How to Measure the Impact of NMTC Investments

Published by H. Blair Kincer on Wednesday, May 26, 2021 - 12:00am

As the new markets tax credit (NMTC) community awaits the announcement of the calendar year 2020 NMTC allocation awards and the opening of the 2021 application cycle, many community development entities (CDEs) and qualified businesses are quantifying the impact of previous investments and estimating the community outcomes of proposed investments.

Community outcomes are one of the many factors the Community Development Financial Institutions (CDFI) Fund considers when awarding NMTC allocation awards and measuring the success of previous allocations.  

As such, it’s helpful to consider what developers and qualified businesses should be doing to measure impact and how things are changing when it comes to measuring community outcomes.

Community outcomes is one of two sections that are scored in Phase 1 of the CDFI Fund’s application review process. In light of how competitive the process is, CDEs must score well in this section or they will fall out of contention for an allocation award.

The CDFI Fund initially asked applicants to provide the methods and assumptions used to estimate potential outcomes. The CDFI Fund now requires projected outcomes to be supported by clear and sound methods and metrics for each outcome selected. To underscore how important metrics are, starting in the 2019 round, applicants were told they would score more favorably if metrics were obtained from or informed by third-party sources rather than relying solely on the applicant’s own track record.

Novogradac conducts third-party analyses that address the outcome or impacts of various NMTC investments. Novogradac’s first forays into this type of analysis was focused on jobs, but our reports have evolved over the past several years. Novogradac uses an Implan modeling tool that generates estimates of the monetary effects of a particular investment. Implan can be used to measure a wide range of impacts. For example, local taxes of various types can be calculated. Consider two recent examples.

Case Study 1: Impact Assessment in Florida

Novogradac conducted an impact assessment for a development in Florida that repurposed a vacant property into an office building specifically designed to house nonprofit service. The rents were all set a below-market rate, enabling the majority of entities to realize occupancy cost savings as compared to their prior spaces. While that obviously is an easily proven impact, Novogradac discovered another level of benefits. Through the course of conducting interviews, we learned that several tenants saw further financial benefits derived from shared community space at the property. The tenants were all allowed free use of event space at the property and many of them used that to host fundraisers. Those fundraisers previously required those business to rent a facility. The impact of both the occupancy cost and event space savings allowed many of the tenants we spoke with to add funding to social programs or add new staff, which means either additional jobs added or more households served. Novogradac was able to show not only the direct first level impact, but also the knock-on impact upon these nonprofits operations.

Case Study 2: NMTC Portfolio Review

Novogradac reviewed a client’s portfolio of previously-awarded and placed-in-service NMTC developments. For this, we approached from both a quantitative and qualitative perspective. Novogradac compiled data from the client, as well as the various qualified active low-income community businesses (QALICBs), related to current employment levels, compensation, populations served, and more. These results allowed the client to get a sense of the number of overall jobs created, as well as the number of households served by their investments.

Novogradac also spoke with most of the QALICBs to document impact that might not easily translate to those metrics. For example, one of the investments involved a healthcare facility. In our discussions with the director, Novogradac learned that the new facility allowed for the addition of pre-natal care. This level of care was not previously available in the area. While those served would have already be counted in the customers served data, the client was able to tie specific types of care serving the population. The client wanted this both for their own information but also for discussions with stakeholders in the community when discussing track record of past investments.

Considerations Beyond the NMTC

Beyond the NMTC, impact analyses are becoming more common in other areas. Reporting requirements are increasing, but the marketplace is also pushing for this information. This question of impact is growing beyond application requirements.

A growing trend in the low-income housing tax credit (LIHTC) market analysis is clients asking Novogradac to include an analysis in our market studies of community service facilities. This is primarily in response to an Internal Revenue Service revenue ruling about including those facilities in basis. This is an example of the trend of increased reporting requirements.

Opportunity zones (OZs) are another area where many fund managers report that part of the attraction of investors is the simple fact that their investment may help a struggling community. This shows that where reporting requirements are not as codified that the market can also drive interest.

In addition, society as a whole is asking this question more often. This means companies and organizations want to be responsive to investors or stakeholders and illustrate their achievements and efforts. Being on the leading edge helps make an organization be more attractive to investors or really any partner.

Further, there is greater and greater pressure to prove that tax dollars are being spent wisely–and showing impact and proving efficacy is key to that argument.

Learn More

For a more detailed discussion of these topics, listen to the May 25, 2021, Novogradac Tax Credit Tuesday Podcast, and join us for the Novogradac 2021 Spring New Markets Tax Credit Virtual Conference, June 10-11.