Economic Development
New
Markets Tax Credits draw 271 applications
By
Donna Kimura
Washington, D.C. – A number of repeat applicants are seeking New Markets Tax Credits (NMTCs) in the latest round.
Thirty-eight percent, or 102 of the 271 applicants vying for tax credits this year, applied in the previous round. Of these repeat applicants, 28 received 2002 tax credits and are now requesting even more.
The number of returning applicants provides an early glimpse into the latest competition for tax credits as the Treasury Department’s Community Development Financial Institutions (CDFI) Fund begins its review of the applications.
The deadline to apply for 2003-2004 tax credits closed last September. The CDFI Fund hopes to announce winners in early spring 2004.
Aimed at increasing private investment in neglected communities, the NMTC program authorizes tax credits to investors in exchange for equity contributions to community development entities (CDEs). The credit to the taxpayer totals 39% of the investment and is claimed over a seven-year period. The total tax credit authority under the program is $15 billion through 2007.
The allocatees are required to invest the proceeds of qualified equity investments they receive in low-income communities. NMTCs may be used to finance a variety of activities, including loans or equity investments in businesses, loans and equity investments in real estate projects, and the capitalization of other CDEs.
The 271 applicants vying for credits have requested more than $30 billion, far more than the $3.5 billion available. This amount is also 17% greater than the $25 billion requested in the first round.
That’s one of the striking figures to come out so far, said Robert Rapoza of the New Markets Tax Credit Coalition. Larger requests by fewer groups, he said, likely indicates that there has been some consolidation by applicants.
The number of applications that the CDFI Fund received is 27% lower than the 345 applications processed in the program’s initial round in 2002. Because the first round was so competitive, fund officials had prepared for as many as 500 applications for the 2003-2004 round.
Affiliated entities were prohibited from submitting more than one application in the same round.
“I heard from some applicants that applied independently last year that they decided to consolidate their efforts with other CDEs this year,” said Tony T. Brown, director of the CDFI Fund. “I also heard that investors were being very selective with their pledges and commitments, which may also have caused CDEs to put forth consolidated applications.”
His comments were made in Nashville at a recent NMTC conference sponsored by the accounting firm Novogradac & Co, LLC.
According to an early look at the 2003-2004 applicant pool, the largest request for an allocation was $1.5 billion and the smallest was $670,000. The average request was about $113 million, while the median size was $72 million.
Ten applicants have requested $500 million or more each while 108 applicants have requested $50 million or less each. There is no limit on the amount of credits that can be allocated to an entity.
A further breakdown of the pool reveals that 38% of the applications came from nonprofit organizations or their subsidiaries.
Looking at the pool, Michael Novogradac, managing partner of Novogradac & Co. in San Francisco, noted that a large number of banks also had submitted applications. About 19% of the applications came from banks and thrifts.
Novogradac said it also appears that many good, but unsuccessful, first-round applicants chose not to resubmit applications in the second round.
Policy moves
Each application will be reviewed by three independent reviewers, said the CDFI Fund’s Brown.
An internal process then evaluates the quality of reviews and checks for scoring anomalies.
The review includes an examination of each applicant’s business strategy to make investments in low-income communities, capitalization strategy to raise equity from investors, management capacity, targeting to areas of highest distress, and impact on jobs and economic growth in the low-income communities where investments are made.
Weight and priority in the allocation review process are given to applicants with a track record of successfully providing capital or technical assistance to disadvantaged businesses or communities.
In this round, the CDFI Fund required any applicant that received an allocation of NMTCs in the first year to have at least 50% of its qualified equity investment issued (cash on hand) by March 5, 2004.
CDFI Fund officials thought they were setting a very high threshold, according to Brown. Still, a good number of allocatees from the first round applied again. “What’s remarkable in this number is that these allocatees plan to have $700 million in cash vested as early as March and are asking to put an additional $5.1 billion to use,” he said.
Banks, both merchant and investment, are expected to be among the early investors. “Investors are now beginning to underwrite transactions and evaluate investments,” Novogradac said in November.
Looking ahead to 2004, one of the big issues will be to get investors to close deals, he said, noting that there are still unanswered questions about the new program.
Deals, however, have been moving along. “We are having success, and some big investors will close by year-end (2003),” Novogradac said.
Fund officials recently reported that 63 out of the 66 awardees had received draft allocation agreements and are in various stages of negotiations and closings.
Some CDEs have been concerned about reporting requirements. They are worried that they may be asked to provide detailed information about every investment that they make under the NMTC program. If they are making a series of small investments, the reporting requirements may be quite burdensome.
Many compliance and tax issues remain, according to Novogradac. “Some have simple solutions that have not yet been adopted by the applicable regulatory agency (the CDFI Fund or the Internal Revenue Service),” he said. “Others are more complex and are moving ever so slowly toward a formal resolution. Compliance issues fall into several categories, including CDFI Fund annual filing requirements and annual IRS filing requirements.”
Rapoza added that he thinks groups will get a better sense of the potential compliance issues as they get their qualified equity investments.
Federal officials were still working to provide clarification to the temporary regulations published in 2001. Several issues, however, have been addressed.
Officials announced that “allocatees can tier investments through up to three additional CDEs before the money is traced to qualifying low-income investment.” This was a big area of concern for bank holding companies that wish to use NMTCs to raise equity, Brown said.
In another move, program officials announced that CDEs may sell loans that they did not originate provided that the loan was originated by another CDE, according to Brown. This should help facilitate secondary-market transactions.
First-round highlights
The program is expected to build upon the inaugural round. In March 2003, 66 organizations were awarded the first $2.5 billion in NMTC reservations. A look at the initial winners may provide some insight into what will happen with the 2003-2004 tax credits.
In 2002, the average award was about $38 million per allocatee. The median allocation was $18 million. The 66 recipients anticipate making investments in at least 40 states and the District of Columbia.
Northside Community Development Fund received the smallest allocation of $500,000. Northside will use its allocation to provide business loans, including micro-enterprise loans and gap financing, and financial counseling and development services to businesses. The program will help to revitalize the Northside neighborhood of Pittsburgh.
The largest award was $170 million, which went to the Phoenix Community Development and Investment Corp., a subsidiary of the city of Phoenix. Tax credits will provide equity and debt financing to develop or rehabilitate commercial real estate in distressed areas, including retail development and hotel projects. Officials also plan to develop large mixed-used commercial facilities in downtown Phoenix, including a biotechnology campus. ••
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Affordable Housing Finance • January 2004