Q&A: Two Key Changes Made in Recent NMTC FAQ Update

Published by Katie White on Friday, January 1, 2016
Journal thumb January 2016

Question: What key changes were made in the most recent version of the Community Development Financial Institutions (CDFI) Fund’s Certification, Compliance and Monitoring FAQ document?

Answer: On Dec. 4, the CDFI Fund released an updated Certification, Compliance and Monitoring FAQ document, which is the second revision since the document’s release in December 2014 (a prior revision was published in October 2015). The CDFI Fund publishes this document to provide guidance on how allocatees can help comply with various requirements of the New Market Tax Credit program.

In response questions received by the CDFI Fund during the past year, the document was revised to provide additional clarification on existing questions. There have been two significant changes in the documents from the October 2015 version.

The first significant change was to Question 25, which answers how the CDFI Fund monitors compliance with the unrelated entity requirement in Section 3.2(d) of the allocation agreement. The CDFI Fund modified its position for allocatees beginning in the 2015 NMTC application round.

Beginning with the 2015 round, allocatees who have committed to invest in unrelated entities will have complied with the unrelated-entity requirement only if: persons unrelated to both the allocatee and the subsidiary allocatee hold a majority equity interest in the qualified active low-income community business (QALICB) after the qualified equity investment (QEI) is made in the allocatee or the subsidiary allocatee, but before the allocatee or subsidiary allocatee uses the QEI proceeds to make the initial qualified low-income community investments (QLICIs) into the QALICB.

The revised FAQ is only applied on a prospective basis. Previously, for investments made after April 15, 2010, compliance with the unrelated-entity requirement was determined either at the allocatee community development entity (CDE) or the subsidiary CDE level, depending on which entity received the QEI investment (but not both). In the past, it was possible for subsidiary CDEs to invest in QALICBs that were related to the allocatee (within the meaning of IRC §267(b) and § 707(b)(1)), but unrelated to the subsidiary CDE based on the technical definition of the test. The new language essentially closes this loophole.

The second significant change was to Question 44, which answers the question of whether a QALICB can use QLICI proceeds to pay a debt or equity provider to monetize an asset owned or controlled by the QALCIB or an affiliate of a QALICB, including but not limited to the accreted value of an asset. Although the answer to the question remains largely unchanged, the CDFI Fund modified the existing language to add clarification that the QALICB’s use of QLICI proceeds to monetize an asset is only prohibited if the QLICI proceeds would be used to pay a debt or equity provider whose capital was used to directly or indirectly fund the QEI. Like to revisions to Questions 25, these provisions only apply to current year 2015 allocations and beyond.