Journal of Tax Credit Investing

Two hundred seventy-one applicants compete for New Markets Tax Credits

by Donna Kimura

Washington, D.C.—Interest remains strong in New Markets Tax Credits (NMTCs), with 271 applicants competing in the second round.

The applications represent an aggregate total of more than $30.4 billion in potential equity investments, a hefty $4.6 billion increase in requests from 2002. The amount requested far exceeds the $3.5 billion in tax credit authority that is available in the second round.

The Treasury Department's Community Development Financial Institutions (CDFI) Fund expects to announce winners in the spring of 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.

CDFI Fund officials said they are evaluating the applications through a competitive review process "to identify those best suited to have the greatest community development impact."

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 low-income communities where investments are made.

Michael Novogradac, managing partner of the accounting firm Novogradac & Co., said he thinks there are several keys to success for applicants in round two, including demonstrating strong investor interest, submitting a well-organized application that clearly states the business plan, and assembling a strong management and consultant team with the demonstrated experience to implement the business plan. He said it will also be important to show the significant community impact that will result from the plan.

While the total amount requested in the second round is a 17% increase from last year, there are 27% fewer applicants. In the initial round for 2002 credits, there were 345 organizations seeking an allocation. CDFI Fund officials had braced for as many as 500 applications after the strong interest shown last year.

This year, affiliated entities were prohibited from submitting more than one application in the same round.

Tony Brown, director of the CDFI Fund, said some applicants that applied separately last year decided to consolidate their efforts with other CDEs this year.

"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," he said at the New Markets Tax Credit Coalition conference in New York City. "We also made it clear in the application process that applicants with stronger investment commitments would score better than others. As a result, this too may have resulted in fewer applications."

In this round, the CDFI Fund required an applicant that received an allocation last round to have at least 50% of the qualified equity investments issued (cash on hand) by March 5, 2004. "We set, what we thought at the time, was a very high threshold," Brown said. "Interestingly, however, 42% of last year's allocatees are again applying. 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."

At the Oct. 15 conference, Brown shared an early glimpse into the applicant pool. He revealed that:

• The largest request for an allocation of NMTCs is $1.5 billion, and the smallest request is $670,000.
• The average request is about $113 million. The median request is $72 million.
• Thirty-eight percent (102 of 271) of the applicants sought an allocation last year.

Brown is also scheduled to appear at a NMTC conference in Nashville in November sponsored by Novogradac.

First-round review

The current round is expected to build upon the first round. A look at the initial winners, which were announced last March, may provide some insight into what will happen with the 2003 credits.

Sixty-six out of the 345 applicants were selected to receive $2.5 billion in tax credits.
The average allocation award was about $38 million per allocatee. The median allocation was $18 million.

Northside Community Development Fund received the smallest allocation of $500,000 in the 2002 round. 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. The tax credits will provide equity and debt financing to develop or rehabilitate commercial real estate in distressed areas, including retail development and hotel projects, and to develop large mixed-use commercial facilities in downtown Phoenix, including a biotechnology campus. Officials also plan to help finance small and start-up businesses, with a special focus on equity investments in biotechnology start-ups and expansions.

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