Q&A: Using CDFI Bond Guarantee Program Proceeds for NMTC-Related Activities

Published by Tamara Forman on Saturday, August 1, 2015
Journal thumb August 2015

Question: Can bond proceeds under the Community Development Financial Institution (CDFI) Bond Guarantee Program be used for new markets tax credit (NMTC)-related activities?

Answer: Yes, under certain circumstances. The CDFI Bond Guarantee Program, enacted Sept. 27, 2010, as part of the Small Business Jobs Act of 2010, directs the Treasury Department (Treasury) to guarantee the full amount of notes or bonds issued to support CDFIs that make investments for eligible community or economic development purposes. The bonds or notes support CDFI lending and investment by providing a source of long-term (29.5-year), patient capital to CDFIs.

Through the CDFI Bond Guarantee Program, selected certified CDFIs or their designees will issue bonds that are guaranteed by the federal government and use the bond proceeds to extend capital for community development financing and for long-term community investments. Authorized uses of the loans financed through bond proceeds may include a variety of financial activities, such as supporting commercial facilities that promote revitalization, community stability and job creation/retention; housing that is principally affordable to low-income people; businesses that provide jobs for low-income people or are owned by low-income people; and community or economic development in low-income and underserved rural areas.
Treasury may guarantee up to 10 bonds per year, each at a minimum of $100 million. Per statute, the total of all bonds cannot exceed $1 billion per year. The Treasury Department’s CDFI Fund opened the application period for FY 2015 through the notice of guarantee authority (NOGA) in the Federal Register issued April 10, 2015, making as much as $750 million in bond guarantee authority available to eligible CDFIs. To date, $525 million in bonds among eight CDFIs have been guaranteed under the program.

Generally, as addressed in the FY 2015 NOGA, award funds received under any other CDFI Fund Program cannot be used by any participant of the CDFI Bond Guarantee Program–including qualified issuers, eligible CDFIs and secondary borrowers–to pay principal, interest, fees, administrative costs or issuance costs (including bond issuance fees) related to the CDFI Bond Guarantee Program or to fund the risk-share pool for a bond issue.

The CDFI Fund’s release of an update to its “New Markets Tax Credit Certification, Compliance Monitoring and Evaluation Frequently Asked Questions,” which supersedes the September 2011 edition of the document, explains that bond proceeds may only be combined with NMTC- derived equity (i.e., leveraged loan) to make a qualified equity investment (QEI) in a community development entity (CDE) or to refinance a qualified low-income community investment (QLICI) at the beginning of the seven-year NMTC compliance period under the following circumstances.

If an eligible CDFI uses bond loan proceeds to finance a leveraged loan in a NMTC transaction, the eligible CDFI must provide:

  • additional collateral in the form of other pledged loans or cash collateral,
  • a payment guarantee or similar credit enhancement and/or
  • other assurances that are approved by Treasury.

The additional collateral, credit enhancement and/or assurances must be from a nonfederal source, remain in place during the entire seven-year NMTC compliance period and comply with the secondary loan requirements.

Further, bond proceeds may not be used to refinance a leveraged loan during the seven-year NMTC compliance period. However, bond proceeds may be used to refinance a QLICI after the seven-year NMTC compliance period has ended, so long as all other programmatic requirements are met.

Allocatees are encouraged to review the latest NOGA for additional details. Additional resources for the CDFI Bond Guarantee Program can be found at www.novoco.com/hottopics/nmtc/cdfi_bgp.php. Interested parties may also contact a local Novogradac & Company LLP office with questions.