NMTC Sixth Funding Round Opens; Has New Rural Mechanism, Lower Award Cap
By Caitlin Jones & A. J. Johnson
8 min read
THE COMMUNITY DEVELOPMENT Financial Institutions (CDFI) Fund has opened its sixth, last schedule funding round for the federal new markets tax credit (NMTC) program, with some significant changes from previous rounds.
A total of $3.5 billion in NMTC equity investment authority is available nationally for allocation in the 2008 competition; no special set-aside is provided for the Katrina Gulf Opportunity Zone.
The application deadline is 3/5/08. Applications may be submitted by certified community development entities (CDEs) and by organizations that by 2/6/08 submit an application requesting certification as a CDE.
A CDFI Fund spokesman told the Tax Credit Advisor that sixth round allocation awards will probably be announced this fall.
Details on the sixth funding round are in a Notice of Allocation Availability (NOAA) published by the CDFI Fund in the Federal Register on 12/28/08. The NOAA is posted on the CDFI Fund’s Web site (http://www.cdfifund.gov), along with the application, a 29-page Q&A on the application, and a 10-page Q&A on NMTC CDE certification requirements.
Under the NMTC program, CDEs that win allocations of NMTC authority in competitive funding rounds raise capital from investors (QEIs) and deploy it, as Qualified Low-Income Community Investments (QLICIs) in eligible projects and activities that are in or benefit low-income communities.
Changes from Prior Round
In one change from the fifth round, CDEs that have received one or more NMTC allocations in previous rounds can apply in the sixth round by 3/5/08, yet have until 6/13/08 to demonstrate they have met certain minimum percentage thresholds as to closing QEIs from their previous allocation(s). If they don’t meet these benchmarks by 6/13/08, their sixth round application won’t be considered.
In the fifth round, CDEs with prior allocations had to have met the minimum percentage thresholds by the application deadline in order to apply.
Washington, DC attorney Herbert Stevens, a partner in Nixon Peabody LLP, told the Tax Credit Advisor that the CDFI Fund in the sixth funding round also has asked for “much more detail” on: (1) fees paid; (2) compensation paid; and (3) financial benefits accruing not only to the CDE, but also to all of its affiliates and staff.
Reduced Anticipated Award Cap
Another change reduces to $125 million, from $150 million in the fifth round, the maximum size of allocation award anticipated by the CDFI Fund in the sixth round. There is no limit on how much applicants can apply for, but Stevens said the Fund in prior funding rounds has never awarded more than the anticipated maximum award amount.
Claudia Robinson, of Bank of America, N.A., which both operates a CDE and invests in NMTC transactions, told TCA the smaller, $125 million cap “definitely hampers the ability to do larger, higher impact transactions,” because these projects often have to get multiple allocations of NMTC investment authority from multiple CDEs. “And every time you add an additional CDE to a transaction,” she explained, “you add a significant amount of transaction costs.”
Rural Proportionality
The biggest change from previous rounds is the incorporation of a new rural mechanism designed to assure that a proportional share of NMTC investments made from sixth round allocations go to rural areas in the U.S.
This additional set of application, allocation, and compliance requirements responds to a late 2006 tax law directive to the U.S. Treasury Department to issue regulations to ensure that non-metropolitan counties receive a proportional allocation of QEIs under the NMTC program.
The CDFI Fund has adopted a three-prong mechanism to implement this directive.
First, at least 20% of the dollar amount of all QLICIs made using NMTC allocations in the sixth round are to be invested in “nonmetropolitan counties.” The latter are defined as counties not contained within a Metropolitan Statistical Area (MSA), as defined by the federal Office of Management and Budget (OMB) in OMB Bulletin 99-04.
Second, the percentage of all sixth round allocatees that are “Rural CDEs,” a new subcategory of CDEs, must be at least equal to the percentage of applicants in the Phase 2 review pool — the applicants that survive the first cut — that are Rural CDEs. The latter are CDEs that over the past five years have dedicated at least 50% of their activities to non-metropolitan counties, and that commit that at least 50% of their NMTC activities will be in such areas if they receive a sixth round allocation.
Third, each sixth-round applicant will have to state the minimum and maximum percentage of their requested allocation they intend to invest in non-metropolitan counties. CDEs that get an allocation will be held to a designated percentage (between their stated minimum and maximum) through language in their allocation agreement.
The Fund said NMTC program users can determine which counties qualify as non-metropolitan by consulting its mapping system (CIMS), which users can access through their online MyCDFIFund account.
Reaction to Rural Provisions
Stevens, Terri Preston-Koenig, and John Leith-Tetrault reacted to the new rural proportionality requirements in interviews with TCA. Preston-Koenig, based in Madison, WI, is a partner in the national accounting and consulting firm of Virchow Krause & Company, and like Stevens structures NMTC transactions and represents client CDEs. Leith-Tetrault is president of the Washington, DC-based National Trust Community Investment Corporation, an affiliate of the National Trust for Historic Preservation that both runs a CDE and syndicates federal new markets and historic rehabilitation tax credits.
Preston-Koenig said the new rural mechanism should boost the amount of NMTC investments in rural areas in the sixth round compared to previous rounds.
But Stevens and Preston-Koenig warned that many areas commonly thought of as rural won’t qualify as being within non-metropolitan counties. “There are many, many fewer non-metro counties than there are rural areas in the country,” said Stevens, who noted there previously hasn’t been a uniform definition of rural in the NMTC program. He added, “It [non-metro counties] is a much more restrictive area in which to invest.”
Stevens for example, noted that a small rural town, of say 30,000 to 50,000 people, could effectively disqualify, as non-metropolitan, a mostly rural county in which the town is located, as well as other nearby mostly rural counties. “All of these counties around a small town are, in effect, now metro counties,” he said. He cited parts of mostly rural southwest Virginia as an example. Preston-Koenig similarly noted many rural counties in Pennsylvania don’t qualify as nonmetropolitan counties.
Preston-Koenig anticipated less populous communities on the fringes of metropolitan areas also will be hurt. She predicted projects here will likely have a tougher time attracting NMTC funding, since they won’t qualify for funding from the non-metro set-aside, and instead have to compete against mostly urban projects for funding from the general NMTC allocation pool.
Stevens predicted that projects in non-metropolitan counties “will be smaller, and will be harder to both fund and underwrite. As a result, it will all take longer for those monies to be spent.”
Leith-Tetrault said he thinks there will be some “challenges” to the NMTC industry to effectively adjust to and efficiently utilize the new non-metro investment requirements. “I think it’s going to probably take a couple of years until the industry can adjust to doing smaller transactions efficiently and meeting the intent of Congress,” he said.
Preston-Koenig suggested one possible way to develop a pipeline of rural projects would be to increase the number of “pool” transactions — blind funding pools set up to provide NMTC financing for multiple smaller projects.
