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New Markets Tax Credit: New Allocation Agreement Disclosure Statement Requirements

Key Takeaways

  • Community Development Entities (CDEs) which were awarded New Market Tax Credit (NMTC) allocation authority in April 2013 are required to enter into Allocation Agreements with the U.S. Treasury’s Community Development Financial Institutions Fund (CDFI Fund).
  • This year’s Allocation Agreement contains changes to the template of prior years, the most significant of which is the new requirement that a CDE provide fee disclosure statements for each Qualified Low-Income Community Investment (QLICI) made.
  • The disclosure statement requires a CDE to divulge all direct and indirect NMTC related transaction costs levied on a Qualified Low-Income Community Business (QALICB) throughout the seven-year tax credit compliance period.

August 2013

The following was distributed as part of the New Markets Tax Credit Connection - Summer 2013 newsletter.

On the heels of the latest announcement of NMTC awards, the CDFI Fund released the template of the Allocation Agreement to be used for the latest round of awards. Allocation Agreements, being contracts between each NMTC Allocatee and the CDFI Fund, have long been used by the CDFI Fund to govern how CDEs use their NMTC awards. Upon examination, this latest allocation agreement seems to be quite similar to prior years’ templates. However, there are changes within this recent agreement that place more requirements on CDEs making QLICIs with their new NMTC awards.

The most significant change to the Allocation Agreement can be found in Section 6.12, which requires a CDE to provide a “disclosure statement” for each qualified investment made to the QALICB, whether in the form of a loan or equity investment. The disclosure statement lays out in detail the costs of the specific NMTC transaction the CDE is requiring the QALICB to pay. These costs are defined as not only the upfront and ongoing fees the QALICB must pay over the seven-year tax credit compliance period, but also indirect costs such as legal and accounting fees. The CDE should provide an estimated disclosure statement to the QALICB upon execution of the initial term sheet for the transaction (or upon execution of the initial term sheet of the last CDE, if the QLICI is part of a multi-CDE transaction). The disclosure statement, in its final format, must be provided to the QALICB at the closing of the transaction. At closing, this statement must be signed by the QALICB, to acknowledge that it has received and reviewed the disclosure statement.

While the CDFI Fund does not require that the disclosure statement be assembled in a standardized format, it has provided an example table which illustrates the level of detail needed for an effective and transparent disclosure statement. Furthermore, the CDFI Fund’s sample statement provides QALICBs with the net benefit to the project. The net benefit to the project method allows a QALICB to quickly assess the bottom line benefit of NMTC subsidized debt, after all fees and interest are taken into account.

While these disclosure statements are only now being provided to QALICBs, the benefits of the requirement are evident, including:

  • QALICBs will have a clear illustration of what fees are being charged in connection with a particular NMTC transaction.
  • Use of the “net benefit to project” method, gives CDEs the ability to quantify the benefits of NMTC-subsidized debt vs. conventional lending in today’s market.
  • The disclosure statements add a level of transparency on transaction fees, especially considering that CDEs are required to retain the executed statements so that they may be available for review by the CDFI Fund.

For more information, please visit the CohnReznick New Markets Tax Credit webpage and contact David Norton, Partner and Editor, at 410-895-7827 or Charles Edelen, Manager, at 410-783-7152.

Circular 230 Notice: In compliance with U.S. Treasury Regulations, the information included herein (or in any attachment) is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing, or recommending to another party any tax related matters.

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.

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