New Markets Tax Credit (NMTC) Program
The New Markets Tax Credit (NMTC) program was established to help attract capital to historically underserved projects and communities. It provides an incentive to debt and equity investors though a 39% federal income tax credit for investing capital into qualified projects in eligible low-income areas. CEI’s NMTC work is done through its wholly-owned subsidiary CEI Capital Management LLC (CCML).
The NMTC program is a powerful tool that can help underserved communities attract capital to good projects on favorable terms, allow investors to book new business with enhanced returns, and create greater opportunities for worthwhile projects and organizations working in low-income communities.
Prospective NMTC projects are only eligible if they are in designated low-income areas (pre-qualified census tracts). NMTC eligible census tracts primarily tend to be in downtown urban areas and lower income rural areas. Visit Qualifying for NMTCs for more on qualification requirements.
NMTC transactions are typically modeled on one of two general structures:
Direct Investment Model (PDF)
Leveraged Investment Model (PDF)
The NMTC program is very flexible within the boundaries of the eligible geographic areas. Capital can flow to companies as debt, equity, or both.
In an NMTC deal, the capital flows through a special-purpose financing LLC, known as a Certified Development Entity (CDE). The investor(s) owns 99.99% of the CDE. A sponsor (like CCML) organizes and manages it, and retains a 0.01% membership interest. The business gets the capital on favorable terms and the investor(s) gets the tax credits.
The 39% tax credit on the amount invested is realized over seven (7) years. The 39% tax credit is allocated so that 5% is available for each of the first three years with 6% available for each of the last four years (5% + 5% + 5% + 6% + 6% + 6% + 6% = 39%). During this period "substantially all" (85%) of the original capital must be available to the borrower and must remain invested. The investor(s) can get cash flow (return on capital), but no
return of capital. (Any principal repayments must be held in reserve at the CDE level).
A bank, private equity investor, or other NMTC capital source can invest directly in the CDE (direct investment model) or through an upper tier "conduit" LLC as a means of leveraging the equity capital and bifurcating the tax credits (leveraged investment model).
In a leveraged transaction, investors can provide the debt, equity, or both. The equity provider would most likely receive its return using the available tax credits calculated on the basis of the combined total investment amount (debt & equity), thereby assuming nominal project risk. Any debt financing in such a leveraged NMTC model could be at market rates if the available tax credits are mostly allocated to the equity investors. Alternatively, some tax credits could be allocated to the debt provider as incentive to make the capital available at more attractive financing rates and terms.
Debt providers (i.e. banks and others) can structure effective security interests in the underlying assets pledged to the CDE and can perform typical bank lending functions. Loan amortization (i.e. principal payment made at the borrower level) can be achieved by retaining reserve accounts at the CDE or borrower levels (since no return of capital is allowed for the seven years).
"Substantially all" (85%) of the capital must stay invested in the project for the 7-year tax credit period. Any unexpected capital repayment would be held at the CDE level so that it could be redeployed to other NMTC eligible projects within a 12-month grace period. Such redeployment any returned capital to either the same project or to another eligible project within the 12-month grace period avoids any potential recapture of the tax credits.
CCML, as the NMTC sponsor, is responsible for obtaining the tax credit investment allocations from the U.S. Government, allocating these credits to the investors, and servicing the investments for the sevenyear life of the tax credit transaction. CCML's fees are paid using a combination of up-front, management, and back-end fees.