New Markets Tax Credit Program: Becoming a Community Development Entity

As I’ve previously discussed, the Community Development Entity (“CDE”) is the central investment mechanism of the New Markets Tax Credit Program.  Under the NMTC Program, certified CDEs apply the U.S. Treasury Department for an award of tax credits, solicit investments, and make loans and investments into qualified businesses and projects.  An organization becomes a CDE by applying to the U.S. Treasury Department.  The U.S. Treasury Department has certified hundreds of CDEs since the inception of the NMTC program, including 16 in Arkansas.

To become a CDE, an organization must meet three basic qualifications:

First, the organization must be legally organized under the laws of the state in which it is incorporated and be a domestic corporation or partnership for federal tax purposes.  In other words, the organization must exist and have a federal tax ID.  No surprises here.

Second, the CDE must have a primary mission of serving or providing investment capital for low-income communities or low-income persons.  The key part of this requirement is that the CDE must demonstrate that at least 60 percent of its products and services are directed to or will be directed to low-income persons, to individuals, businesses, or organizations that serve low-income persons, or to residents of low-income communities. 

Activities that meet this requirement include:

• investing in, lending to, or providing technical assistance to businesses located in low-income communities or owned by low-income persons
• investing in or providing loans to support commercial properties that are located in low-income communities
• lending to low-income persons or residents of low-income communities
• investing in, lending to or providing technical assistance to organizations engaged in activities that promote community development in low-income communities or for the benefit of low-income communities.

Third, the CDE or proposed CDE must designate a “service area” and maintain accountability to the residents of the low-income communities in that service area.  A CDE meets this requirement if at least 20 percent of its governing or advisory board is representative of the low-income communities within the designated service area.  In other words, board members must either reside in a low-income community within the designated service area, or otherwise represent the interest of residents of the low-income communities within the service area – for example, by owning a business in the community.

The deadline for submission of CDE applications for the current round of NMTC awards is June 22, 2011.  A link to the CDE application can be found here: http://www.cdfifund.gov/what_we_do/programs_id.asp?programid=5