CDFI Fund NMTC Report Shows Growth of Non-Real Estate Investment

Published by Brad Elphick on Thursday, August 24, 2023 - 12:00AM

Investment in non-real estate businesses continues to grow among community development entities (CDEs) that receive new markets tax credit (NMTC) allocation.

Through fiscal year 2021, non-real estate qualified active low-income community businesses (QALICBs) received $34.3 billion of NMTC investment from those CDEs, constituting 54.9% of all investment in the history of the NMTC incentive. Contrast that to 10 years earlier, when non-real estate QALICBs had received just 40.3% of investment. Five years ago, the overall percentage received by non-real estate QALICBs was 49.6% of investment.

Year after year, the focus of NMTC investment continues to shift to non-real estate activities, as NMTC stakeholders interpret Community Development Financial Institution (CDFI) Fund guidance as encouraging such investment and as the incentive matures and CDEs find new and better ways to invest in non-real estate businesses.

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The investment information comes from the CDFI Fund’s release of public data on NMTC investment through FY 2021, issued earlier this week. The CDFI Fund requires all NMTC allocatees to submit an annual report detailing their qualified equity investments (QEIs) in low-income communities and this week’s report covers data submitted by allocatees before Sept. 30, 2022.

Through 18 rounds of allocations–the most recent round was announced last fall–the CDFI Fund has made 1,461 awards allocating $71 billion in NMTC authority to CDEs. The 19th round of NMTC allocations is expected to be awarded sometime this fall with the next round expected to open soon after.

The CDFI Fund report provides a big-picture view of investments made through the incentive starting with the first awards in 2003. Through the FY 2021 reporting period, the CDFI Fund reports that CDEs made $62.5 billion in NMTC investments to 7,510 QALICBs.

The most striking change over time continues to be the shift toward non-real estate QALICBs, going from 40.4% to 49.6% to 54.9% of all investment through 2011, 2016 and 2021.

Commercial Real Estate, Community Facilities, Housing, Jobs

The report also details that through FY 2021, 238.9 million square feet of commercial real estate was built using NMTC financing–93.8 million square feet of office space, 77.4 million square feet of manufacturing space and 67.8 million square feet of retail.

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Through 2021, $25.1 million in investment was made in community facility projects. The CDFI Fund reports that 40% of all QLICIs involve a community facility component, which includes facilities providing services for education, child care, health care and art. Over the history of the NMTC incentive through FY 2021, $10.1 billion was invested in educational facilities, $9.7 billion in health care facilities, $2.8 billion in art facilities and $2.4 billion in child care facilities.

Another area of NMTC investment is housing and allocatees who invest in the construction or rehabilitation of housing must make at least 20% of the housing units available to low-income residents. The CDFI Fund reports that approximately 17,000 units of affordable housing were built with NMTC financing through 2021.

A total of 857,096 jobs–512,219 in construction and 344,877 permanent jobs at the QALICBs that received investment–were created in businesses financed by NMTCs.

Areas of Higher Distress

One of the key purposes of the NMTC is to invest in low-income communities. Many applicants go beyond the statutory minimum distress requirements by committing to serving areas of higher distress.

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Through FY 2021, 74.3% of NMTC investments meet at least one primary criterion for severe distress. Breaking that down further, 53.1% of investments were in areas where the unemployment rate is at least 1.5 times the national figure, 52.7% were where the median income is less than or equal to 60% of the area median income and 43.0% were in areas where the poverty rate is greater than 30%. Due to the number of areas where multiple criteria apply, the sum of those figures far exceeds 100%.

Nonmetro Areas, Financing Options, Native Areas

The CDFI Fund report also contains details on a variety of investment types.

Through FY 2021, 18.1% of investment was in non-metropolitan census tracts–a figure that was significantly higher than a decade earlier (13.3%), but slightly below the 2016 figures (21.1%). About 14% of Americans live in non-metro areas.

The CDFI Fund requires allocatees to offer financing with flexible or non-traditional rates and loan terms. There are a series of options from which allocatees can choose and through FY 2021, 96.9% of investments were made meeting at least two criteria. The most common types offered by CDEs were below-market interest rates (94.4%) and lower-than-standard origination fees (86.8%).

Through 2021, $1.0 billion had been invested in federal native areas–federal Indian reservations, off-reservation trust lands, Hawaiian homelands and Alaska Native Village Statistical Areas. That constitutes 1.6% of all NMTC QLICIs.

Evolving Incentive

The data shows that the NMTC has evolved as stakeholders respond to the needs of communities where investment takes place. The New Markets Tax Credit Working Group and others will continue to analyze investment information and pursue legislation to make the incentive a permanent part of the Internal Revenue Code.

The Novogradac 2023 Fall New Markets Tax Credit Conference, Oct. 26-27 in New Orleans, will focus on investments and provides an opportunity to network with CDEs, investors and other NMTC stakeholders.

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