Growing Impact, Evolving Trends of NMTC Program Depicted in New Report

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A new report provides comprehensive data on different aspects of the federal new markets tax credit (NMTC) program through its first five funding rounds.

Issued by the Community Development Financial Institutions (CDFI) Fund, the report contains information and data collected during 2002-2007 about applications for NMTC allocations, recipients of allocations, investors, and funded projects.

In the introduction, the Fund’s Director notes that in its brief history, the NMTC program “has become an increasingly popular and critical tool for facilitating the investment of private sector capital in low-income communities.”

Under the program, organizations called community development entities (CDEs) apply for allocations of NMTC authority in competitive funding rounds. CDEs that receive allocations, or allocatees, raise capital from investors and use it to finance business and real estate developments in low-income communities. Investors claim the tax credit over seven years.

The program’s sixth-round allocation awards, not covered in the new report, were made in late September. (For details, see Tax Credit Advisor, November 2008, p. 1.)

Application Data

According to the report, in the first five funding rounds, the CDFI Fund received $132.4 billion in total requests for NMTC allocation authority from 1,304 applicants, compared with $16 billion available – demand more than eight times the available supply. A total 294 awards were made in these rounds.

Of the four major categories of CDEs that applied for NMTCs in Rounds 2-5, the largest share (36%) of all applicants was nonprofits. Nonprofits also accounted for the largest share of allocatees, about 36%. Governmental entities were the only category to see their share of all applicants increase with each round.

Fewer than 23% of the applicants in Rounds 2-5 received an allocation. The average award size was $59 million; the average request, $111 million.

About 52% of awards in Rounds 3-5 went to CDEs that hadn’t won an allocation before.

In Rounds 3-5, CDEs proposing to target a local service area accounted for the largest share of all applicants, 36%, while CDES with a national service area led the way among allocatees (35%).

Data on Investors

Through 12/31/07, covering Rounds 1-4, investors had made $9 billion in qualified equity investments (QEIs) with CDE allocatees, or 75% of the aggregate $12.1 billion in NMTC authority allocated to these CDEs. The largest share of this capital, 47%, was provided through investor leveraged funds, followed by banks or other regulated financial institutions (32%). Overall, 2,600 investors provided an average investment of $3.4 million.

The NMTC has enabled CDEs to build new relationships with investors. According to the report, 77% of the NMTC investors weren’t affiliates of the CDE allocatees. Also, more than 61% of the invested dollars came from investors making their first investment in the particular CDE.

Investment Traits

Through FY 2006 (9/30/07), CDE allocatees had made a total of 1,543 qualified low-income community investments (QLICIs) totaling $5.6 billion. Of the four major categories of QLICIs, the largest share by number (94.0%) and dollars (96.4%) was direct investments in qualified active low-income community businesses (QALICBs). Next were purchases of loans from other CDEs (4.4%, 2.1%), followed by investments in other CDEs (1.6%, 1.6%). The fourth category, not measured, is financial counseling and other assistance.

Through FY 2006, of the two types of QALICBs (real estate and non-real estate businesses), the most investment, $3.8 billion, went to real estate. The lion’s share of this was for commercial real estate projects ($3.5 billion), followed by residential real estate projects, working capital for real estate business, and other purposes. Another $1.7 billion went to non-real estate businesses; $1.1 billion of this was for working capital.

The NMTC helped finance a significant portion of the total costs of supported projects. This share averaged 36.9% for residential real estate projects, 30.9% for commercial real estate projects, and 30.8% for business lending.

Some 466 of the real estate projects created construction jobs (median number, 80), while 320 created or maintained jobs at the tenant businesses (median, 80). Some 233 of the operating businesses created or maintained jobs (median, 16).

On average, each $1 of NMTC investment supported $3.56 in total project costs. As for cost vs. benefit, the report estimates each $1 of foregone federal tax revenue fostered $14 in investments in projects in low-income communities.

The most common type of NMTC investment was term loans (85% of transactions and 88% of dollars), followed by equity investments (10%, 8%). More than 98% of all transactions offered preferential rates and terms to the borrowers/investors; the most common feature here was a below-market interest rate on a loan (83%).

About 95% of the financed projects were in areas of higher economic distress. More than 75% of projects were located in census tracts characterized by one or more of the following conditions: a poverty rate of 30% or higher; median family income not exceeding 60% of area median income; or unemployment rate at least 1.5 times the national average. Allocatees on average anticipated making 77% of their investments in areas of higher economic distress areas in Round 2; by Round 5 this level had grown to 97%.

Through FY 2006, NMTC investments had been made in 47 states plus the District of Columbia and Puerto Rico; missing were Kansas, South Dakota, and Vermont. By dollar amount, the most NMTC proceeds had been invested in New York (10.3%) and California (9.8%), followed by Ohio, Massachusetts, and Oregon.

For Rounds 2-5, allocatees proposed to make 60% of their investments in major urban areas, 23% in minor urban areas, and 17% in rural areas.