July 7, 2011

Just over ten years ago, Congress created the New Markets Tax Credit (NMTC) program to encourage economic development in low income communities and distressed areas. The NMTC program is not well known but has been used in several Iowa cities in recent years. Because familiarity and potential demand for the program may be increasing, economic development personnel may be asked about the program or see it in use. This alert is intended to familiarize you with the NMTC program and how it works.

With below market rates and flexible terms, NMTC financing often brings an extra source of financing to a project. The NMTC financing structure can finance all or part of a project, and can be used in conjunction with other financing tools. To qualify, projects must be in designated low-income and distressed census tracts. Projects able to successfully utilize NMTC financing tend to be in the range of $10,000,000 and upward.

The basic overview is straight forward:

  1. The NMTC program was adopted by Congress in 2000 and is part of the Internal Revenue Code. The U.S. Department of the Treasury, through the Community Development Financial Institutions Fund (the CDFI Fund), provides oversight for the NMTC program.

  2. A qualified Community Development Entity (CDE), which has applied for and received federal tax credit allocations from the CDFI Fund that are awarded annually, serves as a conduit between the project/developer and a financial institution who makes an equity investment in return for federal tax credits designated by the CDE.

  3. The equity investment passes through the CDE to a business or commercial property located in a low-income area (within a designated census tract).

  4. Over the next seven years, the equity investor receives a tax credit worth 39% of the equity investment.

  5. The tax credits provide a sufficient rate of return to the investor to allow the initial equity investment to fund below market rates and flexible terms or to provide residual equity in the project.

In general, CDE's are domestic corporations dedicated to providing investment capital to low-income communities. The CDE is the middleman between the investor and the project. After the investment is made into the CDE, and subsequently into the project, the tax credits totaling 39% are given to the investor in 5% increments for the first three years and 6% increments for the latter four years. The equity investment usually operates in conjunction with a loan, and generates the 39% tax credit based on their combined amount.

By way of example, if an equity investment of $2.7 million from a financial institution is coupled with a $7.3 million loan from a traditional lender or another entity interested in the project, for a total investment of $10 million, the equity investor gets a 39% tax credit based on the entire $10 million investment. The added value from the $3.9 million in tax credits enables below market rates and flexible terms and also funds the attorney, accountant, and CDE fees involved. After a 7-year compliance period, the equity investor usually exits the project through a put or call option.

     Iowa projects that have utilized NMTC financing include the following:

  • River Point West, Des Moines

  • Village Place, Des Moines

  • Northwest Airlines Reservation Center, Sioux City

  • Adler Theater, Davenport

  • Cambridge Investment, Fairfield

  • Hotel Julien, Dubuque

  • Roshek Building (IBM Service Center), Dubuque

  • Wright on the Park, Mason City

  • Hawkeye Pride, Corwith

  • Swift Pork Company, Marshalltown

For more information regarding the NMTC program, please contact Steve Nadel, John Bunz, or the attorney you regularly work with at Ahlers & Cooney, P.C.



About Ahlers and Cooney's Client Alerts

Our Client Alerts are intended to provide occasional general comments on new developments in Federal and State law and regulations which we believe might be of interest to our clients. The Client Alerts should not be considered opinions of Ahlers & Cooney, P.C., and are not intended to provide legal advice as a substitute for seeking professional counsel. Readers should not under any circumstance act upon the information in this publication without seeking specific professional counsel. Ahlers & Cooney will be pleased to provide additional details regarding any article upon request. Additional copies of this Client Alert may be obtained by contacting any attorney in the Firm or by visiting the Firm's website at www.ahlerslaw.com.


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Bunz, John


Nadel, Steven


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