Types of Projects that Qualify

  • Commercial Real-Estate Development or Rehabilitation;
  • Community Facilities/Non-Profit Facilities
  • Office Real-Estate Development or Rehabilitation;
  • Industrial Real-Estate Development or Rehabilitation;
  • Mixed-Use Real-Estate Developments or Rehabilitation;
  • Skilled Nursing and Assisted Living Developments or Rehabilitation;
  • Hotel Developments or Rehabilitation;
  • Businesses of Any Type;
  • Not-For-Profit Entities.

NMTC Transaction Restrictions:

The CDFI Fund has identified specific sin and luxury uses for which NMTC allocation may not be used. The prohibited uses include the financing of:

  • Golf courses, country clubs;
  • Casinos , race track or other facility used for gambling;
  • Tanning salons, hot tub facility, or massage parlors;
  • Liquor stores for off premises consumption;
  • Farming;
  • Development or holding of intangibles for sale of license.

Benefits to Potential Borrowers from NMTC

  • Highly subsidized loan terms;
  • Typically non-recourse mezzanine loans;
  • Commonly an equity contribution to Project at end of 7-year compliance period;
  • NMTC equity contribution is approx. 15-23% of the NMTC allocation utilized for the Project.
  • Most often interest-only payments for loan term.

Typical Limitations on Loan Terms

  • 7 year locked out loan term;
  • Required to maintain compliance with NMTC criteria (all under Borrower’s control).

General Loan Parameters from CDE Lender

A bankruptcy remote entity whose sole purpose shall be the ownership and operation of the Project.

Sponsor Profile:
The sponsor of the loan must demonstrate sufficient experience, track record, and financial strength to effectively develop and/or operate the Project. In general, the sponsor shall demonstrate a net worth acceptable to the NMTC Lender to support the Project completion and provide sufficient equity investment in the Project.

Loan Sizing:
Due to varying CDE lending programs and tax credit investor pricing, NMTC equity loan amount varies significantly by CDE. Industry averages range between 15% and 23% of the NMTC allocation awarded to the Project. For example, a $10 million NMTC award will net between $1.5 million – $2.3 million subsidized NMTC loan from the sale of the tax credits to the Project (the “NMTC Loan”).

Loan Term:
Generally 7-years to coincide with the NMTC tax credit compliance period for the loans from the CDE to the Project (the Qualified Low Income Community Investments “QLICIs” which includes the NMTC Loan). Some NMTC lenders offer up to a 30-year loan term, but few NMTC lenders offer programs shorter than 7-years due to NMTC allocation reinvestment risk and tax credit recapture risks.

The NMTC Loan is often fixed.

Interest rate is determined by the CDE and/or any third party lender and is determined based on profile of transaction. Interest rates by nature of the program are highly subsidized from market pricing.

Loan Fees:
Vary between CDE programs. Often NMTC CDEs do not charge loan fees.

Property lien, pledge of partnership interest of Borrower, equipment or other business collateral, assignment of leases and rents or other interests as determined by the CDE.

Generally interest only.

Generally locked-out for 7-years.

All Loans shall have: (i) customary recourse carveouts; and (ii) recourse for completion of construction and/or renovation if applicable. Repayment recourse determined on a deal-by-deal basis.

NMTC Indemnity:
The Tax Credit Investor generally will require a NMTC tax credit recapture indemnity from a person(s) or entity with financial strength sufficient to support any recapture risk to ensure the Project maintains compliance during the 7-year compliance period. Such NMTC compliance is generally considered easy to maintain and is entirely in the control of the Borrower.

Loan Draws:
Draw periods and amounts are permitted based upon the term of the loan and the scope of the anticipated construction, renovations, or needs of the business where applicable.

Third Party Reports:
MAI Appraisal, Phase I Environmental Report, Engineering and Seismic are often required for real estate projects and reviewed/audited financial statements for any business.

New Markets Tax Credit Transaction Qualification

The NMTC program is designed to incentivize private capital to invest into low income communities for the purpose of creating an economic stimulus for these targeted communities. To achieve the program’s goal, a NMTC loan provides subsidized financing targeting operating businesses, value-add real estate transactions, and projects that provide services to low income persons. By design, NMTC program qualification is both objective by location and subjective based on the level of economic stimulus and community benefits the project will provide to the low income community as determined by the CDE.

Qualification by Location

The property or qualifying business must be located in a low income census tract based on year 2000 census data or have the primary objective of providing services to low income persons. A qualifying census tract is defined for the purposes of this program as having either: (a) a poverty rate of at least 20% or (b) a median income no more than 80% of area median income. Furthermore, most CDE programs require the property or qualifying business to be located in a census tract qualifying as highly distressed. High distress designation is determined through a series of tests based on the census tract’s statistical data along with numerous other location measures. Capital Peak Partners conducts qualification analysis and can provide additional information upon request.

Qualification by Community Impact

There is no standard evaluation for community impact but this evaluation commonly focuses on the level of community impacts the transaction will provide to the low income community and/or low income persons. Methods of drawing conclusions are often subjective based on quantifiable and non-quantifiable impacts. As such, the community benefit analysis is conducted differently by each CDE lender and consequently many CDE lenders have differing minimum thresholds. Although difficult to measure, some of the quantifiable and non-quantifiable measures of community impacts include:

  • Total number of direct, indirect and induced construction jobs created or maintained;
  • Total number of direct, indirect and induced permanent jobs created or maintained;
  • Increase of tax base for community;
  • Services provided to low income persons and/or community;
  • Social benefits to low income persons, non-profit organizations, community, etc;
  • Level of community support;
  • Renewable energy benefits;
  • Job training provided.

Ongoing Borrower Reporting

Financial Information

Quarterly Statements:
From and after the Closing Date, Borrower shall provide to Lender (a) quarterly income and expense statements as to the operation and leasing of the Property (or applicable portion thereof) for the previous calendar year or quarter, as applicable, together with the current cash flow and up-to-date payables and receivables for the Property, and (b) quarterly balance sheets, income and expense statements and statements of cash flow of Borrower for the previous quarter. All such statements must be prepared by Borrower’s chief financial officer and certified by Borrower as being true, complete and correct in all material respects and showing, in detail, all such income and expenses since the last such quarterly statement.

Annual Statements:
Borrower shall deliver to Lender, (a) an annual income and expense/operating statement reflecting the operation and leasing of the Property (or any applicable portion) for the previous fiscal year, together with current cash flow and up-to-date payables and receivables, and (b) annual balance sheets, income and expense statements and statements of cash flow of Borrower for the previous fiscal year, together with a copy of Borrower’s tax return for the previous tax year. Each of the foregoing shall be certified as true, complete and correct in all material respects by Borrower. Borrower shall file its tax returns within the time allowed for filing without penalty.

Annual Budget and Updates:
On or before thirty (30) days prior to the beginning of each fiscal year of Borrower, Borrower shall deliver to Lender for its approval a detailed annual operating budget for the Property for such fiscal year, which shall include an income and expense statement for the Property, a description of proposed capital improvements with cost breakdown, and a marketing plan. The annual operating budget shall be supported by a certified rent roll and other appropriate documentation, all of which shall be in form satisfactory to Lender in its reasonable discretion. Should said budgets be updated, Borrower shall deliver to Lender within five (5) Business Days after the effective date thereof, a copy of such updated budget and corresponding supporting documentation. In addition, Borrower shall deliver to Lender quarterly updates of such annual operating budget reflecting a detailed comparison of the actual operating results with the operating budget that had been previously submitted to Lender. Such update must set forth details explaining each material deviation from the annual operating budget.

Rent Rolls:
To the extent any leases are in effect, Borrower shall provide to Lender quarterly rent rolls.