Panelists discussed the challenges that arise when using the targeted populations approach to new markets tax credit (NMTC) financing earlier this month at the Novogradac 23rd Annual New Markets Tax Credit Conference in San Diego.

A goal of the federal tax credit incentive is to bring private debt and equity capital to businesses and nonprofits serving low-income communities. A majority of NMTC transactions do this using geography based on census tracts with a poverty rate of at least 20% or a median family income that is 80% or less of the metropolitan area median income.

However, another possibility is used less frequently. The targeted populations approach looks at the low-income business or organization that will benefit from an NMTC investment, whether that’s the employees of a business, a company’s owners or the customers their product serves. The approach decouples NMTC financing from the census tract-based structure and allows businesses or nonprofit organizations to use the incentive.

Its use is rare, however. One of the panelists, United Fund Advisors’ Shelly Crowder, estimated as few as 5% of NMTC transactions use the approach.

After illustrating the approach, its requirements, successfully closing a transaction and compliance requirements, each of the three panelists–Crowder as well as Ginsberg Jacobs’ Darryl Jacobs and U.S. Bancorp Community Development Corporation’s (USBCDC’s) Emily Rose–discussed how qualified active low-income community businesses (QALICBs) can use the approach and gave examples of instances in which their organizations used the approach and the complications that arose from doing so.

Jacobs, Crowder and Rose all agreed that data collection was the biggest complication in using the targeted populations approach.

“People are reluctant to give up their information or data,” Jacobs said. “I think a deal fails if you can’t get the data.”

Methods of data collection vary depending on the endeavor, but the trio mentioning avenues such as employee surveys, raffles, prizes, gift certificate giveaways and more.

Massachusetts Health Care Facility

Rose and USBCDC used the targeted populations approach in Massachusetts to purchase and renovate a 27,857-square-foot building into a senior care health facility.

Rose said the bar for data collection was lower to clear in this endeavor since the QALICB was already collecting a variety of information as part of qualifying its patients for Medicaid reimbursement. This even extended to household data, Rose said, as the QALICB used such data to know who other caretakers in the homes of its patients were.

When the data wasn’t available, Rose said, it sorted individuals into an unqualified category to err on the side of caution.

Rose emphasized that this was a situation where the needs aligned properly to use the targeted populations approach, but that that isn’t always the case.

“Every kind of business isn’t going to work,” Rose said.

Meals on Wheels of San Francisco

Crowder and United Fund Advisors, the NMTC consultant to one of the CDEs, used the targeted populations approach for Meals on Wheels of San Francisco Inc. The endeavor received a $37.9 million NMTC allocation from four CDEs to build a state-of-the-art kitchen so the organization could expand and increase meal production by three times.

During the conversation on ongoing compliance and reporting, Crowder noted that there is a key difference between endeavors that are located in a qualified census tract (QCT) and use targeted populations to qualify as higher distress and others that are not located in a QCT such as the Meals on Wheels transaction. In response to an audience question, Crowder pointed out that an endeavor qualifying for higher distress using targeted populations in a QCT needs to provide evidence of qualification only at financial closing, not on an ongoing, annual basis thereafter.

“There isn’t that annual requirement over and over again,” Crowder said. The CDFI Fund has provided guidance that documentation of targeted populations used solely to meet the criteria of higher distress only needs to be done once on the closing date, she said. “Hopefully, that can ease some folks’ apprehension of doing these transactions.”

Crowder said enthusiasm from within the Meals on Wheels organization, some of whom had been there more than decades, allowed them to take an employee-based tack to the targeted populations approach and clear the data collection hurdles.

Jacobs said being able to gather data on the employees made the endeavor viable in a way that trying to collect information on the customers Meals on Wheels serves would make complicated.

“Sometimes it makes sense [to say], OK, this is a deal we know we’re going to be helping the community,” Jacobs said. “Let’s find a way to make it work with targeted populations because the ultimate benefit for the entire community outweighs its location. You’re going to create a structure to make it work even if you can’t get the data from the customers.”

Rose said the investment was a perfect fit for the NMTC incentive.

“The spirit of the program wants to do deals like this,” Rose said. “You can work together to pull together and overcome those hurdles.”

Marimn Health Coeur Center

Ginsberg Jacobs’ case study for the panel was the Marimn Health Coeur Center on Coeur D’Alene tribal lands within the state of Idaho, which was not within a QCT. The endeavor received a $20 million NMTC allocation. The center hired members of the tribe who qualified as low-income people, falling under the employee-based approach.

“We did it by qualifying it through the employees of the tenant,” Jacobs said.

Jacobs said patience is valuable in a targeted-populations approach transaction involving employees, saying that instead of financial closing in 90 days, aspects of the Marimn Health Coeur Center took nine months to one year. Jacobs said working in tribal trust lands can create additional hurdles due to navigating the relationship between the U.S. government and tribal representatives.

“This was a little bit of a complex project,” Jacobs said.

Confronting Challenges

The panelists agreed data collection and the targeted populations approach to the NMTC can be complicated but encouraged attendees and others in the business not to let that hold them back.

“There are challenges, but challenges can be overcome,” Crowder said. “Don’t rule out using this.”

Rose agreed.

“We don’t do it a lot, but we don’t say no if it makes sense,” Rose said. “We’re not afraid to wrestle [the transactions] to the ground.”

Novogradac has an array of resources available to community development professionals. The Novogradac New Markets Tax Credit Handbook is a great resource to better understand the nuances of the targeted populations approach. You can also visit the Subscription Center to sign up for NMTC email alerts.