throughout the nation regularly sponsor qualified projects that successfully compete for and receive NMTC. A successful transaction will involve a project in a qualified census tract that produces community benefits such as the creation or retention of jobs, the provision of services to underserved populations and/or environmental benefits and improvements. The tax credits are provided through the participation of a Community Development Entity that has received an allocation of tax credits from the CDFI Fund. A public agency seeking to use NMTC will first need to identify qualified projects and then enlist the support and participation of a CDE with NMTC allocation.
Proceeds from a NMTC transaction may be used for a wide range of project costs, from pre-development expenses to construction (including infrastructure), purchase of supplies and equipment and provision of services to qualified communities. Infrastructure costs are generally only funded to the extent they are part of a larger qualified project and can be directly tied to the community benefits attributable to the project.
Although the program is highly competitive and can be complex, over the last several years I have successfully closed two NMTC deals for public agencies. The first was for a city-sponsored state-of-the-art health and wellness facility and the other for a port infrastructure project plus a mobile pantry bringing healthy food and nutrition education to needy communities. These two examples show the breadth and flexibility of the program; only a handful of projects cannot use NMTC, including strictly residential (though mixed-use projects do qualify), massage parlors, racetracks, and liquor stores.
NMTC has been used for YMCAs, office and retail, hotels, industrial development and many other types of projects. The main restriction is ensuring that the tax credits are deployed in a qualified census tract. To find out whether a project in your jurisdiction qualifies and NMTC can be used to attract private investment dollars, contact me anytime.
This article first appeared on SoCalLatinos.org on Feb. 1, 2017. Republished with permission.
Note: This article originally appeared on the now-defunct BBKnowledge blog, where Best Best & Krieger authors shared their knowledge on emerging issues in public agency law.