Prepare for Success: Four Steps CDEs Should Take Now for the Next NMTC Application Round

Published by Michael Novogradac on Monday, May 3, 2021
Journal Cover Thumb April 2021

Community development entities (CDEs) are celebrating a five-year extension of the new markets tax credit (NMTC) and preparing for the calendar-year 2020 (CY 2020) NMTC awards.

They should also be preparing for the future.

With five authorized rounds of NMTC allocations coming at $5 billion per year, CDEs should look forward while waiting on the Community Development Financial Institutions (CDFI) Fund to announce the 2020 awards this summer because the CY 2021 round will open soon afterward.

Here are four major steps to maximize your CDE’s preparation for success in 2021 and beyond.  It goes without saying, but it’s still worth emphasizing: Novogradac can assist you with each of these four steps.

Journal Article Image: CDE Checklist for NMTC Application Round
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1. Confirm Eligibility

The most fundamental step starts with the eligibility section of the NMTC notice of allocation availability (NOAA). The draft application template for the 2021 allocation round includes a new requirement that CDEs be certified by the CDFI Fund before the round opens (a provision that likely will be in the final application). If your CDE is not yet certified, apply for certification now! Do not wait.

In a March 1 letter to the CDFI Fund, the NMTC Working Group recommended that the Fund reconsider this requirement and either revert to its previous practice of allowing CDEs to apply for certification on or before a deadline in the NOAA or publish a clear timeline and deadline to apply for certification to avoid confusion. But neither has happened, so if you aren’t yet certified, apply now.

Confirming eligibility to apply for an NMTC award goes beyond verifying or applying for and receiving certification of your CDE. CDEs should also review the following seven application eligibility conditions. Once again, review now, as you may still have time to correct any shortcomings. 

  • Delinquent debt: Determine if your CDE, its controlling entity or any affiliate has a pending or delinquent debt to the federal government. If so, address that up now and stay eligible.
  • Issuance thresholds: Prior awardees, including any who receive a CY 2020 award, must meet minimum qualified equity investment (QEI) issuance and qualified low-income community investment (QLICI) thresholds. Until the CY 2021 QEI issuance and QLICI closed thresholds are finalized, we won’t know the exact requirements. Take time now to review prior-year issuance and QLICI closed requirements for a preview of what those thresholds may be in 2021 and takes steps to ensure you can satisfy them.
  • Schedule 1: Confirm compliance with Schedule 1 of any prior NMTC allocation agreement, which outlines various special features and commitments from the allocation application. For areas in which you are not yet in compliance, review how that may affect your eligibility to apply for NMTCs in the next round, and/or means to get in compliance.
  • Reporting requirements: Make sure that you have completed all annual reporting requirements for previous allocations, since the CDFI Fund places great importance on CDEs being good stewards of the incentive.
  • Material events: The CDFI Fund requires notification of any “material event” and a statement of how the CDE intends to correct or address it. Material events are defined as any change in organizational condition that could create a violation or lead to a violation of any terms and conditions of assistance, allocation or bond loan agreement, regulation or law–a fairly broad definition. Circumstances related to COVID may have increased the likelihood of such an event, so get assistance in determining whether any situations rise to that level and how to address them.
  • Other CDFI Fund programs: Determine whether your CDE or any of its affiliates are noncompliant or are in default status with any CDFI Fund program. If so, correct that status.

Having taken those steps, remember that the NOAA includes a complete list of eligibility criteria. Review the NOAA and ensure that you’re in compliance with each requirement.

One practical tip to ensure eligibility is to review the 2020 NMTC program allocation application’s frequently asked questions document. Particular attention should be paid to Section II, which includes questions on eligibility and CDE certification. Those questions could change in 2021, but the standards set in the 2020 application are a good guidepost to your eligibility.

Finally, CDEs should review the assurances and certifications section of the NMTC application (you can look at 2020) and determine whether their responses to any of the questions would be “false.” Those answers require a brief explanation, so it’s worth consulting an expert to determine the best answer and to anticipate how that answer may impact the eligibility of the applicant.

2. Build a Strong Team

This is crucial both inside and outside the CDE, since the best NMTC applicants have strong internal and external connections. There is an obvious benefit to expertise inside your CDE, but outside expertise can improve your application, assist with impact studies and more. Now is the time to make sure internal and external teams are in place and ready to go.

A suggested first action is to have both your internal and external team conduct a thorough review of prior applications–whether or not they were successful. A good review by an outside expert may help identify why previous applications were unsuccessful. Application experts are also aware of emerging trends and can help inform your CDE’s business strategy so italigns with what the CDFI Fund is seeking.

Successful previous applications should be reviewed, too. There’s no guarantee that a winning allocation was an easy choice for the CDFI Fund and competition for allocation is always improving. A good review makes a good application even better.

While preparing, your team should also gather information related to community outcomes, a key factor in success for NMTC allocations. Conduct impact studies, talk to various stakeholders, examine how you met outcomes promised in previous applications.

Your team should also collect historical data for application responses and tables. The NMTC application is lengthy and any work that can be done in advance leaves more time to polish details of the application. Spend this summer gathering the data you’ll need later.

Prepare for the next round by connecting with community partners. As you identify potential investments (see next section), work to ensure that local leadership supports them. Time spent lining up that support now will save work and headaches down the line.

3. Build a Pipeline

Your pipeline of potential investments is critical, so always look ahead. The first step is to identify projects that will be ready to go when the awards are made, a scenario that allows you to quickly deploy allocations. Review potential investments with a focus on the heightened focus on community outcomes: Do the projects in your pipeline have outcomes that align with those sought by the CDFI Fund? Have they changed their expectations? Make sure your pipeline is ready, but also that it is positioned to win allocations.

Additionally, CDEs should check in with investors about the CY 2021 round. Discuss any changes in the investor’s diversity, equity and inclusion emphasis, because that continues to evolve for many investors. Gathering that information now can ensure that your pipeline outcomes align with those of potential investors.

CDEs should conduct formal impact studies on past transactions and future prospects. That allows you to measure impact from previous investments and to have solid information on transactions in the pipeline. A study gives you concrete data to make the case for impact and studies are useful to share with the CDFI Fund and potential investors.

4. Practice Sound Business Strategies

Business strategy affects the entire world of a CDE. For starters, make sure your CDE is holding meaningful board meetings. CDEs must hold board meetings at least annually. Beyond meeting CDFI Fund requirements, this presents an opportunity to engage with community and receive feedback about pressing community needs. That includes whether recent events have affected those communities–a definite possibility after the past year.

This is also the time of year that CDEs should compare midyear results to forecasts, identifying issues that should be addressed. One example: during the COVID-19 pandemic, many CDEs offered deferred interest periods to borrowers so they could support businesses and real estate projects hit hard by the pandemic. Such deferrals could create mismatches between accrual-basis taxable income and cash receipts, which would be obvious in midyear reports. Those and other issues are worth having tax advisors examine and help navigate to avoid long-term problems.

There can also be significant tax consequences to the modification of QLICI loans, another scenario made more likely during the pandemic and related recession. CDEs should have an analysis done to ensure that there weren’t significant loan modifications or other tax issues in the past year-plus. The rules related to what constitutes a significant modification and reissuance of a loan are complicated and CDEs should contact their tax advisors with questions.

Conclusion

The CY 2020 allocation announcement will be the focus of the summer, but shortly thereafter, the 2021 application period will begin.

CDEs should ensure they’re preparing for that by confirming eligibility, building a strong team, building a pipeline and practicing sound business strategies. Doing so can set your CDE up for success. 

Listen In

Michael Novogradac discusses this column and more in the May 4 Tax Credit Tuesday podcast. Listen to it at www.novoco.com/podcast.