Equity provided by new markets tax credits, or NMTCs, continues to be used with - or as an alternative to - bond financings because they provide substantial nontraditional benefits to operations and projects of for-profit and nonprofit borrowers, as well as flexibility to municipalities and bond authorities.

The federal program can be used not only with bond financing, but also in connection with other subsidies, such as tax increment financing, federal and state historic tax credits, state NMTCs, grants, and a plethora of other federal and state subsidies.

To date, approximately 40 cities and bond issuers have received over $2.5 billion in NMTC allocations. Cities and other issuers can work with unrelated awardees or apply for the NMTC allocations themselves.

The program is facilitated by the Community Development Financial Institutions Fund, which is administered by the U.S. Treasury Department. The NMTC program was created in 2000 as an incentive to generate private investment capital for businesses and nonprofits located in qualifying urban and rural low-income communities that otherwise could not obtain traditional financing in the marketplace.

For any project, business, or nonprofit that qualifies for bond financing - especially tax-exempt financing - it's imperative to consider the use of NMTCs to minimize the cost of capital. Issuers can also avoid using up private-activity bond volume cap as quickly by supplementing financings with NMTCs.

As incentive to participate, investors receive a 39% federal tax credit on their investment that's recognized over seven years, an after-tax return generally between 7% and 12%, and credit under the Community Reinvestment Act. The excellent return available to investors is due in large part to the ability to leverage an investment in an NMTC financing as permitted in Revenue Rule 2003-20.

Most of the projects that qualify for bond financings also qualify for NMTCs. Although they cannot be used for residential rental housing, they are permitted for certain mixed-use projects in which at least 20% of the gross revenue is from commercial rent and the remaining portion can be from residential rental units.

The NMTC program provides non-conventional, below-market financing to qualifying projects, businesses, and nonprofits. Typically, at the end of the seven-year compliance period, a substantial portion of the financing is effectively forgiven, thereby placing the borrower in a strong position to have sources of capital to continue to pay debt service on the loan.

Each year the CDFI Fund awards NMTC allocations to qualified community development entities, or CDEs. These are entities that a have a primary mission of serving or providing investment capital for low-income communities or persons, and that maintain accountability through a board of directors, or similar governing board, to residents of low-income communities.

Bond issuers are now in an optimal position to participate in NMTCs - through their own CDEs or as leverage lenders to other such entities - because issuers can provide NMTC financings at tax-exempt rates, which are quite attractive to investors, CDEs, and borrowers.

Each CDE has its own service area,which can be local, statewide, regional, or national. Issuers can contact CDEs whose service areas and programs are consistent with a particular project financing. Each CDE has its own questionnaire that can be completed and submitted for consideration to provide NMTC financing. Obviously, a bond issuer is in a better position of control if it forms its own CDE and receives NMTCs.

The CDFI Fund does not allocate money or NMTCs per se. Instead, the fund provides the maximum dollar amount of investments that a CDE may receive from investors that qualify.

For example, if the CDFI Fund "allocates" $100 million to a CDE, an investment of up to $100 million in the entity is permitted upon which NMTCs can be recognized - i.e., $39 million, which is 39% of $100 million - over seven years by the investor. An allocation is like a "permission slip" for investors to receive NMTCs if they make investments in such entities. NMTCs are a dollar-for-dollar reduction of tax liability, as compared to a tax deduction that merely reduces taxable income.

If an issuer desires to apply for a NMTC allocation, the first step is to organize and qualify a community development entity. A CDE is easily organized, and will be certified by the CDFI Fund based on straightforward objective criteria. There is no application fee and the certification process is not competitive.

The second step is to apply for a NMTC allocation. Each year up to $3.5 billion of NMTC allocation is available, although there is a proposal to provide an additional $1.5 billion to prior-year applicants and add an additional $1.5 billion to 2009 applicants for a total of $5 billion in 2009. Thus, 2009 provides an even better opportunity for issuers to participate in the NMTC program, as described below. The Obama administration may increase the annual NMTC allocations even more.

The CDFI Fund is permitted to award $3.5 billion - and if current legislation is passed, $5 billion - of NMTC allocations each year with a cap of $100 million for any single applicant. Although this is a competitive process, there is no application fee.

The NMTC allocation application has four categories which are evaluated and scored: up to 25 points for each category, plus up to an additional 10 bonus points. The four categories of the application are: the business strategy of the CDE, the potential community impact of the proposed projects, the management capability of CDE, and the investor strategy in obtaining investments in it. The 10 bonus points consist of five points if the CDE commits to loan to entities that are not related to it, and five points if the investor in the CDE is unrelated to the entity.

Municipalities and cities interested in applying for a NMTC allocation must act now because applications are due April 8, 2009. By working with counsel and accountants, applicants can submit a thoughtful, consistent application to the CDFI Fund that clearly sets forth the applicant's business strategy, the community impact, management capability, and investor strategy. That strategy should minimize the cost of capital and maximize benefits to low-income persons and low-income communities while satisfying the tax-exempt bond provisions and NMTC provisions of the Internal Revenue Code, as well as state and local law requirements.

Alan L. Kennard is a partner at Wildman, Harrold, Allen & Dixon LLP in Chicago.

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