The New Markets Tax Credit Provides a Targeted Economic Recovery Tool

Published by Brad Elphick, Peter Lawrence on Friday, May 22, 2020 - 12:00am

Impact of COVID-19 is Far-Reaching and Fast-Moving

The coronavirus pandemic has swept the United States with more than 1.3 million cases and counting. While the pandemic has had huge health and economic impacts nationally, it is disproportionately affecting low-income, minority and rural communities that desperately needed investment even before COVID-19. The new markets tax credit (NMTC) is designed to serve these communities in the form of investments that support small businesses, manufacturing, and community-based facilities like hospitals and health clinics. As such, the NMTC can be an important tool in the nation’s economic recovery moving forward.

Virus Disproportionately is Affecting Low-Income, Minority Communities

While data is being collected daily, what has been gathered so far illustrates that low-income, minority communities are suffering at greater rates than higher-income areas. As mentioned above, nationally there are over a million cases of COVID-19 and according to the CDC, more than 82,000 deaths. According to the Kaiser Family Foundation survey of states able to report ethnicity, African-Americans have accounted for 34 percent of the cases, despite making up only 13 percent of the population. Both Hispanic and Asian individuals have also been found to account for a larger share of confirmed cases and deaths than their total share of population, in states where data is available, though the disparities are not as stark as compared to African-Americans’ figures.

Beyond the health implications, the economic repercussions of the pandemic are hitting these communities harder too. According to the Bureau of Labor Statistics, less than 20 percent of African-American workers have jobs and only about 16 percent of Hispanic workers that allow them to telecommute. Out of those who have already lost jobs, NPR reports that 45 percent of black workers have lost jobs or had their hours cut, which is higher than the 31 percent seen for white workers. Job loss is especially detrimental for people of color, as 58 percent of African American and 58 percent of Latino households do not have enough money to cover three months of expenses without an income stream, which is almost double the percentage of white households (29 percent) who could not cover these expenses. Additionally, lower-income citizens are more likely to be essential workers, because many essential jobs (stock clerks, food preparation workers, physical therapist aides) are among the lowest-paid workers across essential industries. These workers are also more likely to be minorities as CDC research finds that nearly a quarter of employed Hispanic and African American workers are employed in service industry jobs compared to 16 percent of non-Hispanic whites. This highlights that lower-income, minority communities are not only at a physical risk to COVID-19, but at an economic risk as well.

As COVID-19 moves toward the middle of the country, rural communities, due to their demographic composition and access to resources, or lack thereof, may find themselves at a disadvantage when it comes to dealing with the pandemic. According to Healthline, the 15 percent of U.S. residents who live in rural areas are older and less healthy than those living in more urban areas. This puts them at higher risk for serious complications due to COVID-19. And if they do get drastically ill, they may have a harder time accessing hospital care as according to Healthline, residents who live in rural areas often live farther away from hospitals.

Once those rural residents do get to hospitals, they might be met with a serious shortage of medical supplies. According to the Economic Innovation Group, one in five hospital beds were lost in rural areas between 2006 and 2017, and rural clinics are closing at alarming rates. Economically distressed rural areas have lost the greatest amount of healthcare facilities in terms of sheer numbers.

Beyond the outsized impact COVID-19 has had on certain communities and geographies, a number of industries have been harder hit as well. The American Hotel and Lodging Association (AHLA) details the degree to which the leisure and hospitality industry has been negatively impacted, thus far. According to AHLA, U.S. hotels have already lost more than $18 billion in room revenue since mid-February, and  nearly  3.9 million total hotel-supported jobs have either been eliminated or will be eliminated in the coming weeks, with 70 percent of all direct hotel employees having been laid off or furloughed. Research shows that the lodging and hotel industry are largely staffed by minorities, though they are more heavily distributed towards lower-wage positions. The short-term outlook appears bleak, as major operators and individual hotels are projecting occupancies below 20 percent in the upcoming months, which puts 33,000 small business (and therefore jobs of low-income, minority workers) at immediate risk, per AHLA.

NMTC Influence in These Communities and Industries

The NMTC program exists to serve the low-income communities that need private investment the most. By law, all NMTC investments must be made in economically distressed areas. However, throughout the life of the program, nearly 75 percent of the investments have been made in severely economically distressed areas – which is defined as a community with unemployment rates more than 1.5 times the national average and a poverty rate of 30 percent or more, or a community that has a median income at or below 60 percent of the area median. Between 2003 and 2018, $95 billion in financing was delivered through the NMTC in communities meeting this criteria.

What has this financing provided? A myriad of benefits have been realized, including jobs and necessary community goods or services. In 2018 alone, more than 58,000 jobs were created through the NMTC program, and between 2003 and 2018, the program is estimated to have created more than a million jobs. With unemployment claims at a record high, tools of job creation (such as the NMTC) are proving as crucial as ever. Beyond job creation, NMTC has also created needed health care facilities. Through 2017, $3.6 billion of NMTC investments have helped create 333 community health care facilities and these facilities serve 6.7 million patients annually. The NMTC has also assisted the hospitality and service industry. In 2018 alone, 455 jobs in the tourism and hotel industry were created due to the NMTC, and 9,216 jobs were created in small businesses (such as retail, restaurants and other service industries). As detailed previously, employees in these industries are more likely to be African American or Hispanic, than non-Hispanic whites, and thus more likely to be counted among those who have lost jobs or seen their hours cut as a result of the COVID-19 pandemic. Therefore, NMTC investments that bolster these industries have the twin benefit of assisting minority workers.

Efforts to assist minority residents in low-income communities may be supported by encouraging and preparing Minority Community Development Entities (CDEs) – those that are classified as a minority-owned for-profit entity, a minority-controlled not-for-profit entity, or a Minority Depository Institution (MDI) – to better take advantage of the NMTC incentive. The CDFI Fund Minority CDE Training and Technical Assistance Initiative was implemented to provide Minority CDEs with the information and strategies needed to improve their odds of receiving NMTC allocations. This work has appeared to pay off, as 50 percent of highly qualified Minority CDEs received allocations for the 2018 NMTC award round, compared to 45 percent of the application pool as reported in the NMTC Program Award Book for calendar year 2018. In each of the last three NMTC awards the percentage of Minority CDEs receiving allocations, compared to the number deemed highly qualified, has been higher than the general pool of applicants as reported by the CDFI Fund.      

According to the NMTC Coalition, the NMTC has also significantly aided rural areas. Between 2003 and 2014, 49,940 full time jobs and 21,706 construction jobs have been created in rural areas because of the NMTC program, and $6.15 billion in NMTC allocations have generated $11.6 billion in total project costs. This is significant because rural areas have historically struggled in attracting capital. Between 2003 and 2014, 107 NMTC projects financed health care facilities, for a total of $800 million worth of investments.

NMTC in the Face of the COVID-19 Pandemic

The creation of jobs and the support of the industries discussed above highlight the NMTC as an important tool for low-income, minority communities. The COVID-19 pandemic may be putting some of these projects, and therefore these communities, at a larger risk. Novogradac has been tracking the impacts of the COVID-19 pandemic on NMTC projects in a number of ways – for more details, see the NMTC Working Group COVID-19 letter. Some highlights include:

  • Loan Modifications – Many QLICIs are structured as loans. Due to the impact on qualified active low-income community businesses (QALICBs) due to the current shut-down, the terms of some debt QLICIs may warrant significant modifications. Certain modifications would constitute a reissuance of the debt as of the date of the modification and may also cause a loss to be recognized by the CDE and income by the QALICB, both of which would be detrimental. If reissuance occurs, it may require a reconfirmation that the investment constitutes a QLICI as of the date of the reissuance. Important to note is that temporary waivers of defaults under a debt instrument do not usually constitute a significant modification of the debt instrument under the applicable regulations. 
  • Reasonable Working Capital Safe Harbor – Currently, the 12-month safe harbor for construction of real property allows proceeds that are spent within 12 months after the date of the investment or loan is made to be treated as a reasonable amount of working capital. However, complications due to COVID-19 may result in construction delays of ongoing and future projects – by temporarily extending the safe harbor to 24 months, more time will be allowed for construction.
  • QEI Deployment – Currently, CDEs have 12 months to make investments after raising qualified equity investments (QEIs) – adding an additional 12-month extension would allow CDEs who are experiencing difficulty deploying those proceeds because of the pandemic extra time to invest.
  • QLICI Reinvestments – A 12-month extension to the existing 12-month period allowed to make reinvestments such that CDEs that have received amounts that are payment of, or for, capital, equity or principal with respect to a QLICI and are experiencing difficulty in reinvesting those proceeds due to the pandemic, will temporarily have additional time to make reinvestments.
  • Reasonable Expectations – Due to impacts from the pandemic (such as employees working remotely), entities may fail to be a QALICB. In order to help these entities, these failures should be deemed as not reasonably foreseeable and the CDE should be protected by the reasonable expectations safe harbor. 

For more considerations and specifics about the pandemic’s impacts on NMTC projects, also see the May issue of the Novogradac Journal of Tax Credits.

The Future of the NMTC

Despite its clear benefits, the NMTC is still not a permanent part of the tax code. However, NMTCs could be a tool used by many of the communities and industries most severely impacted to help speed up the economic recovery once the COVID-19 pandemic is over. By enacting legislation to make the NMTC permanent small businesses, community health centers, and the hospitality industries will have a reliable financial tool to make an economic upturn as soon as possible.