Qualifying for NMTCs

Qualifying for a New Markets Tax Credit (NMTC) allocation is both multi-faceted and inflexible in terms of criteria. This makes it crucial to satisfy qualifications prior to marketing projects to a community development entity (CDE). Most NMTC qualifications apply to the borrowing entity, which can be a subsidiary or affiliate of a broader company. For example, a healthcare company with five clinics is pursuing NMTCs to build a sixth clinic in a severely distressed community.  Typically, the sixth clinic will be held in its own "Subsidiary LLC" to be owned by the broader healthcare company. This subsidiary must fully qualify for the NMTC program. However, the other five clinics do not need to qualify as they are not part of the subsidiary. Because NMTC is meant to be project-based financing, it is the project rather than the broader company or organization that must comply to NMTC requirements.

NMTC Qualification Concerns

The following is a high-level summary of major New Markets Tax Credit qualification concerns:

• Project must be located in a low-income census tract and ideally in a severely distressed census tract.

• Project cannot be a farm, a "sin business" or leisure business. Ineligible businesses include: farms, golf courses, liquor stores, massage parlors, tanning facilities, etc.

• No more than 80% of the project's revenue can come from the sale or lease of residential real estate. Apartment projects must be mixed-use to qualify for NMTCs.

• Balance Sheet assets cannot hold a material amount of collectibles (artwork, etc.), intangibles (software licensing, etc.) or financial products (loans, stocks, etc.);

• A majority of the physical assets of the project's subsidiary LLC must be in a low-income community. For example, a project whose assets comprise ever-moving 18-wheeler trucks could be challenging.

• A majority of the project employees' time must be spent in a low-income community. For example, a catering company where employees work in various locations could be challenging.

Other NMTC Considerations

• The NMTC program is intended to be a gap filler. The single biggest reason why impactful NMTC programs do not close after pursuing NMTCs is they are unable to raise the other 75-80% of the project total financing. The up-to 25% NMTC benefit cannot fund without the other 75% present at closing.

• There is one NMTC award each year. Project timelines may or may not align well with the NMTC cycle. If there is a misalignment of timing, there are strategies that could help alleviate some of these risks.