Country / Language

Demand for NMTC Allocation Drives Positive Changes in the Industry


First Quarter - 2015

View the full newsletter.

It is no secret that demand for New Markets Tax Credit (NMTC) Allocation is incredibly high.  Over the life of the NMTC program, only about 28% of the hundreds of applicants each round actually receive an award. This demand has allowed the Community Development Financial Institutions (CDFI) Fund, the branch of the Treasury that administers the NMTC program, to utilize the application process to affect positive changes to the way the NMTC industry works in practice.

How has the NMTC program influenced the industry as a whole?

“As the NMTC program has grown, it has become a critical tool for community development organizations to advance their mission,” says Scott Szeliga, a CohnReznick audit partner. Due to the competitive nature of the program, the CDFI Fund has the ability to drive NMTC investments in a particular direction by awarding points to applicants who agree to make investments under more stringent criteria, or in a specific part of the country.

“Obtaining a NMTC allocation has become so important that most Community Development Entities (CDEs) do not hesitate to commit to the more stringent investment criteria in recent allocation applications in hopes of securing an award,” Szeliga explains. If a CDE receives an award, the CDFI Fund can then “lock in” investment criteria by including such criteria in the allocation agreements, ensuring the CDE will do as they promised in their allocation application. 

The transformations are gradual, but positive

The changes that have taken place throughout the process have made the NMTC a better program and have increased the likelihood that one day the NMTC program will become permanent. Some of the industry changes have been gradual. For example, the competitive nature of the program has had a noticeable impact on fees taken by CDEs throughout the life of a deal. As the program has matured and demand for allocation has remained high, CDEs have been more willing to reduce the amount of fees taken during the life of an investment in order to increase their chances of obtaining allocation. The level of detail required by the fee section of the allocation application provides enough clarity that all fees during the transaction cycle are disclosed. This allows the CDFI Fund to better understand the total amount of fees expected to be taken by all applicants, which helps level the playing field. 

Most CDEs are only required to make 75% of their NMTC investments for a particular allocation in census tracts that qualify as targeted distressed communities. However, Szeliga explains, “We also have seen CDEs go well above their required percentage of investments made in targeted distressed communities.” It is also very common for a CDE to have a policy that 100% of their investments will be made in these qualifying census tracts.

Another gradual change has been the percentage of qualified equity investments (QEI) required. “While the tax code only requires 85% of a qualified equity investment to be invested into a low-income community, we typically see CDEs locked into QEI usage percentages in the 95% - 97% range,” maintains Szeliga. The increased detail required in the application related to fees, as mentioned above, has also given clarity to the equity usage percentage.

The creation of the innovative investments section

In addition to the gradual changes occurring over the years, high demand for NMTC allocation has allowed the NMTC program to move quickly to drive investments in various directions. Through the allocation application, the addition of the innovative investments section has become one of the required criteria for a CDE in their allocation agreements. As an example, the CDFI Fund has used this section to drive NMTC investment into states that have been underserved by the NMTC program. This section has also been used to drive more NMTC investments into non-real estate deals, investments with original terms of 60 months or less, as well as investments that are $2 million or less. In response, the industry has experienced an increase in the number of revolving loan fund deals as CDEs look to meet the new innovative criteria.

The evolution of the NMTC program impacts the road ahead

As the NMTC program matures, more and more CDEs are meeting the standard requirements in the application process. This means there are plenty of groups that score high in the management capacity and capitalization strategy sections of the application. The competitive nature of the program propels applicants to differentiate themselves in the business strategy and community outcomes sections.

With the increase of qualified applicants, CohnReznick foresees that the demand for NMTC allocation will remain strong. This continued demand will ensure that CDEs drive investments to areas highlighted in the innovative investment section of the application and will encourage investments in the most distressed communities throughout the country.

What Does CohnReznick Think?
The demand for NMTC allocation has ultimately been a catalyst for positive change in the NMTC program. It also allows the NMTC program to be extremely flexible for a federal program – which is key to the program’s staunch support in Washington. The continued improvement of the NMTC program and its unique flexibility has helped place it in a prime position for consideration to become permanent.

Contact

For more information, please contact Scott Szeliga, audit partner, at scott.szeliga@cohnreznick.com or 410-783-7472.


This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

Search Our People

Search Our People

Look ahead. Gain insight. Imagine more. Is your business ready to break through?

View our new TV commercial..

Industry Outlooks

Industry Outlooks

Gain insight into what is ahead for the Commercial Real Estate, Technology and Middle Market Private Equity industries.

READ MORE

Learn about our upcoming events.

READ MORE

Working With Us

Working With Us

What makes CohnReznick different from others in our profession? And what should our clients come to expect when working with us? The answer is The CohnReznick Advantage. Contact us to learn how we can out the CohnReznick Advantage to work for your business.


People

The value of an organization is determined by the skills and qualities of its leaders. With more than 280 partners serving clients nationwide, CohnReznick is renowned for the diverse experiences, knowledge and backgrounds of its leadership.

Learn More

Services

We align our services in three segments: Accounting and Assurance, Tax, and Advisory. This approach allows us to provide holistic solutions to complex business problems and to seize upon opportunities requiring an integrated approach.

Learn More

Industries

Accounting and tax issues different significantly based on an organization's industry. We provide clients with expertise in nearly two dozen industries – we know the opportunities, the obstacles, the competitive landscape.

Learn more

Insights

CohnReznick professionals are thought leaders in their industries. Clients benefit from relevant and timely economic, legislative and industry insights that can keep them a step ahead of competition.

Learn More

Global Reach

Our involvement in the Nexia International network of firms enables us assist our clients wherever they do business-providing local expertise and connections wherever they needed. Nexia is comprised of 20,000 professionals operating in over 100 countries.

Learn More