The New Markets Tax Credit (NMTC) Program is designed to funnel financing into qualified projects that support the community. It could be contended that the goal of the NMTC Program is to make itself obsolete. There would be no need for any community development programs, in general, if communities were not in need. Of course, this is not yet the case. And more to the point, some communities could use more immediate support than others. Read on to learn about the NMTC allocation process and what aspects are considered when selecting projects.
Community Distress Framework
Fortunately, the NMTC Program provides a framework to evaluate which communities are the most distressed and would-be potential candidates for financing. If a community measured at the census tract level has a poverty rate of at least 20%, or an average median income (AMI) of less than 80%, then it will qualify for the NMTC Program.
Baseline for Participation
This is both a baseline for participation and a starting point for project selection. In many cases, the Community Development Entities (CDEs) and NMTC investor that make financing decisions prefer to direct dollars to communities that are the most distressed. Within the NMTC framework, that usually means projects located in areas where poverty rates far exceed 20% and where AMI is far below 80%. The more distressed the community, the greater the perceived need, and therefore the higher likelihood of selection for NMTC funding.
Factors for Project Selection
However, distress level is not the only factor for project selection. Certainly, to participate, the location of the project must fall into an NMTC-qualified census tract. Once a location is confirmed, several questions are important to answer:
- How will the project help the community and those who live and work there?
- What type of project is it?
- What is the status of development?
- What is the cost?
- When could the project close on NMTC financing?
These questions tend to work together in a push/pull manner. There is no one right answer. For example, a project that creates quality and accessible jobs may receive favorable feedback. However, if that project plans to begin construction two years from now, it may be a better candidate for future consideration. CDEs and NMTC investors are under pressure to deploy NMTC dollars in a timely manner—waiting to allocate dollars only delays the positive benefits of the program.
In another example, if a project plans to bring the first grocery store to an area in decades, then it could receive positive feedback. However, if that project only costs $1.5 million, then it may not be an ideal NMTC project. In general, NMTC transactions carry some fixed transaction costs and most CDEs want to deliver the most benefit to a project as possible. If a project cost is too low or too high, the net benefit after transaction costs may not actually be as helpful as intended.
Project Cost Considerations
The demand for NMTC dollars is high. Often, worthy projects are not selected by CDEs and NMTC investors. Sometimes, it is a project-type issue. Some CDEs, for example, only select healthcare-related projects. A manufacturer expanding operations will not fit the healthcare needs. The same story plays out across all project types. CDEs and NMTC investors commit to certain project types and thus will not consider alternative project types for selection. CDEs and NMTC investors are forthcoming about these parameters so that projects know upfront if they fit the CDE project profile.
Summary
As they say, there is more to the story than meets the eye. The first step is to gauge whether a location qualifies for participation in the NMTC Program. Once confirmed, the work to determine a project type, timing, and circumstances is a complicated feasibility exercise. For the right project, at the right time, and with the right collaborations, the NMTC Program can be a powerful economic development tool.
If you have any questions or need assistance, please visit our New Markets Tax Credit Services or contact a professional at Forvis Mazars.