Part One: The How, What and Where of the New Market Tax Credit Program

Equity capital can transform a business or provide the financial support needed to develop a real estate project. Low-cost equity capital is hard to come by, which is why the New Markets Tax Credit (NMTC) program was created. Since its creation in 2000, the NMTC program has deployed some $61 billion in tax credits to generate equity investments in urban and rural low-income communities. The investments are targeted to manufacturing businesses, new and improved healthcare facilities, daycare centers, community facilities, nonprofits and commercial real estate development.

In December 2020, Congress extended NMTC with $25 billion of new credits to be disbursed over the next 5 years. This $25 billion is intended to finance 690 business, 225 healthcare facilities, and 775 investments in community facilities. The following provides a brief description of the NMTC program, and projects that may benefit from credits.

How the Program Works

The NMTC program is administered by the US Treasury Department through its Community Development Financial Institutions (CDFI) Fund. Generally, a Community Development Entity (CDE) submits an application to the CDFI Fund each year to be awarded an allocation of NMTCs. CDEs are typically your local community-based banks but also include corporations or partnerships who act as intermediary vehicles for the provisions of loans, investments or financial counseling. The process to obtain an allocation of NMTC is highly competitive, and typically occurs on an annual basis. A list of CDEs by jurisdiction may be found at www.novoco.com.

NMTCs themselves are actually claimed by investors who invest equity capital in qualifying projects through CDEs with available NMTC awards. The investor may provide up to 39% of the cost of the project. Investors make investments (typically with leveraged funds) in projects located in qualifying low-income census tracts (Qualified Active Low-Income Community Businesses, or QALICBs), which projects are selected by the CDE. The CDFI Fund website (www.cdfifund.com) includes a mapping tool that indicates which census tracts qualify for this purpose.

Who Uses the Credits

A QALICB can be an operating business or a real estate project. Real estate projects must be physically located in a qualifying census tract. Determining whether an operating business is within a qualifying census tract is more complicated, and will be determined by (i) the location in which revenue is derived from the QALICB’s activity, (ii) the location of tangible property and (iii) the location of service performance by employees. There are additional ways to qualify if the business provides services for “targeted populations”.
In order to obtain NMTC financing, a project must locate a CDE (or multiple CDEs) with a NMTC award that is willing to commit to allowing an investor in the project to claim a portion of those NMTCs. There is high demand for NMTC financing so the process is very competitive. The better designed and thought through your project, the more likely success.

To obtain an allocation of NMTCs, CDEs promote investment in specified projects, e.g., health-related facilities, mixed-use facilities, community centers. These Investments in turn support job creation, improving access to healthcare, improving access to healthy foods, increasing environmental sustainability, better educational opportunities, and financing for business or projects overlooked by traditional financiers. Identifying a CDE with missions and goals in line with a particular project may improve the likelihood of receiving NMTC funding.

Available Credits through 2025

The $25 billion of NMTC allocations approved by Congress in December is the largest extension in the program’s history. Despite its size, this pending NMTC award will likely only make a small dent in the overall market demand of deserving projects seeking NMTC program funding. Indeed, many CDEs have already identified projects that they intend to fund when they receive an allocation of NMTCs in connection with the upcoming awards. Given the multi-year horizon of the NMTC program, however, it is not too soon for qualifying projects to begin strategizing to be successful in future NMTC program funding rounds. In Part Two on NMTC, we will provide a roadmap for businesses and developers who seek a successful path to obtaining equity financing through a NMTC.

Brown Hatchett & Williams LLP is a corporate boutique law firm located in New York City. Find us at www.bhwllp.com.

Opportunity Zone Funds are a new asset class and source of equity capital financing, established in the Investment in Opportunity Act sponsored by Sens. Corey Booker and Tim Scott, passed in late 2017 as a provision of The Tax Cuts and Jobs Act. This novel legislation was designed to unleash trillions of dollars of capital gains to fund real estate projects and grow businesses in low-income urban, suburban, and rural communities designated as Opportunity Zones.

Under the Act, an investor can employ virtually any “capital gain” (the increase in an asset’s value upon its sale) to obtain relief from the payment of taxes applicable to capital gains, if the investments are made in Opportunity Zones. These zones have been authorized for a period of 10 years, expiring Dec. 31, 2028. Potentially, investors could make Opportunity Zone Fund investments multiple times over the ensuing years. While still early in the life of the legislation, trending evidence indicates that Opportunity Zone Funds or “OP Zone Funds” could become a significant new source of equity capital for real estate projects and businesses in Opportunity Zones.

With the issuance of very detailed regulations in 2018 and 2019 on the tax and legal framework for OP Zone Fund investments, the collective experience of investors, real estate developers and businesses, as well as financial, legal, and tax advisers, with the Act and OP Zone Fund investments is still in its infancy with limited precedent transactions. This circumstance provides both challenges and opportunities.

One of the challenges includes the structuring of OP Zone Fund deals in compliance with the new Act and regulations. The OP Zone Fund investment, similar to other tax-structured investments, such as 1031 exchanges and New Market Tax Credits, is a complex investment, with regulatory and structural requirements that must be understood and applied correctly to protect the tax advantages of the investment.

Another challenge is locating real estate deals and businesses in Opportunity Zone designated census tracts that are eligible for OP Zone Fund investment. To help meet this challenge, Brown Hatchett & Williams (BHW) works closely with existing local developers and businesses, as well as community-based organizations, with established ties to OP Zone neighborhoods.

The historic Booker-Scott legislation creates the opportunity to identify and structure real estate and business transactions that meet target returns for Op Zone Fund investors to bring much-needed equity capital to under-served communities where Opportunity Zones are located.

At BHW, we believe that the Opportunity Zone Fund legislation presents a generational opportunity for real estate developers, business owners, and investors to put OP Zone Fund capital to work in low-income neighborhoods across the United States.

In our next entry, we will examine how investors benefit from Op Zone investments and identify strategies local developers and companies might use to attract Op Zone capital to their communities in order to take advantage of the tremendous promise of the Opportunity Zone Fund legislation.

Brown Hatchett & Williams LLP is a corporate boutique law firm located in New York City. Find us at www.bhwllp.com.

This is the inaugural column of the Brown Hatchett & Williams LLP (BHW) bi-monthly column, “The BHW Memo: Legal Strategies and New Business Opportunities.” In partnership with BLACK ENTERPRISE, the goal of this column is to provide innovative and current legal strategies for Black businesses to thrive and achieve expansion and further success. Black business finds itself in a unique situation following the confluence of events in the first half of 2020.

On the one hand, COVID-19 has had a ruinous impact on many U.S. businesses. Add the murder of George Floyd and the rise of a nationwide social justice movements and ongoing protests, the first two quarters of 2020 presented difficult terrain to traverse. The confluence of these events can be viewed as devastating events for businesses across the U.S. as they clearly have been.

They can also be viewed as creating opportunities to pursue renewed and restructured business strategies. Certain legal strategies can be undertaken to allow Black businesses to execute renewed and restructured business strategies to be well-positioned to benefit from opportunities arising in these challenging times.

“It’s about building this country back better.”
— Kamala Harris, US Senator and Vice President Nominee

In the coming weeks, this column will present several of these legal structures for your consideration, detailing in straightforward language how they may be used to promote and grow Black business. These legal strategies include opportunity zone funding (OZF), new market tax credits, employee stock ownership plans, and financial and corporate restructuring. These sophisticated legal tools can be used to reduce the weight of company debt, raise equity capital, provide liquidity for business owners, or help transition ownership to family members or trusted staff so that your business may survive and even expand in these challenging times.

Today’s business landscape is creating opportunities to reimagine, retool, and restructure your business to meet the challenges of the future. There are numerous examples to follow, including NYC restauranteur Luca Di Petro, who renewed his high-end chain of Tony Manhattan restaurants into a food supply and distribution business for health care workers; Ford Motor Company retooled production lines in order to manufacture much-needed ventilators; and innovative companies, such as Graffiti Shield and American Seating, as well as enterprising entrepreneurs, have created new markets as manufacturers and distributors of personnel protective equipment (PPE).

At BHW, we make it our business to understand these complex legal strategies to support our clients’ objectives. In the coming weeks, we look forward to sharing our knowledge.

Brown Hatchett & Williams LLP is a corporate boutique law firm located in New York City. Find us at www.bhwllp.com.