Practice Area: New Market Tax Credits
The New Markets Tax Credit (NMTC) program is a robust federal incentive that has generated much needed private investment in underserved urban and rural areas since 2000.
While NMTCs can be used to catalyze development over many industries (manufacturing, commercial/retail, healthcare, education, etc.), there are many requirements to qualify for these incentives. Determining whether a project is eligible for NMTCs is a critical step for many borrowers and investors.
Last year, Convergent Law founder Jong Sook Nee presented on NMTC alongside Richard Davies, an accountant from Cohn Reznick who specializes in NMTC, for the Council of Development Finance Agencies (CDFA) annual conference. Below are the takeaways from this seminar which are perfect for anyone new to NMTC or wanting a refresher.
Factors to help determine whether your project is eligible for NMTC:
Location in a low-income qualifying census tract
Qualification of the business
Gross Income Test
Use/Property Test
Services Performed Test
5% limit of certain assets
Collectibles (art, rugs, wine)
Non-Qualified Financial Property
The NMTC's require that borrowers meet the "But For" test. Generally meaning, the borrower would not be able to undertake the project “but for” the subsidy provided from a NMTC financing. It can mean the provision of much needed services in underserved areas, and it can be the more generous lending terms (lower loan to value ratio, debt service coverage ratio, lower interest rates, etc.). Projects with a "Feel Good" Story can be very valuable (expansion of healthcare, supermarkets in food deserts, new community space in underserved areas, etc.)
The parties in NMTCs are all motivated to make the project work, but borrowers should be careful about the requirements to satisfy the NMTC standards for the entire seven year compliance period. Working with a solid team is imperative to understand the risks and benefits during the whole term of the NMTC loan, including any potential tax impacts.
Some uses are not permitted to be financed with NMTC and other restrictions – however that is not to say that there are no creative ways to address any given challenge. It is important to find a great team to think creatively about how to address issues as they arise. Our goal is to get our clients’ projects off the ground and it often requires that we approach an issue from multiple perspectives in order to get to the solution that is best for each project.
Have questions? Let us know how we can help you with your project.