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New Markets Tax Credits 101

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Affirmative Investments

on 23 November 2016

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Transcript of New Markets Tax Credits 101

Affirmative Investments
New Markets Tax Credits 101

Intro to the Guide
As the project sponsor, you will be involved in every detail of the development, and will be holding many conversations explaining how NMTCs work to your board, partners and donors. Affirmative Investments will assist you throughout this process, but you can also use this guide to become more comfortable with NMTCs and to assist you with those conversations.
What are New Markets Tax Credits?
NMTC Snapshot:
Launched in 2000
Overseen by the Community Development Financial Institutions (CDFI) Fund
Goal: to attract capital to low-income communities by providing a tax incentive for investors

How it works:
The CDFI Fund allocates tax credits to Community Development Entities (CDEs) across the country who work with investors and project sponsors to mobilize that funding into projects in qualifying neighborhoods.

Outcome:
NMTCs help realize projects that would not have been feasible otherwise due to the risk of investing in low-income communities.
Affirmative Investments Inc. is a specialty real estate finance and development consultancy. We partner with mission-driven organizations to deliver projects that stimulate economic development, expand housing opportunities, and deliver critical services in low-income communities.
Additional NMTC Resources
How do NMTCs work?
What is Affirmative Investments' Role?
Typically, AI acts as the NMTC consultant, which means we structure the financing for your project. This includes:
Sourcing CDEs with NMTC allocation who will commit to your project
Finding NMTC investors
Sourcing and negotiating the non-NMTC debt-financing with banks or other sources (excluding fundraising)
Working with project partners and third-party professionals to structure the transaction and bring it to closing

Once we are hired, we are committed to finding the best financial structure for your project that will enable you to launch.

For select projects, AI can also be the CDE and/or can act as development consultant. Let us know if this service that would help your project.
Affirmative Investments:
www.affirmativeinvestments.com or (617) 367-4300

CDFI Fund:
www.cdfifund.gov/what_we_do/programs_id.asp?programID=5

New Markets Tax Credit Coalition:
http://nmtccoalition.org/

Cohn Reznick:
www.cohnreznick.com/industries/new-markets-tax-credits

Novogradac:
www.novoco.com/new_markets/index.php

East Boston Neighborhood Health Center
Fairmont Apartments
Vicente's Supermarket
What do you get out of this?
Let's look at an example $10M deal
Here's how the NMTC funding flows:
Based on annual Federal allocations, Community Development Entities (CDEs) pair NMTC Investors with qualified projects by offering Investors a 7-year tax credit.
Because of this tax incentive, NMTC Investors invests equity in the CDE covering ~33% of eligible project costs. The 67% balance of the funding comes from other sources including fundraising or bank loans.
The CDE, less their fees, loans the total amount to the project entity that serves as the Qualified Active Low-Income Community Businesses (QALICB).
For 7 years, the QALICB makes payments on the loans.
After 7 years, the sponsor can acquire the loan corresponding to the NMTC Investor for a nominal amount or at a deep discount. After that, no more payments are required for the NMTC investment!
In a $10M project, the project sponsor can secure up to a "$10M NMTC allocation", which covers ~33% of eligible costs. So what does that work out to?

Let's do the math for the NMTC portion:
+ $3.3M invested by NMTC Investor
- $400K CDE fees
- $350K 7-year NMTC compliance fees ($50K/yr)
- $245K transaction costs
--------------------
$2.305M NET*

That $2.305M can be acquired at a discount after 7 years.

The fees and interest on the $6.7M depend on the
nature of that funding.

*Caveat: This calculation pertains to non-profits. For-profit entities can have tax implications not shown here.
NMTC funding acts like an interest-only loan that the sponsor (you) can acquire at a discount after 7 years.
Example Projects:
NMTC Brief Overview:
Remember:
NMTC funding acts like an interest-only loan that the sponsor (you) can acquire at a discount after 7 years.
And soon you'll be operating in your new building that finally meets your organization's needs! Just like...
Galvin Community Center
High Point Treatment Center
Tropical Foods
Codman Academy Charter School
East Boston Neighborhood Health Center
United Teen Equality Center
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