U.S. Treasury Announces New Market Tax Credit Allocation
The US Treasury has awarded $3.5 billion in New Market Tax Credits (NMTC). The NMTC program allows individuals and corporations to take a credit against federal income taxes for investing in Community Development Entities (CDE). For example, a charter school building in a low-income area may obtain the credits by demonstrating economic benefit to the area. This then improves the economics of the project.
Loosely described, NMTC’s work by soliciting a tax credit investor that takes a 25% equity stake and a 75% leverage lender. The CDE assembles this team and takes a fee. It is then an interest only loan for a period of seven years. The tax credit equity is then treated as “forgiven” debt and the loan resets as an amortized loan for 75% of the principal amount. This financing vehicle serves as a strong stimulus model for lower income areas and demonstrates why these credits are difficult to obtain.
The Philadelphia Industrial Development Corporation (PIDC) was awarded $38 million in NMTC and is the only organization exclusively targeting Philadelphia.
More details on this program can be found on the Community Development Financial Institutions Fund’s website. Click here for a full list of NMTC recipient entities.