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The Secret to a Strong(er) Capital Stack

Blog Post
November 4, 2024

At the end of October, Novogradac & Company LLP held its annual New Markets Tax Credit Conference in New Orleans, which was attended by BMD Attorney Jacob R. Davis. The conference highlighted the fact that New Markets Tax Credits (NMTCs) continue to be a successful capital stack’s best kept secret.

NMTCs were authorized by Congress in 2000 to address the lack of investment, nationwide, in low-income communities. At their core, NMTCs incentivize private investors to support projects in underserved neighborhoods. In return, the investor receives tax credits equal to 39% of their original investment over a seven-year period. For an investor that is already prepared to invest dollars in community development, the credits provide an added benefit to their bottom line.

As you might imagine, deals involving NMTCs can take on very sophisticated structures. At their core, though, the following players are always needed:

  1. A qualified low-income community business (QALICB), which is usually a special purpose entity created by the business working on the development project. The QALICB (or its parent) is the entity that is completing the project and needs the investor’s contribution to help round out its capital stack.
  2. A community development entity (CDE) that has been certified by the Community Development Financial Institutions Fund (Fund), an arm of the U.S. Department of Treasury. The CDE applies for and receives an allocation of NMTCs from the Fund which it then allocates to projects led by QALICBs.  Currently, there are only 104 CDEs in the United States that have received an allocation of NMTCs for the most recent allocation round.
  3. An investor ready to invest in the QALICB in exchange for the CDE’s tax credits. The investor is often a bank or group of private individuals that will invest through the NMTC structure in return for the CDE’s allocation of tax credits.

The NMTC deal is normally a product of the following connections: (i) a QALICB pitches its project to a CDE, who confirms that the QALICB is qualified to receive NMTCs and decides that the project is a great candidate for allocation; and (ii) the CDE and QALICB work together to pair an investor to the project.

From there, attorneys and accountants work to develop and draft a compliant structure for the CDE to issue the tax credits to the investor, and the investor to make its investment in the QALICB’s project. The NMTCs are often only one piece of the QALICB’s capital stack – the closing of the NMTCs will happen concurrently with any traditional financing, grant funding, or other applicable tax credits to the project.

After funding, the QALICB gets started on its project. Importantly, though, for the seven-year period that the investor receives its tax credits, the QALICB must work with the CDE to complete various compliance reporting that is provided to the Fund.  This reporting ensures that the QALICB remains qualified to participate in the program.  While the CDE serves as a quasi-lender to the QALICB, it is in the CDE’s best interest that the QALICB’s project gets completed with no issue, ensuring that the investor fully receives its bargained-for tax credits over the seven-year period. 

Over the summer, the Fund announced a “double round” of allocation – where CDEs normally are in competition to receive a combined $5 billion in tax credits per year, applications for 2025 will permit an allocation of up to $10 billion by the Fund.  This means that CDEs are poised to receive a substantial increase in the amount of tax credits they can allocate to QALICBs throughout the country.

With a record allocation comes the possibility of a record number of completed QALICB projects.  With all these credits available, businesses that (i) need an extra boost to get their development project started, and (ii) can qualify as a QALICB, should seek out area CDEs and explore how New Markets Tax Credits could help transform their capital stack. 

For questions regarding NMTCs or assistance in building your project’s capital stack, please do not hesitate to contact BMD Member Jason Butterworth at jabutterworth@bmdllc.com or Attorney Jacob Davis at jrdavis@bmdllc.com.

Tax CreditsInvestment
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