Spring 2007 issue of Horizons

knowledge. commitment. value. CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS

NMTC CHART NMTC CHART

development of housing for sale and those providing consulting or financial counseling services to a qualified business. Ineligible businesses would include residential rental property and those holding unimproved land.

QALICBs

QLICIs

CDFI Fund

Investments & Loans

Businesses

RECAPTURE RULES

Tax Credit Allocation

Businesses & Residents of LICs

Financial Counseling

Community Development Entity (CDE)

The law provides for a recapture provision during the seven-year period of the credit. Recapture will occur if during this period the CDE ceases to remain qualified as a CDE, if the CDE redeems the original investor’s equity during the seven-year period, or if the CDE ceases to meet the test that substantially all of the proceeds are invested in qualifying businesses.

Businesses

Investments and Loans

Tax Credit Benefit

CDEs

Cash (QEI)

Purchase Loans that are QLICIs

Private Investors

Investments, Loans, & Fin’l Counseling

CDEs

This is an example of a simple transaction, but there are many possible ways to structure a deal, including the use of leverage, whereby an investor would borrow funds to invest in the CDE and receive tax credits on the full investment amount, greatly increasing the return on the equity investment.

REPORTING REQUIREMENTS

Due to the need to track the status and performance of the CDEs and to evaluate the effectiveness of the NMTC Program, the CDFI Fund has developed a financial tracking tool, the Community Investment Intelligence System. This system is the vehicle through which the Fund will collect compliance and performance data from the CDEs and will, for the first time, collect detailed data on each loan or equity investment a CDE makes. In order to comply with the reporting requirements under this new system, the CDEs will be requiring the recipients of their loans or equity investments to provide the information necessary to meet these reporting requirements. The followingchart shows howa typical NMTC transaction would work. The CDE would receive an allocation of tax credit authority from the CDFI Fund and would then have private investors invest cash in the CDE. The investors would receive tax credits over the next seven years. The CDE would then make equity investments, make loans or provide services for qualifying businesses or to other CDEs, with the investments providing a return to the investors in the CDE. HOW THE NMTC WORKS

NMTC ALLOCATION UPDATE

The legislation provided for annual investment amounts on which NMTC would be available. These annual allocations are awarded by the CDFI Fund on a competitive basis to CDEs making an application for New Market Tax Credits. The Fund has conducted four rounds of allocations so far, resulting in 233 awards totaling $12.1 billion in allocation authority. The fifth round of allocations is pending, with 258 CDEs submitting applications totaling $27.9 billion for the $3.9 billion in available allocation authority. Applications were submitted in March 2007, and the allocation awards are expected to be made in the fall of 2007.

The sixth NMTC allocation round will begin in the spring of 2008, when the next round of applications will be due.

34 u summer 2007 issue