The Future of NMTC’s Legacy

7 min read

A Retro- and Prospective Analysis 

“What is a legacy? It’s planting seeds in a

 garden you never get to see.”   – Hamilton

Originally authorized by Congress as a part of the Community Renewal Tax Relief Act of 2000, authorization for the New Markets Tax Credit (NMTC) once again runs out at the end of 2020. The program was initially authorized for five years and has been kept alive by several short-term renewals, which speaks more to Congress’s desire and ability to get anything done than it does to the effectiveness of the program. As we celebrate the program’s 20th anniversary and stare down the barrel of yet another nerve-wracking, year-end reauthorization, we thought it timely to examine the program through both retro- and prospective lenses.

The New Markets Tax Credit Coalition (NMTC Coalition) recently released its annual progress report, which contains a special insert commemorating the 20th anniversary. By the numbers, the program is impressive: in 2019 alone, “288 projects totaling $4.5 billion received $2.7 billion in NMTC allocation (at a cost to the federal government of $679 million)” and Community Development Entities (CDEs) created 57,414 jobs. As of Fiscal Year (FY) 2016, NMTC projects have leveraged $8 of private equity per federal dollar invested.

NMTC projects run the gamut of revitalization – abandoned buildings turned into counseling centers, expanding homeless shelters to allow additional services to be provided, adaptive reuse to provide housing and office space, and the list could (and does) go on and on.

Over the Long-Haul
“A May 2020 analysis of CDFI Fund data and NMTC Coalition survey data found that the program directly generated over one million jobs through 2019, including 484,182 full-time equivalent (FTE) permanent jobs and 544,172 temporary construction jobs.”

The NMTC Coalition report “analyzed 6,397 NMTC projects and found that 2,843 projects (44.4 percent) included at least one of the following: healthcare facilities or services, childcare, shared space for nonprofits, youth programs, municipal facilities, libraries, schools, recreational facilities, religious organizations, shelters, food pantries, adult education or vocational training, or other service providers supporting low-income communities. Of those 2,843 projects, we identified 704 projects with multiple community facility or social service components. In total, we identified 3,602 discrete community facilities or service provider components of projects.”

Maintaining Demand
The Internal Revenue Code stipulates that no more than roughly 75 percent of a business’s tax liability can be offset by General Business Tax Credits, which includes NMTCs, Low Income Housing Tax Credits (LIHTCs), and many other tax incentives. One of the many negative impacts of COVID-19 is a reduction of business’ profits, ergo tax liability. NMTCs have a relatively small pool of about ten investors, meaning that reduced tax liability for even one company could have a disproportionate impact on credit pricing. One solution, led by the business community and The Recovery Coalition, is to increase or eliminate the current limit of 75 percent to allow businesses to offset more of their tax liability, which would have the effect of maintaining pre-COVID investment levels and pricing. For more information on the impacts of COVID-19 on NMTC projects, see Scott Beyer’s article in this issue.

Legislative Outlook
Congress has a fairly consistent tradition of passing year-end tax bills and the tradition seems poised to continue this year. While the control of the Senate in the 117th Congress remains in the balance with the Georgia run-offs the deciding factor, it is clear that whichever party prevails will be working with the thinnest margins. The 60-vote threshold for regular order legislation will force the Democrat-controlled House and President-elect Joseph Biden to negotiate with their Republican counterparts in the Senate.

Given this governing reality, Democrats may be eager to clear the backlog of necessary, but unexciting legislation (like tax extenders and funding the government past December 11) in the closing days of the 116th Congress, so President-elect Biden can use his first 100 days to advance his legislative priorities, rather than worry about keeping the lights on.

A short-term extension of NMTC authorization seems likely, but not a foregone conclusion. The work of many advocates and stakeholders will be needed to make sure it gets across the finish line given the myriad of competing tax priorities. Assuming reauthorization is successful, the program will likely fare well under a President Biden; his housing plan calls for making the program permanent and expanding funding to $5 billion per year.

Playing Better in the Tax Credit Sandbox
NMTCs are often paired with other tax credits, like LIHTCs and Historic Tax Credits (HTCs), to make deals financially feasible. Each program comes with its own set of rules, which often don’t align very well with each other. The contradictory program rules often result in complicated condo structures that drive up legal and accounting costs. More streamlined regulations across programs would mean that more money can go to hard construction costs and, ultimately, to the communities these programs were designed to serve.

The NMTC 80/20 rule requires that at least 20 percent of income of the Qualified Active Low Income Community Business be derived from commercial income (i.e. non-residential rental income). Even prior to COVID-19, many lenders would underwrite the commercial income at zero because of the difficulty of finding commercial tenants and the impact of Amazon and digital shopping on brick-and-mortar stores. COVID-19 has temporarily closed many small businesses and it remains to be seen how many will be able to weather the storm. Some are bracing for the other shoe to drop, when these stores default on their loans and banks and investors are left holding the bag (not unlike the looming crisis in the residential market with the mounting backlog of unpaid rent in Mark Olshaker’s story in this issue). A relaxation of the NMTC 80/20 rule could allow for more income to be derived from residential income and further the development of affordable housing aimed at moderate-income households, which the LIHTC program struggles to assist.

Other Place-Based Initiatives
Three of the last four presidential administration’s have had their own version of a place-based initiative: President Donald Trump and Opportunity Zones, President Barack Obama and Choice Neighborhoods, President Bill Clinton and Empowerment Zones. As the existing programs continue to evolve and perhaps new ones are developed in the Biden Administration, it will remain important to make sure we can leverage these tools to serve low-income communities efficiently.

Continued Evolution
NMTC was designed as a place-based initiative to spur private-sector investment in low-income communities. Over the years that mandate has expanded to require a representational share of projects awarded to non-metropolitan communities; again to expand eligibility to non-eligible census tracts if the project primarily benefited low-income individuals, either by setting aside at least half of its workforce for low-income individuals or providing over half of its services to low-income individuals; and most recently, to allow low-population census tracts to qualify if they bordered a qualified tract and were located in an Empowerment Zone.

NMTC is a nimble place-based tool that has been utilized to rebuild communities after natural disasters and the financial crisis of 2008. Applications for NMTCs have persistently outstripped the availability of funding, even since the beginning of the program. In September 2002, the CDFI Fund received 345 applications requesting a total of $26 billion in allocation. The CDFI Fund awarded the $2.5 billion first round of NMTC allocation in March of 2003 to 67 CDEs. To ensure its legacy into the future, the program will likely continue to evolve, and hopefully, expand.

Kaitlyn Snyder is managing director of National Housing & Rehabilitation Association.