Question: What would be considered an innovative use of a new markets tax credit (NMTC) allocation in accordance with the 2014 NMTC allocation application, and how will the innovative investments be reported on the current allocation agreement?

Answer: The recent release of the notice of allocation availability (NOAA) has community development professionals shifting their efforts toward formulating a successful application for the calendar year (CY) 2014 allocation round. One key question within the application is Question 20 in the Business Strategy section related to value added and innovative investments. Within this section, the Community Development Financial Institutions (CDFI) Fund has instructed applicants to select one of the following three options to score well in this section: a) increase the volume of its activity, b) undertake activities of greater financial risk or c) pursue innovative qualified low-income community investments (QLICIs). The CDFI Fund indicated in its tips for a successful application that no one activity from this list is scored more favorably. In the 2014 Application FAQs, a discussion has been added about what is and what is not considered an innovative investment.

According to information released by the CDFI Fund, innovative activities include:

• investing in unrelated CDEs that do not have NMTC allocations;
• investing in states identified by the CDFI Fund as having received fewer dollars of QLICIs historically;
• providing QLICIs where the total QLICIs received by the QALICB are $2 million or less;
• making QLICIs with an original term less than or equal to 60 months; and
• providing QLICIs for non-real estate activities, such as working capital, inventory or equipment purchases.

Any use of the NMTC allocation outside of this list will not be considered innovative for purposes of Question 20(c). The CDFI Fund as also stated that the use of the leverage structure, combining NMTCs with historic tax credits and investments in real estate activities would specifically NOT be considered innovative for purposes of Question 20(c). These types of investments will better be discussed in other sections of the application.

The CDFI Fund has identified Puerto Rico, along with the following 10 states that have received fewer dollars of QLICIs in proportion to their statewide population residing in low-income communities: Alabama, Florida, Georgia, Idaho, Kansas, Nebraska, Nevada, Tennessee, Texas and West Virginia. West Virginia is the only state that is new to this list in 2014. The CDFI Fund will also consider American Samoa, Guam, Northern Mariana Islands and the U.S. Virgin Islands to have received lower levels of NMTC investment for purposes of Question 20(c). To date, these four territories have not received any QLICI dollars. Investment in any of the areas listed above will be considered innovative for purposes of Question 20(c).

If applicants intend to use any of the innovative activities above, they are required to quantify the percentage of the applicant’s total QLICIs that are intended to be used on the specific innovative investment. If the applicant receives an NMTC allocation, it may be required to meet the percentage identified in Question 20(c) as part of its allocation agreement.

In fact, the recent release of the CY 2013 Allocation Agreement template has added innovative investments as Section 3.2(l). Previously, the innovative investments were a part of the Restrictions in Section 3.3(b). Section 3.2(l) requires allocatees that have innovative investment requirements to satisfy said requirement by the earlier of such time that the allocatee has made 100 percent of its QLICIs, or Sept. 30, 201X, and until the allocatee redeems its first qualified equity investment related to its NMTC allocation. Similar to non-metro requirements of Section 3.2(g), this is an important compliance requirement that allocatees with innovative investment requirements should monitor.

For example, ABC CDE received a $20 million CY 2013 NMTC allocation. It signs its allocation agreement, which requires it to invest 50 percent of its QLICIs in Puerto Rico. Further, section 3.2(l) of the allocation agreement provides ABC CDE until the earlier of Sept. 30, 2016, or when it had made 100 percent of its QLICIs to meet this requirement.

If ABC CDE makes a $7 million investment in California in early 2016 and another $4 million in Puerto Rico in late summer of 2016, it will only have until Sept. 30, 2016 to make an additional $3 million investment in Puerto Rico to ensure that 50 percent of its investments are to Puerto Rico by that target date. In the event ABC CDE does not satisfy the 50 percent requirement, it will not be in compliance with its allocation agreement.

With the NMTC program being so competitive, potential allocatees are always looking for ways to make their applications stand out from the crowd. The recently released Q&A has provided much needed guidance on one of the questionable sections of the 2014 application: the use of innovative investments. Once an award has been received, allocatees should also be aware of the requirements of Section 3.2(l) related to innovative investments and are advised to carefully monitor their QLICIs to ensure they are in compliance with their allocation agreement. If you have any questions about whether your use of QLICIs will qualify as innovative, or need help in tracking your innovative investments, be sure to reach out to your qualified advisors.