What is a CDE?
CDE stands for Community Development Entity. A CDE is a domestic corporation or partnership which acts as an intermediary for New Markets Tax Credits (NMTC). CDEs can be banks, community development financial institutions (CDFI), investors or other organizations with a successful track record of identifying and facilitating investments in low-income areas. CDEs are certified through the U.S. Department of Treasury's CDFI Fund.
In addition to their certification, CDEs must apply for allocations every year. With more than 400 CDEs in the United States, the competition is steep. Each year, approximately 200 CDEs apply for the NMTC allocation. On average, about one-third are successful. Awardees then sub-allocate their award into four to ten different projects that align with their strategy and focus.
CDE Allocation Strategy
The annual application for allocation is a very involved process with CDEs submitting a proposed strategy for that particular year. Each CDE has its own geographic focus, which can be as narrow as a neighborhood or as wide as the nation. Within their respective geography, each CDE focuses on a specific impact strategy, which is both unique and variable from year to year. These strategies can include any number of variables, such as: minimum threshold of minority-owned projects, rural locale, specific industries or certain neighborhoods.
Given the highly competitive nature of NMTCs and its limited allocation, CDEs invest in very few of the projects in their pipeline. As a result, they focus their NMTC allocation into projects that check multiple boxes. This could mean an alignment of geography, industry, types of people served or type of impact created.
After the Allocation
Once a CDE provides NMTC allocation to a project, they will perform asset management for seven years after closing. During asset management, CDEs track project financial performance and impacts to ensure compliance is met. At the end of the seven years, the NMTC structure is anticipated to be unwound through mechanisms already in-place from the closing documents.
Overall, CDEs are responsible for carrying out the impact goals of the CDFI Fund. Despite being a government program, the NMTC program is largely administered by the private market through CDEs, who are responsible for setting impact criteria that align with the CDFI Fund's goals, making NMTC investments, tracking and reporting community outcomes from invested projects, and ensuring project compliance. Performing these duties well is required for the CDE to continually receive NMTC applications. In other words, if CDEs don't invest in the right projects or effectively report and track impacts, they have a lower chance of winning future NMTC allocations.