Monday, January 9, 2012

New life for New Markets Tax Credits?

New Markets Tax Credits (“NMTCs”) are up for re-authorization this year.  While among the more complicated of development-based tax credit schemes, NMTCs basically boil down to this:  an investor receives a 39 percent federal tax break over 7 years (five percent for each of the first three years, and six percent for each of the remaining four years) for investing in a qualified low-income community, which is defined by census tracts.

The program has grown in popularity since its first authorization in 2000, as has its allocations, which total $29.5 billion since 2000.  The original NMTC legislation provided $15 billion in NMTCs from 2000 to 2007.  Most recently, Congress allocated $3.5 billion in NMTCs for each of the 2010 and 2011 fiscal years.  The bills currently before the House and Senate propose to allocate $5 billion in NMTCs for each of the next 5 years. 

One of the most interesting things about NMTCs is the wide variety of uses to which NMTCs can be put . . . at least on paper:  almost any real estate or small business loan subsidy or grant in a qualifying low-income community is eligible.  In reality, the majority of NMTCs thus far have been used for real estate projects in low-income areas.  (See 2010 GAO report, Figure 3).  The CDFI Fund recently issued regulations to try to spur use of NMTCs to assist small businesses.  NMTC loans to small businesses are inherently more risky, seeing as the entity receiving the tax credit wants to make certain the investment remains for the full seven years to receive the entirety of the tax credit. 

Other issues with NMTCs have been that they are simply extremely complicated transactions.  As a result, in researching NMTCs a couple months ago, one national lender told me that his institution wanted deals of at least $5 million in order to be able to make the transaction pencil out, while another national lender told me that number was $15 million in her organization.  That means that the transaction costs are probably too high with NMTCs to facilitate smaller projects; hopefully, this cycle can streamline some of that transactional weight, as the 2010 GAO report noted above recommended.

My investigation into NMTCs suggests that they have great promise, especially when states are willing to double up the value by providing NMTCs that apply to state taxes, such as Ohio.  In particular, I have been extremely impressed with the use of NMTCs in Cincinnati’s Over-the-Rhine neighborhood.  I grew up in Ohio and visited Over-the-Rhine while in Cincinnati in December.  I was impressed by the ability to make headway in a troubled area (you may recall the 2001 riots there) that continues to have its share of problems, but appears to also have signs of life once again, thanks in part to NMTC funding.  Check out the work of 3CDC and its related entities using NMTCs.

In thinking of the relative importance of NMTCs, I’d also note that the budget for Community Development Block Grants (“CBDGs”) was $5.6 billion in 2001.  In 2011, CBDG funding was just $3.3 billion, which is less than NMTCs.  NMTCs appear to have bi-partisan support (see list of bill sponsors at House/Senate links above), and appear to be on the rise.  Of course, it will be a challenge to get anything passed this election year, even with bi-partisan support, but I believe re-authorization of NMTCs will be an important issue to watch this year, especially for those who work in low-income communities.

Stephen Miller

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