The envelope has been opened and the New Markets Tax Credit awardees have been announced. After diligent review, the Community Development Financial Institutions (CDFI) Fund has made its selections for the 2002 allocation recipients.

Some of the recipients now can put their programs in place. Others are figuring out what it is that they have been allocated and what to do.

This article is not focusing on the class of 2002. Rather, we are looking ahead to 2003 and beyond. So dry those tears if you were not one of the 66 selected and figure out what you have to do right now to get yourself in the winner's circle next year.

The NMTC Facts

The New Markets Tax Credit (NMTC) program was enacted in December 2000 under Sec. 45D of the Internal Revenue Code. The national limitation for investment amounts is

  • $1 billion for 2001
  • $1.5 billion for 2002 and 2003
  • $2 billion for 2004 and 2005
  • $3.5 billion for 2006 and 2007

Because of the timing of when the legislation was enacted and the need to create the procedures for the first year, the CDFI Fund combined the 2001 and 2002 investment authority for a total of $2.5 billion in 2002. Looking at the schedule, this means $1.5 billion should be available for 2003, right? The answer is maybe.
According to the CDFI Fund, they "are considering" combining the 2003 limitation with all or a portion of the 2004 authority. The potential increase is "under consideration" in order to remain consistent with the original schedule of increasing investment authority over the seven years. Also, the overwhelming demand for the credit this year and the efficiencies involved with administering the application process (collecting, scoring and allocating the credits) are contributing to the interest in expanding the 2003 allocation. This means there may be as much as $3.5 billion of investment authority allocated in early 2004.

According to the CDFI Fund, the calendar and timing of the application process will be similar to last year. The application round will open sometime in June or July, with applications due in the fall. Submissions for certification of Community Development Entities (CDEs) will be required prior to the closing of the application period.

The CDFI Fund intends to communicate the schedule to the industry once it is finalized, and details (including application materials) will be posted on its Web site. In addition, the CDFI Fund will again host outreach programs to describe NMTCs, the procedures involved in applying for them and changes from last year.

They expect that outreach programs may not be as numerous this year as last year, because last year was the first year for the program. We recommend keeping your eyes open for these events and making every effort to attend if you are planning on applying.

For those of you who applied in 2002 and did not receive investment authority, you can expect to receive a debriefing letter from CDFI around May 30. The letter is intended to describe the criteria that were used to review the application and provide a sense of the characteristics of an "excellent" application. In addition, specific details regarding strengths and weaknesses, as identified by the independent reviewers, are expected to be included in the letter.

If you intend to apply again this year, these debriefing letters obviously will be good road maps to get you on your way with this year's application.

For those of you who did not apply in 2002 but intend to so this year, we suggest the following:

First and foremost, it is not too early to get started. There are some steps you can and should undertake now to enhance your chance of success.

You can begin by taking a look at last year's application. It provides very good insight into the CDFI Fund's scoring criteria. Also, the CDFI Fund advised paying attention to the "tips" provided in the application. This year's application is expected to be similar to last year's with minor changes.

Next take an objective look at your organization.

  • What are the strengths and weaknesses?
  • How does it compare to some of the organizations that did receive allocations?
  • How does your mission fit with the goals and objectives of the NMTC program?

As we see it, there are essentially three fundamental components to the NMTC application. After scanning the list of successful recipients, they appear to excel in all three areas. The first area is the CDE itself as an organization, the second component includes the business strategy or products and services to be delivered by the CDE, and the third is the capitalization strategy or investor relationships.
The successful CDE is mission-driven. The board and management team must be experienced in providing community-oriented services and committed to the region in which they intend to operate. If your organization is lacking in this area, consider creating a joint venture with an organization that has the personnel, skills and history of providing these services. This could include nonprofit organizations.

The combined organization will be scored for the management team. However, only the history of the "controlling entity" is eligible for five bonus points. Finding the right fit, coming to terms, and arranging business ventures takes time. These issues need to be worked out before putting an application together.

The successful business strategy needs to: (a) be clearly articulated and consistent with the goals and objectives of the NMTC program, (b) include supporting documentation with a history of successfully delivering the applicable products and services, and (c) be ready to proceed should you be awarded the investment authority.

While many candidates may score high because they have a history of providing positive community impact, if they do not have a pipeline of projects or a strategy for locating qualifying activities, vital application points will be lost. Readiness to proceed and the ability to "get the dollars out the door" into the community in a timely manner are critical to success. This means you should be identifying and locking up your qualifying projects and activities now. The more specific you can be about the projects you intend to support, the stronger your application will be.

Most of the successful candidates in 2002 have proven track records for raising capital or are aligned with deep-pocket institutional investment organizations. The largest allocation recipients in 2002, particularly those with investment authority in excess of $100 million, have a long history of syndicating tax credits or are part of financial corporations. Again, if your organization is lacking in this area, consider a joint venture with another, stronger group - or start lining up your investors now. Show the investors the projects you intend to fund and get them to commit, as firmly as they can, to invest in your CDE.

Benefit from the lessons learned in the 2002 allocation round. Get your organization in order and position yourself to be the strongest candidate you can be for the 2003 round. Start now. Best of luck.

Eric Darling and Gary Goldman are with Ernst & Young's Tax Credit Investment Advisory Services and can be reached at 617-570-8454 or or