12th Round NMTC Awardees Expect to Maintain Greater Focus on Operating Businesses

Published by Michael Novogradac on Thursday, June 25, 2015 - 12:00am

Operating businesses continue to outpace real estate projects as likely beneficiaries of new markets tax credit (NMTC) financing. The last two NMTC allocation rounds have seen awardees expecting to use about $3 of NMTC awards for an operating business for every $1 dollar for real estate activities.

Previously, through 2010, real estate activities slightly outpaced operating businesses. Starting in, 2011 operating businesses outpaced real estate, by about 1.3 to 1. And again in 2012, operating business outpaced real estate at a 1.45 to 1 level. For 2013 and 2014, the shift is considerably more dramatic, averaging 3 to 1.

The early historical focus on real estate projects was at least in part because such investments present fewer compliance risks that could result in loss of future tax credits and credit recapture.

In response to concerns that NMTC awards were too heavily skewed toward real estate, in September 2012 the Internal Revenue Service modified the NMTC program regulations to encourage investments in non-real estate businesses in low-income communities. To facilitate investments in the operations of non-real estate businesses, such as working capital and equipment loans, the revised rule defined a non-real estate business; addressed the reinvestment of capital; and outlined investing guidelines, among other things. These regulations, though, are not believed to have had much of an effect on this shift.

One change that has a meaningful impact was the change in the categorization of real estate versus operating business that was made in Question 13 of the September 2011 Compliance and Monitoring Frequently Asked Questions.


Blog Graph NMTC Allocation Chart
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To learn more about the 12th NMTC allocation round, check out the July 2015 Novogradac Journal of Tax Credits.