Operating Businesses Continue to Benefit Most from Latest NMTC Allocation Round

Published by Michael Novogradac on Monday, November 21, 2016 - 12:00am

When the CDFI Fund announced details of this week’s record $7 billion allocation of new markets tax credits (NMTCs) for 2015-2016, it continued a years-long trend of focusing a majority of the awards on operating businesses, rather than real estate activities.

This was the fifth consecutive NMTC allocation round in which the majority of investment proceeds are expected to be used for loans or investments in operating businesses. This year’s estimate of 70.7 percent going into operating businesses was the third straight round in which more than 70 percent of funds were expected to go to that purpose.

Before 2011, real estate activities were the prime beneficiaries of the NMTC program. But over the past five rounds, 57.0 percent, 59.3 percent, 75.8 percent, 73.6 percent and 70.7 percent of investments have been estimated to go into operating businesses.

Early in the program–which started with the 2002 round but for which the breakdown of where investments go didn’t begin until the third round (in 2005)–the focus was on real estate investments. Part of the reason, at least, was that real estate had fewer risks in compliance, which could lead to recapture of the credits.

That changed when the Internal Revenue Service (IRS) modified the NMTC program in September 2012 to encourage investment in non-real estate business in low-income communities. Although that likely had some effect, a more substantial impact was made with a change in the categorization of real estate vs. operating businesses made in 2011.

 

Blog Chart 2016 NMTC Allocation
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The 13th round was also noteworthy for the fact that the average allocation was the highest since 2007. The 120 community development entities (CDEs) that received awards landed an average of $58.3 million, significantly higher than the historical average of $48.9 million and trailing only Round 4 ($65.1 million average) and Round 5 ($63.9 million average) in the history of the program. Demand remained high, with $17.6 billion sought by the 238 applicants.

To learn more about the 13th round of the NMTC allocation, see the January 2016 issue of the Novogradac Journal of Tax Credits.