Wednesday, June 15, 2011

Sustainability Law 101: The New Markets Tax Credits Program

The New Markets Tax Credits Program is a key, if somewhat unheralded, incentive for investment in the sustainasphere.  Found in Section 45D of the Internal Revenue Code, the NMTC Program rewards investment in low-income communities with federal income tax credits.  In simple terms, investors in “Community Development Entities” get a federal income tax credit equal to 39% of the investment.  The credit is claimed over seven years at a rate of 5% of the investment for the first three years and 6% of the investment for the remaining four years.  All told, the NMTC credits have an estimated present value of about 30% of the investment.

Here are the basic elements of the program: 
  • The NMTC credits are awarded by the U.S. Treasury Department to certified “Community Development Entities,” or “CDEs.” 
  • A CDE must meet various criteria, but the basic qualification is that the CDE must have the primary mission of community development. 
  • The CDE is the entity that applies to the Treasury Department for an allocation of credits.
  • $3.5 billion in credits will be allocated in 2011, and it is expected that several hundred CDEs will compete for allocations ranging from several thousand dollars to several million dollars.
  • Once a CDE receives an allocation of new markets tax credits, the CDE solicits investments.  Investments must be in cash. 
  • The CDE uses the capital raised to make equity investments and loans to “qualifying businesses.” 
  • Eligible businesses include for-profit retail, manufacturing, and service businesses and non-profit businesses. 
  • Residential rental housing is expressly excluded from NMTC eligibility and, while a NMTC can be combined with other federal tax benefits, it cannot be combined with low-income housing tax credits or tax-exempt bonds.

Some see the prohibition against NMTC investment in residential rental housing as limiting the utility of the NMTC program, particularly as current economic conditions seem to devalue home ownership and affordable housing communities experience constant 100% occupancy.  But Arkansas cities and communities are becoming increasingly focused on revitalizing long neglected downtowns and business districts.  State and local governments are slowly, but steadily, “greening” municipal buildings.  And the state, under Governor Beebe’s stewardship, has done a remarkable job of attracting major out of state and foreign renewable and clean energy businesses to the state.  Effective, and, in some instances, creative, use of the NMTC program can and should facilitate all of these activities.

(Department of Things to Come: CDEs will be discussed in more detail in a future post.)

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