New Markets Tax Credits for Private Investment Funds and Family Offices
What Are New Markets Tax Credits?
The Federal New Markets Tax Credit (NMTC) Program was enacted as a part of the Community Renewal Tax Relief Act of 2000 to revitalize Low-Income Communities (LICs). NMTCs are federal
tax credits used to assist in the funding of neighborhood changes, job creation, commercial real estate projects, and new or existing businesses located in low-income census tracts.
LICs sometimes have difficulty attracting investments, leading to dormant or vacant buildings and businesses, inadequate access to healthcare and education, and lower property values. NMTCs provide an opportunity for investors to not only invest in these “distressed” communities, but to do so in a way that minimizes investment risks and optimize returns.
For family offices and private investment funds, NMTCs offer a financial incentive to invest in businesses or real estate projects located in areas of perceived higher risk, while keeping returns in line with investments located in more economically developed areas.
Benefits of NMTC
- Through the Community Development Financial Institutions Fund, a division of the Department of Treasury, the federal government grants authority to private Community Development Entities (CDEs) to issue 7 years of federal tax credits to investors in exchange for equity investments.
- CDEs use the equity investment received from tax credit investors to issue low-interest, interest only, subordinated loans (NMTC Loans) to geographically qualified projects in exchange for certain community impacts.
- The NMTC Loans can cover as much as 15%-20% of total project costs.
- The CDE and Investor typically sell the NMTC Loans to the project sponsor for a nominal fee, thus the NMTC capital can be left in the project.
- The NMTC Loan may be subject to cancellation after the investor exits.
Examples of NMTCs at Work
A key value of the NMTC program is that it has very few limiting features with respect to asset class or form of investment. So, for some family office clients, NMTCs can, for example, support an investment in a mixed-use development like 100 Prince1 in Athens, Ga., which brought grocery and retail to a USDA Food Desert as well as the first non-student multi-family housing to be built in Athens in more than 10 years. The NMTC subsidy helped overcome severely depressed commercial rents to make the project feasible for the family offices invested in the project while still delivering the community impacts of accessible food and in-town housing.
Alternatively, as a gap financing tool, NMTC was used to complete the capital stack for Jones Capital’s Jones Lumber Co. to acquire and update the former Rives and Reynolds lumber mill in Natchez, Miss. With the NMTC investment, Jones Lumber Co. was able to re- engineer the mill, add sufficient working capital, and keep one of the major employers in Natchez strong for the future.
Private Investment and Family Offices New Markets Tax Credit Q&A
1. For more information, see NMTC Case Study for 100 Prince