Saving New Markets Tax Credits

10 min read

Industry and Congress Optimistic About Combatting Political Threat 

The New Markets Tax Credit (NMTC) program faces political pressure. It is being questioned in some circles as no longer being necessary, now that other Trump-era initiatives, such as Opportunity Zone investments, have been put in place. For example, the House of Representatives’ Tax Reform Proposal of 2017, if passed, would have completely repealed the NMTC. According to Novogradac, the national professional services organization, “While Trump and his Treasury Department aren’t outwardly hostile to the NMTC program, they haven’t embraced it the same way the Bush and Obama administrations did. Indeed, this administration has proposed eliminating all CDFI Fund grant programs. If the NMTC isn’t extended this year, it’s likely that the Trump administration would wait for an extension to be approved before even beginning the 2020 allocation round. That approach would be painful for the NMTC community and it would be compounded by a presidential election looming over the entire 2020 Congressional year, making further delay likely.”

NMTC was created by the Community Renewal Tax Relief Act of 2000 as a means to stimulate growth and increase capital investment in low-income and economically distressed and challenged urban neighborhoods and rural communities. It was a bipartisan political effort, authorized with the understanding that it would take several years at least and “patient capital” in each case to grow businesses, upgrade the built environment, create jobs and stabilize and sustain the local economy.

NMTC is administered and allocated through the Treasury Department’s Community Development Financial Institutions Fund (CDFI) and generates more federal tax than it costs. According to CDFI, NMTC Program awards have generated $8 of private investment for every dollar invested by the federal government. Yet it must be reauthorized each year or it expires on December 31. There are bipartisan bills under consideration in both houses of Congress to make the tax credit permanent, as the Low Income Housing Tax Credit was made permanent back in 1993.

At his confirmation hearing for Treasury secretary, Steven Mnuchin refused to take a stand on NMTC. “If confirmed, I will work with Congress to determine which tax credits or deductions warrant retention, modification or elimination in order to maximize economic growth and job creation,” he said in reply to a question from Senator Maria Cantwell (D-WA).

On the other hand, he has come out foursquare for Opportunity Zones, stating at the outset of the program, “We want all Americans to experience the dynamic opportunities being generated by President Trump’s economic policies. This incentive will foster economic revitalization and promote sustainable economic growth, which was a major goal of the Tax Cuts and Jobs Act.”

With conflicting issues and constituencies, and a potentially uncertain future looming, we at Tax Credit Advisor decided to take a look at the NMTC record and get perspectives from some longtime and expert observers.

“A Powerful Tool”
“The New Markets Tax Credit is a powerful economic development tool that attracts private capital into hard-to-finance businesses in distressed communities nationwide,” CDFI Fund director Jodie Harris said upon the awarding of the year’s $3.5 billion of NMTCs in May 2019. “Today’s awards will finance projects ranging from large manufacturing plants to grocery and retail stores that will create jobs and provide critically needed goods and services to residents of low-income communities. One-fifth of the investments resulting from today’s awards will be made in rural communities.”

Matt Josephs is senior vice president for policy of the Local Initiatives Support Corporation (LISC), headquartered in New York City. Before coming to LISC in 2012, he worked for 13 years at CDFI, coordinating policy development and implementation. His message is straightforward: “If the program is not extended or made permanent, that’s it! Our goal is to make it permanent and raised from $3.5 billion to $5 billion annually.”

However, he is optimistic since Senators Roy Blunt (R-MO) and Benjamin Cardin (D-MD) introduced S.750 supporting extension. Sixteen Democrats and 15 Republicans have already signed on as cosponsors. Nearly identical is the House of Representatives version, H.R.1680, introduced by Representatives Terri Sewell (D-AL) and Thomas Reed (R-NY) with 108 bipartisan cosponsors. Both bills provide for indefinite extension of the program, index future allocations to inflation and provide investors with relief from the Alternative Minimum Tax.

“There certainly has been confusion on the Hill,” says Kevin Boes, president and CEO of New Markets Support Company (NMSC), a subsidiary of LISC whose mission is to deliver creative financing solutions to empower underserved communities across the country. “Particularly for members not in the weeds on these community development tools. But I think the confusion has dissipated over the course of the last year or so.”

“The House bill ups the amount to $5 billion,” says Josephs. “The Senate hasn’t passed any tax extenders, but our main objective is permanency. We don’t want to have to limp along with extenders every year, but we’ll take whatever we can get politically.”

Kermit Billups is cofounder and executive vice president of Greenline Ventures, LLC of Denver, which, in conjunction with mission-driven capital provided by investors, leverages the NMTC program to provide financing to underserved businesses and communities. He is also the current president of the New Markets Tax Credit Coalition, based in Washington, DC. “The last authorized application closed at the end of October,” he says. “Without an extension, communities across the nation will lose out on billions for economic and community development.” He notes that the demand for NMTC allocations has outpaced availability by 400 percent and that the average award ranges between $40 and $50 million.”

“So that puts us back in the familiar place of submitting for a round that has not yet been authorized,” Boes says, adding, “People are getting good at writing applications, so there’s even more competition. If I had to make a bet, I’d say by the end of next year they’ll find a vehicle to get an extension done. But I have a hard time seeing a scenario with House Ways and Means and Senate Finance to get awards by next spring or summer.”

“The best thing for everyone to do in support of a NMTC extension is to contact your congressional representatives and urge them to support the New Market Tax Credit Extension Act of 2019. Congress needs to understand the broad support for this program.”

The Trends
Based on the Coalition’s annual survey data, Billups says the following trends are apparent:

  • Community facilities, such as daycare centers, schools and service providers, “Their share of total projects went from about a third in 2014 to about one half in 2018.”
  • Community Development Entities (CDEs) are decreasingly financing stand-alone retail centers and restaurants. The share of those projects has declined from 11 percent in 2014 to under three percent in 2018. Those numbers exclude grocery stores and projects expanding access to fresh food in food deserts.
  • We are also seeing increasing comfort with the loan pool model for structuring small NMTC transactions.

“For example,” says Billups,”Our INDUSTRY Denver project used NMTCs to transform a former warehouse into flexible incubator-style office space for early phase businesses in the technology and creative services industries. INDUSTRY Denver has been a redevelopment catalyst for the Brighton Boulevard corridor, the city’s northern gateway. The project spurred significant follow-on investments in the historic district, including a brewery, city park and apartments.”

Josephs lists the “sweet spots” for NMTCs as health centers, charter schools, YMCAs and other communal and recreational facilities, manufacturing and commercial mixed use. He cites the needs of rural communities and says LISC has set up a small business loan fund and has been involved with 20 to 25 transactions in rural areas.

Boes defines New Market benefits as, “All the complements to LIHTCs, enabling community assets around healthcare, education, services and quality, accessible jobs.”

“I haven’t seen indications of this administration not supporting NMTCs, even though they’re not being vocal,” Josephs continues. “My ears are open, but so far, I have not heard anything.”

OZones vs. New Markets
“I was worried at first, but I don’t have negative things to say in general about Opportunity Zones,” Josephs comments. “It’s uncapped capital whereas NMTCs are capped, so the scale could be huge. Investors are not just in that NMTC space and OZones offer closer to market-rate returns, and only 25 percent of Opportunity Zones can be NMTCs.

“They are completely different programs,” says Boes. “You can get things done with NMTC that you can’t get done with OZones.”

“The two programs are complementary, with some key distinctions,” says Billups. “They finance projects with different risk profiles, raise investment from different classes of investors, and provide different financial products to projects. With respect to differences, low-income communities need access to patient, flexible capital, in the form of both debt and equity. The NMTC typically provides debt while the OZone program is 100 percent equity.

Projects vary, but many investors will seek to maximize the OZone incentive with more traditional real estate projects that deliver ten-year returns. NMTC investors are mostly regulated financial institutions, whereas OZone investors vary, but are often corporations and high-net worth individuals.”

“I think they can be complementary,” Josephs agrees. “The asset classes are going to end up being pretty different and we’re trying to create OZones ourselves.” He also notes that Senator Tim Scott (R-SC), an author of the Opportunity Zone legislation, has stated he is a NMTC supporter.

Among the critiques of the OZone program is that it is a capital gains shelter for wealthy people that can invest in transitional areas bordering on the truly disadvantaged or bring up the level of neighborhoods in a more general way, while by law, all NMTC investments must be to economically distressed communities. Historically, more than 72 percent of all NMTC investments have to be places deemed distressed, including unemployment rates more than 1.5 times the national average, a poverty rate of 30 percent or more, or a median income at or below 60 percent of the area median.

But summing up, Billups says, “Both of these programs are similar in that they lower the cost of capital in distressed areas. Furthermore, both programs target new investment to American’s hardest hit rural and urban areas.”

Who Is Getting the Awards?
Over the course of the program, the share of awards to nonprofit-controlled entities, banks, government-controlled entities and non-bank for-profits has remained relatively steady,” Billups says. “The only notable trend is an increase in the share of awards to government-controlled entities and a slight decrease in the share of awards to banks.”

He also says, “It’s important to note that because of the NMTC program, banks and financial institutions are more effectively tracking loan performance data in low-income communities. This data is helping credit committees better understand that opportunities in disadvantaged areas have been overlooked and the market perceptions that have resulted in redlining are not supported by actual performance outcomes.

As far as Billups’ own company, “Greenline is focusing on using NMTC loan funds to specifically support small business expansion and job creation. Our loans help these businesses grow and stabilize. When our funds exit, the businesses are able to receive more traditional bank capital, and that’s really the step that helps low-income communities grow. We want to use the NMTC subsidy to support early investment in severely distressed areas, which will ultimately provide incentives for market-rate capital to invest in these same areas.”

“The only things that even come close to doing the same work as NMTCs are the state programs that build off the base of these tax credits,” says Boes. And as to, “Why didn’t the House and Senate just make this program permanent that returns so much more than it costs? I’m afraid I can’t give you a good answer to that.”

Story Contacts:
Kermit Billups,
Kevin Boes,
Matt Josephs,