NMTC Participants Seek COVID-19 Guidance, Relief
Published by Bob Ibanez and Brad Elphick on Wednesday, May 6, 2020
New markets tax credit (NMTC) participants are facing a slew of challenges because of the COVID-19 pandemic.
Challenges range from delays in transaction closings and construction schedules to needing additional time to meet reporting requirements.
At press time, the NMTC Working Group was preparing letters to the IRS and to the Community Development Financial Institutions (CDFI) Fund to outline key challenges faced by the NMTC industry and to request guidance, and in some cases relief, in light of the current operating environment due to the pandemic.
Below is a non-exhaustive list of challenges identified by the NMTC Working Group, organized by issues that need a possible statutory fix authorized by Congress, regulatory guidance from the IRS or guidance from the CDFI Fund.
IRS Regulatory Guidance, Statutory Change
- Challenge: Community development entities (CDEs) need certainty that loan modifications can be made to address the economic impact of COVID-19 without triggering the debt modification rules that impact the CDE’s ability to rely on reasonable expectations.
Regulatory guidance: Request a temporary modification to the debt modification rules in Treas. Reg. 1.1001-3 to provide relief from the requirements to determine if debt modifications are significant modifications resulting in an exchange of the original debt instrument.
Sub-regulatory guidance: Request a ruling that loan modifications determined to be significant per Treas. Reg. 1.1001-3 and deemed an exchange of the original debt instrument will not require a CDE to re-examine whether it reasonably expects an entity to be treated as a QALICB for the duration of the CDE’s investment in accordance with Treas. Reg. 1.45D-1(d)(6)(i).
Statutory change: Request that a statute be enacted to temporarily suspend the application of the debt modification rules in Treas. Reg. 1.1001-3 for debt that is modified because of the COVID-19 pandemic.
- Challenge: Construction projects need additional time because of construction delays related to the COVID-19 pandemic to fully expend NMTC proceeds and stay within the 12-month reasonable working capital safe harbor.
Guidance: Request an Internal Revenue Code (IRC) Section 7508A notice allowing a 12-month extension to the reasonable working capital safe harbor in Treas. Reg. 1.45D-1(d)(4)(i)(E)(2) for construction of real property. It currently allows proceeds that are expended within 12 months after the date the investment or loan is made to be treated as a reasonable amount of working capital. Because of delays due to ongoing and future business impacts of the COVID-19 pandemic, an extension of that period is needed.
- Challenge: CDEs need additional time to deploy qualified equity investment (QEI) proceeds after receipt of the cash as a result of the delays in closing transactions because of the COVID-19 pandemic.
Guidance: Request an IRC Section 7508A notice allowing an extension to the 12-month period allowed to make investments under Treas. Reg. 1.45D-1(c)(5)(iv).
- Challenge: CDEs need additional time to make reinvestments of amounts received by a CDE in payment of, or for, capital, equity or principal with respect to a QLICI because of the COVID-19 pandemic.
Guidance: Request an IRC Section 7508A notice allowing an extension to the 12-month period allowed to make reinvestments under Treas. Reg. 1.45D-1(d)(2)(i).
- Challenge: CDEs need the ability to distribute operating income from prior years because of the disparity between their current year operating income and the reduced cash flow because of the economic impact of COVID-19 on its borrowers.
Guidance: Provide guidance that corrects the inconsistency between the distributions that CDEs tax as partnerships are permitted to make under Treas. Reg. 1.45D-1(e)(3)(iii) and those that CDEs taxed as corporations are permitted to make, to allow CDEs taxed as partnerships the ability to make distributions of undistributed operating income from prior years, similar to current regulations allowing corporations to make distributions out of accumulated earnings and profits from all prior taxable years.
- Challenge: CDEs need certainty that the qualified active low-income community business (QALICB) status of an entity will not change if a mixed-used project is determined to be residential rental property because the amount of rental revenue from the residential portion becomes more than 80 percent of all rental revenue for a taxable year due to ongoing and future business impacts of the COVID-19 pandemic on commercial tenants.
Guidance: Provide guidance that, if an entity ceases to constitute a qualified business for purposes of Treas. Reg. 1.45D-1(d)(5)(ii) in any year based on the property becoming residential rental property due to ongoing and future business impacts of the COVID-19 pandemic (because the amount of residential rental revenue exceeds 80 percent of total rental revenue), such failure will be deemed not reasonably foreseeable and the CDE will be protected by the reasonable expectation safe harbor, to the extent otherwise applicable.
- Challenge: CDEs need certainty that employees of a QALICB that are now working remotely because of the COVID-19 pandemic and due to various shelter-in-place orders will not cause a QALICB to fail the services test.
Guidance: Provide guidance that under Treas. Reg. 1.45D-1(d)(4)(i)(C), employees that are working remotely as a result of the ongoing and future business impacts of the COVID-19 pandemic and various shelter-in-place orders will be considered to be performing services in a low-income community if their normal work location was in a low-income community.
CDFI Fund Guidance
- Challenge: CDEs need flexibility to use their NMTC allocation for investments that address the ongoing and future economic disruption due to the COVID-19 pandemic, even if such projects are not consistent with the strategies (including, but not limited to, the proposed product offerings, QALICB type, fees and markets served) set forth in their allocation application.
Guidance: Provide relief under Section 3.3(i) of the allocation agreement, which requires the allocatee to use its NMTC allocation in a manner that is generally consistent with the allocation application, to use their allocation in ways that address the economic disruption of the COVID-19 pandemic but weren’t described in previous applications.
- Challenge: CDEs need additional time to meet their reporting requirements as a result of the ongoing and future impacts of the COVID-19 pandemic.
Guidance: Provide an extension to the reporting requirements for the institution-level report, transaction-level report and audited financial statements as required in the allocation agreement under Sections 6.5(b), 6.5(c) and 6.5(d).
- Challenge: Allocatees need additional time to meet the requirements under Section 3.2 – Authorized Uses of NMTC Allocation, due to delays caused by the COVID-19 pandemic.
Guidance: Provide an extension for any allocation agreement deadlines under Section 3.2 – Authorized Uses of NMTC Allocation for allocation awards received from the calendar year (CY) 2017 allocation round and those thereafter.
- Challenge: CDEs need to be able to look back further than 24 months before the QLICI closing date to include expenditures that will be repaid or refinanced because of delays in closing transactions.
Guidance: Provide an extension of the 24-month lookback period defined in the allocation agreement under Section 3.3(j)(i) – Restrictions on the Use of NMTC Allocation.
There will likely be more issues and challenges that arise in the months ahead, but in the meantime, the types of guidance and relief requested in this article can help NMTC participants keep capital flowing into communities in need.