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Q&A How the EB-5 Program Can be Used as an Alternative Funding Source

Published by Thomas Boccia on Friday, July 1, 2011

Journal cover July 2011   Download PDF

Within six months of publishing in late 2010 a special 10th anniversary report that chronicled the New Markets Tax Credit (NMTC) program’s efficacy in deploying capital to distressed communities, the New Markets Tax Credit Coalition announced that a cross-section of community development entities (CDEs) invested a whopping $4.4 billion through the program in 2010 alone. The Coalition’s 2011 NMTC Progress Report also revealed that 96 percent of the CDEs’ 2010 investment activity has occurred in communities with at least one more factor of higher economic distress than that required by law.

The annual report, a compilation of survey responses submitted by CDEs, is in its seventh iteration. Each successive report has shown an increased appetite for the credits, said Alison Feighan, vice president of Rapoza Associates, which prepares the annual report and manages the Coalition. But this year’s survey results far exceeded the firm’s expectations. “Almost $4.5 billion – that’s the most ever, 50 percent higher than the best previous year,” said Robert Rapoza, president of Rapoza Associates.

Case studies from the report show that the money that supported last year’s projects ranged from a new childcare center on Chicago’s west side to a new aerospace facility in Oklahoma.

Both the progress report and the anniversary report indicate that the NMTC program was an economic lifeline for low-income communities during the depths of the recession. The Coalition estimates that for the $15 billion that the government has invested in the program to date, $50 billion in capital has been deployed to distressed communities and approximately 500,000 jobs have been created or sustained. “We think that’s something the government got for a relatively low cost,” said Rapoza, who observed that no other program could have produced those results.

But with both Houses of Congress seeking to reduce deficit and debt, the economy’s tenuous state is also causing concern about the program’s reauthorization. “As [members of Congress] move to allocate scarce resources, we have to work to persuade them that the program has value. That will be our challenge,” Rapoza said.

He emphasized the importance of reaching out to legislators through invitations to groundbreakings and support letters, and also noted that materials and fact sheets are available on the Coalition’s web site. Extension of the tax credit program is the top priority for the group, which is encouraging local business owners to sign a letter of support for S. 996, the New Markets Tax Credit Extension Act of 2011. That bill would extend the program for five years at a level of $5 billion each year.

“There’s a clear case to extend the program for a longer term than one year, which is generally what we’ve had,” Rapoza said, adding that such a change would bring economies of scale to the program and give investors more confidence in the program’s future. “It would make it easier for everyone to plan,” he said, noting that the economy is still reeling from the recession. For that reason, Rapoza and the Coalition would also like to see the program cap returned to last year’s level of $5 billion. In May, the CDFI Fund opened the 2011 NMTC competition round with $3.5 billion in credit authority.

One potential change that the Coalition has helped advance is the Internal Revenue Service’s (IRS’s) proposed rulemaking to encourage NMTC investments in non-real estate businesses. “We anticipated that an important part of the program would be lending to businesses. That has turned out not to be the case,” Rapoza said, citing restrictive IRS requirements on deploying capital.

Those requirements and ensuing investor wariness have resulted in a program in which the vast majority of activity is in real estate, he said, and, as the Coalition communicated to the IRS, loosening those restrictions would assure investors that they won’t be subject to recapture for reasons that relate to capital. “There’s a great desire on the part of some CDEs to invest more in non-real estate businesses. It’s been much more difficult for businesses in poor communities to get equipment and working capital,” Feighan said. She said the Coalition would submit comments on the proposed rule, for which a September 29 public hearing has been scheduled.

As for the program’s future, Rapoza says he expects Congress to pass renewal legislation closer to the end of the year. “We have a task in front of us, but we’re confident we’ll get an extender,” he said. Copies of the reauthorization bill, the 2011 NMTC Progress Report and the NMTC 10th Anniversary Report are available for download at

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