The New Markets Tax Credit Program (NMTC) provides a credit against Federal income taxes in exchange for making qualified equity investments in designated Community Development Entities (CDEs). All of these investments must in turn be used by the CDE to provide loans or equity investments for designated projects in lower-income communities. The credits are provided to the CDE and passed through to investors based on their proportionate investment in the CDE. The credits are equal to 39 percent of the funds invested and are claimed over a seven-year credit allowance period. In each of the first three years, the investor receives a credit equal to five percent of the total amount paid for the stock or capital interest at the time of purchase. For the final four years, the value of the credit is six percent annually. Investors may not redeem their investments in CDEs prior to the conclusion of the seven-year period.
CDE’s apply for an allocation during the annual allocation period (July-September). The CDE does not have to identify specific projects or have a committed source of capital to fund those projects. To date, the Fund has made 170 awards totaling $8 billion in allocation authority.
A designated community must meet certain low-income characteristics. Eligible communities include low-income rural counties with high out-migration. An organization wishing to receive awards under the NMTC Program must be certified as a CDE by the Fund.
Once a CDE is awarded a NMTC allocation, it solicits projects consistent with its targeted investments. At the same time, it attracts private capital to invest in the CDE. The CDE then makes equity investments in or lends to the designated projects. Lending terms are usually better than what may be offered by commercial lenders. The outside investors receive tax credits and, depending on the structure of the transaction, either interest payments from or an equity stake in the projects.
To qualify as a CDE, an organization must:
- be a domestic corporation or partnership at the time of the certification application;
- demonstrate a primary a mission of serving or providing investment capital for low-income communities or low-income persons; and
- maintain accountability to residents of low-income communities through representation on a governing board of or advisory board to the entity.
In 2006, three Midwestern and one Gulf Coast CDEs were awarded NMTC allocations to provide debt and equity for rural businesses involved in value-added agricultural activities including renewable energy. These were:
Midwest Minnesota Community Development Corporation, Detroit Lakes, MN
$80 million allocation
Projects in Minnesota
Dakotas America, LLC, Sioux Falls, SD
$50 million allocation
Projects in North and South Dakota
American Community Renewable Energy Fund, LLC, New Orleans, LA
$42 million allocation
Projects in the Gulf Coast
Potential developers of community wind or other renewable energy projects in the targeted geographic investment areas of the four CDE entities listed above can contact them to discuss financing considerations.
Combining NMTCs with the PTC
According to tax counsel at the law firm Nixon Peabody LLP, a renewable energy project that is eligible for Section 45 tax credits can utilize both NMTCs and the production tax credits from the project. Unlike other grant or subsidized loan programs, there would be no reduction in the available production tax credits from the project. If the CDE is providing debt to the project, then the investors in the CDE can claim the NMTCs while equity investors in the project can claim the PTCs. If the CDE is providing equity support to the project (less typical these days because the Treasury strongly favors CDEs that aren’t “related” to the businesses they invest in), then the investors in the CDE can claim both the NMTCs and their proportionate share of the PTCs. Note that for a typical wind project ($1,500/kW, 35% capacity factor), the New Markets Tax Credit has roughly the same value as the PTC.
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