Definitions

Community Development Entity (CDE) Domestic corporation providing loans, investments, and financial counseling for LICs. Can receive NMTC allocations to distribute to investors.

Community Development Financial Institutions Fund (CDFI Fund) US Treasury fund devoted to promoting community development in underserved areas. Administers the NMTC program.

LIC Low-income community (poverty rate at least 20%).

New Markets Tax Credit (NMTC) National program offering tax breaks to developers to encourage development in low-income communities

Overview

The New Markets Tax Credit (NMTC) Program is designed to encourage developments in low-income communities by providing federal income tax credits for investors in Community Development Entities. The credit comes out to 39 percent, spread over seven years. The program was started as part of the Community Renewal Tax Relief Act of 2000 and is administered by the Community Development Financial Institutions Fund in the Department of Treasury. Since creation, $33.1 billion in tax credits have been approved.

The Rapid City Journal reported on the July 31, 2012 meeting of the Public Works committee where the developer for Presidents Plaza in downtown Rapid City informed the committee that construction was delayed due to difficulty in acquiring a New Markets Tax Credit. The credit was necessary for the plaza to be built under the current plan; denial of the credit would mean having to re-size the project.

NMTC has been used in past projects in South Dakota, such as grain elevators in Bowdle, Faulkton, and McLaughlin.

Applying for NMTC

(some of this material comes from Enterprise's How New Markets Tax Credits Work)

Each year, CDEs can apply for NMTC from the CDFI. The demand far outweighs the availability- 2012 saw 70 CDEs awarded NMTC, out of 314 applicants (value of the credits was $3.6 billion, from a request $26.7 billion).

The CDEs then decide what projects to fund. The credits are then usually allocated in portions of $5-15 million, so the CDEs can diversify their investments. Projects are often chosen on the basis that they wouldn't be done without the NMTC; the NMTC is needed to secure other financing. Developers make Qualified Equity Investments in the CDE, in return for the tax credit on future income. Communities then benefit from new construction jobs, as well as permanent jobs and tax income from the completed project.

The process of applying for a NMTC allocation can be long and confusing; businesses may seek a consultant for help navigating the process (one example would charge a $15,000 retainer for services, replaced by .85% of the qualified investment if successful, i.e. $85,000 for a $10 million Qualified Equity Investment). There may be other costs involved with closing the deal; another example estimates $300,000 from a $10 million investment. Estimates in this report from 2011 place costs to acquire at 2-3% of the transaction size, with 2-8% closing costs, and possible other fees in the process.

Additional Resources

CDFI How to Apply- Information on how to apply for a NMTC

CDFI Fund Releases Application Demand for 2013/2014 Round of NMTC Program- Article form October 2013. 310 applications were received; the 2012 rewards below were distributed to 70 organizations out of 314 applicants.

Treasury Announces $3.6 Billion in New Markets Tax- Article from February 2012 on the recent round of allocations.

Center for Rural Affairs- Solid examples of projects that have used NMTC. Links to a very clear explanation of the program with easy-to-understand examples.

Dakotas America- Recipient of NMTC and has used the credits for South Dakota projects. Information on what the NMTC is and who can use it.

IRS rules and information on NMTC- Detailed and in-depth information on the program.

NMTC Census Tracts- Map from Dakotas America showing qualifying areas in South Dakota

NMTC Impact Dakota Towns- Article telling how NMTC have been using in South Dakota

History of President's Plaza- BHKN resource page on the development of a multi-use building downtown, now waiting on NMTC allocation.

President's Plaza- Archive of news stories and government reports on the development of Presidents Plaza and previously proposed multi-use buildings.

Support for the New Markets Tax Credit- Video hearings on extending the NMTC program and explanations