Question: My community development entity (CDE) and another CDE are planning to each make a $1.5 million qualified low-income community investment (QLICI) to XYZ qualified active low-income community business (QALICB). Would this satisfy the small-dollar QLICI requirement as set forth in Section 3.2(l)(iii) of our respective New Markets Tax Credit (NMTC) program allocation agreements?

Answer: When some CDEs applied for an allocation of NMTC, they indicated that they would pursue an innovative use of their NMTC allocation by providing QLICIs where the total QLICIs received by the QALICB are $2 million or less. Upon receipt of a NMTC allocation, such CDEs are then bound by Section 3.2(l)(iii) of their allocation agreement which states “… the Allocatee shall invest the minimum percentage of its QLICIs with one or more of the following characteristics, as listed in Schedule 1 to this Allocation Agreement:”

(iii) QLICIs made in QALICBs receiving total QLICIs of $2 million or less;

In accordance with the allocation agreement, both CDEs might initially seem to have satisfied this small-dollar QLICI provision of their respective allocation agreements, as each CDE is making a QLICI that is less than $2 million. However, in the “New Markets Tax Credit, Compliance and Monitoring Frequently Asked Questions (FAQ)” published Feb. 6, 2017, by the CDFI Fund, FAQ 22 asks how the CDFI Fund measures “innovative investments” for the purpose of meeting Section 3.2(l) of the allocation agreement. The first paragraph of FAQ 22, states (emphasis added):

In addition, qualifying activities include QLICIs to Unrelated CDEs as defined in the IRC Section 267(b) and IRC Section 707(b)(1), that have not received an NMTC allocation in the CY 2011, CY 2012, or CY 2013 rounds; QLICIs where the total QLICIs received by the QALICB (from all CDEs) are $2 million or less; QLICIs with terms that are less than or equal to 60 months; and QLICIs for the financing of non-real estate activities (such as working capital, inventory or equipment purchase) regardless of the type of QALICB.

Then in the second paragraph of FAQ 23, it states:

In addition, multiple allocatees investing in the same QALICB, cannot meet the criteria for small-dollar QLICIs. Only the first QLICI provider would be deemed to have made a small-dollar QLICI. If a QALICB receives a small-dollar QLICI and makes principal repayments, an allocatee can make another small-dollar QLICI provided the total QLICIs outstanding to the QALICB do not exceed the $2 million limit.

Thus as explained in the FAQ, it would appear that for the CDEs in question, only the first CDE that provided the $1.5 million QLICI would be deemed to have made a small-dollar QLICI. However, since the total QLICIs exceed the $2 million limit, the first CDE cannot claim that it has met the small-dollar QLICI criteria. 

If you change the example slightly so that two CDEs are each making a $1 million QLICI on the same day to XYZ QALICB, in accordance with FAQ 23, only the first QLICI provider would be deemed to have made a small-dollar QLICI. There is no guidance in determining who the first QLICI provider would be, but similar to a multi-CDE transaction whereby all the CDEs agree on the lead CDE, the two QLICI providers could also have to agree with who would be the first QLICI provider to have made a small-dollar QLICI.

Allocatees are encouraged to consult with their tax advisors to ensure that any small-dollar QLICI will meet the requirements of their allocation agreement.