The current economic conditions and the current lending market are challenging real estate developers to find alternative vehicles to finance development projects.  Loans and equity investments made under the federal New Market Tax Credit Program may provide a cost effective alternative to traditional financing for commercial real estate development projects in low-income communities.

In general, the federal New Market Tax Credit (NMTC) Program provides a credit against federal income taxes for investors that make investments that ultimately benefit real estate projects in low-income communities.  Often, a portion of the economic benefit of the tax credit is passed through to the developers in the form of reduced interest rates on development loans or a reduced return on equity requirements, thus reducing the financing costs for such developers, which is critical for many projects. 

Basically the NMTC Program works like this:

1. An entity (usually a for-profit entity, but a non-profit entity may also be utilized under certain conditions) that complies with specific requirements under the NMTC Program applies for certification as a Community Development Entity (CDE) to the Community Development Financial Institutions Fund (Fund), which has been established by the United States Department of Treasury.  There is a specific deadline annually for CDE certification applications (this year the deadline was in March, go to www.cdfifund.gov for specific filing dates).  Many community development organizations have formed CDEs in order to enhance development in their community by providing low interest loans to developers.
2. Once certified as a CDE, the CDE applies to the Fund for tax credit allocations.  The application for tax credit allocations must be completed by the specified deadline each year (this year the deadline was in April, go to www.cdfifund.gov for specific filing dates).  There are certain strategies that may be utilized during the application process to maximize a CDE’s score for the allocation review process.
3. The CDE offers the tax credits it has been allocated to investors who acquire with cash an equity investment in the CDE (at its original issue).
4. The cash investments are utilized by the CDE to extend credit to, or make equity investments in, Qualified Low-Income Community Investments (QLICIs).  A loan to, or an equity investment in, a developer will qualify as an QLICI if the developer’s business satisfies the requirements of a Qualified Active Low Income Community Business (QALICB).

The NMTC Program imposes specific requirements relating to, among other things, the character and timing of investments in the CDE, the CDE’s use of the investments, the CDE’s offer of NMTC allocations to investors, what constitutes a QLICI and what constitutes a QALICB.  Taft’s team of attorneys can provide the needed legal services in connection with various deal structuring options and the process and documentation required by the NMTC Program to a CDE that is providing credit and capital to qualifying projects.  We can also assist developers in analyzing and resolving tax, real estate and other legal issues involved in obtaining such loans and equity investments from CDEs in connection with qualifying projects.  As the result of successfully closing numerous projects involving financing through the NMTC program, we have the experience and knowledge to represent CDEs providing credit and capital to QLICIs through the NMTC Program and to represent developers in obtaining credit and capital through the NMTC Program.