How Can NMTC Project Sponsors Attract CDEs?

Published by Nick Henderson on Tuesday, April 7, 2020
Journal Cover Thumb April 2020

Question: As competition for finding and procuring allocation continues to increase in the new markets tax credit (NMTC) space, what should project sponsors know about the kinds of investments that attract community development entities (CDEs)?

Answer: Since its inception in the year 2000, the NMTC has proven to be an exceptional tool for driving economic growth in low-income areas. With its obvious effectiveness, steady demand and increased competition have changed the way CDEs apply for and ultimately deploy the allocation they receive. The program’s primary goal is maximizing the impact made in low-income communities and with more and more CDEs seeking allocation, innovation and creative investment products are becoming the rule rather than the exception.

So how have winning CDEs been able to stand out in such a competitive landscape? Much of it lies in the kinds of commitments these entities are making in their applications–commitments that far exceed minimum program standards.

In 2012, the business strategy section of the NMTC application was revised and expanded to include on option for applicants to specify how allocation received would enable them to pursue more “innovative” investments. This category encompassed those kinds of projects that otherwise might not be possible, but for NMTC financing. At that time, choices included directing investments into states with fewer previous qualified low-income community investments (QLICIs) and offering smaller QLICIs to a broader range of investees. Since, the definition of an “innovative” investment has shifted somewhat between rounds and has expanded, as of the 2019 allocation round, to include the following:

  • investing in unrelated CDEs that do not have NMTC allocations;
  • investing in states identified by the Community Development Financial Institutions (CDFI) Fund as having received fewer dollars of QLICIs historically;
  • providing QLICIs where the total QLICIs received by the qualified active low-income community businesses (QALICBs) are $4 million or less;
  • making QLICIs as equity or debt with an original term less than or equal to 60 months;
  • providing QLICIs for non-real estate activities, such as working capital, inventory or equipment purchase; and
  • investing in federal Indian reservations, off-reservation trust lands, Hawaiian home lands and Alaska native village statistical areas.

Applicant CDEs, when providing answers to this question, must disclose the percentage of QLICIs they are committing to make in these various categories. Reporting amounts here significantly increases the likelihood that such CDE would be bound by their allocation agreement with the CDFI Fund to make these kinds of investments, should an award be given. It also increases the likelihood that their application will be viewed more favorably.

As a result, potential projects that meet any of this criterion will already be more attractive to a broader range of CDEs, as it enables them to meet these specialized terms of their allocation agreements. It’s also important to note that CDEs are not allowed to propose new types of innovative investments, but are limited to those specifically outlined by the CDFI Fund in the application. This undoubtedly limits the scope of the kinds of projects that CDEs will be looking to invest in, should an award be given.

In addition to specifically outlined innovative investment types, CDEs are also making greater commitments to investment in non-metropolitan counties. Metropolitan counties are those that have a large population nucleus of 50,000 people or more or hold a designation as a U.S. Census Bureau-defined urbanized area. Any county that doesn’t meet this criteria is considered a non-metropolitan county. In the 2018 round alone, roughly 49 percent of winning CDEs were required by the CDFI Fund to deploy some or all of their investments in non-metropolitan counties. This means that some developments, even if located in a severely distressed urban areas, may not check all the boxes for CDEs with non-metropolitan county investment requirements.

So what does this mean for project sponsors currently seeking NMTC financing?

It means understanding the details of your development in light of where CDEs are focusing their investment efforts. CDEs are always looking for opportunities to enhance their application and stand out above other applicants. Part of that is promising to use allocation in these specialized ways that maximize impact in low-income communities. Knowing these factors and what constitutes an “innovative” investment, will help you to market your project to potential CDE lenders, and have a clearer picture of what kinds of projects more and more CDEs are looking to invest in.

Knowing those CDEs that have a presence in your state or geographic region is also a very important step. The CDFI Fund website has a number of resources dedicated to finding this kind of information and outlines winning CDEs from each application round. Getting the conversation started early with your CDE contacts can help determine what allocation they have left and how your development might fit into their remaining investment pool.

In the end, knowing specifically how your development meets or exceeds the NMTC program’s investment requirements in the ways mentioned and staying current with the application process are both key elements for project sponsors to be aware of as they search for allocation.