This little-known, often misunderstood credit offers significant tax savings potential for real estate investors. The NMTC permits taxpayers to receive a credit against federal income taxes for making qualified equity investments in designated Community Development Entities (CDEs). Substantially all of the qualified equity investment must, in turn, be used by the CDE to provide investments in low-income communities.
[blockquote]More than $21 billion has been allocated to the New Markets Tax Credit (NMTC) Program.[/blockquote]
The credit provided to the investor totals 39% of the cost of the investment and is claimed over a seven-year credit allowance period. In each of the first three years, the investor receives a credit equal to 5% of the total amount paid for the stock or capital interest at the time of purchase. For the final four years, the value of the credit is 6% annually. The Community Development Financial Institutions (CDFI) Fund has made 396 awards totaling $21 billion in allocation authority.
Availability and Use of the Credits:
- $5 billion of NMTC allocations were awarded in October 2009 by US Treasury's CDFI Fund (which administers the NMTC program)
- CDEs with awards use the following criteria to determine whether to invest:
– What is the community impact of the transaction? (i.e., job creation)
– The ‘but for' test – but for receipt of NMTCs, would this deal happen?
– Does the transaction meet their underwriting standards?
- The business using the credits must be located in or predominately serve a low income community in order to qualify for benefits
- Low income community definition for purposes of this credit is 30% poverty, 1.5 x national unemployment, with median family income less than 60% of statewide median family income
Historic and NMTC can be used in combination called “twinning.”
Though a Complex Program, the Benefit to Business is Below Market Debt or Equity.
- Subsidy stays in the business for 7 years – no return of capital to avoid recapture
- Typically involves real estate and can be used for new construction or substantial rehabilitation of existing buildings
- Four states also have a state NMTC
What We Do:
- Determine whether a potential project is located in a NMTC eligible census tract
- Review the project to see if the proposed use of the project generally meets NMTC criteria
- Evaluate whether the project's proposed preliminary budget to see if the NMTC could be practically useful
- Determine whether a project might potentially qualify for both New Markets and Historic Tax Credits
Additionally, if NMTCs Makes Sense for the Project:
- We can identify CDEs who have NMTC allocations whose goals potentially match those of the proposed project
- We can assist the developer in structuring, negotiating and closing of the transaction with a CDE
Contact us at 561-253-6640 or email us here to learn more about the New Markets Tax Credit. If NMTCs make sense for your project, you may benefit significantly.