New Markets Tax Credits and Innovate Fund Award

HOST: Welcome to the Cherry Bekaert Tax Beat, a conversation about tax that matters. Welcome to this edition of the Cherry Bekaert Tax Beat podcast.

HOST: Today's episode is a conversation about New Markets Tax Credits and Cherry Bekaert's affiliated entity, The Innovate Fund. We'll unpack the acronyms and seeming complexities around the New Markets Tax Credit Program, as well as discuss Cherry Bekaert's affiliated entity and a community development entity called The Innovate Fund.

HOST: We'll also discuss how this program helps lenders and community development projects. Joining today's conversation is Laurel Tinsley, the managing director of our firm's Strategic Finance and Services group.

HOST: Hello, Laurel. How are you doing today?

LAUREL TINSLEY: I'm doing well. A little tired — it's New Markets application season, so I'm a little tired, but thankfully we are coming toward the end. We're going to submit all ours by the 15th and the last day to submit is December 19th.

HOST: Awesome. And as always, joining me, my partner in crime from Greenville, South Carolina, Sarah McGregor. Sarah, how's life treating you?

SARAH MCGREGOR: Life is good, Brooks. I was shopping online this weekend, getting ready for the holidays. We should see boxes coming from the trucks pretty soon, I hope.

HOST: You're making me feel guilty. I can tell you I have bought zero presents at this point. I'm waiting until application season is done to start the holiday season, so that's it. In my little corner of St. Louis we aren't starting the holidays until the 19th.

SARAH MCGREGOR: Very good.

HOST: A little background before we get started. For more than 20 years, the New Markets Tax Credit Program has issued federal tax credits to incentivize business investment in economically challenged communities around the country. It's a very popular and successful program with broad bipartisan support.

HOST: This fall, the Treasury announced a new round of $5 billion in credits. Awards went to more than 100 community organizations, which will now fund private business projects and community development. We are thrilled that The Innovate Fund was one of the winners in this allocation process.

HOST: Laurel, let's cover the basics. What are New Markets Tax Credits? What are CDEs? And let's even talk about CDFIs.

LAUREL TINSLEY: It's a great program, but the complexity means there are a lot of people who need to be around the table to make this work. I used to be a lawyer and would define every little acronym very specifically, but most people don't need to get that far in the weeds. We'll talk a bit at a higher level.

LAUREL TINSLEY: The design of the program was to increase investment in underserved, low-income communities that were falling behind on job creation, investment, and addressing blight. The federal program was designed to bring both sides of the aisle together in a program that could help businesses and low-income communities by creating jobs and providing access to goods and services, including wraparound services like education.

LAUREL TINSLEY: Because of the complexity, multiple types of entities are involved. Sometimes communities lack the capacity to understand complex financial mechanisms like New Markets and Historic tax credits. There are entities called Community Development Entities (CDEs) and Community Development Financial Institutions (CDFIs). Those entities work within communities and act as intermediaries for the government.

LAUREL TINSLEY: Essentially, CDEs apply to the government for awards of tax credits, and then they find projects within their communities to make investments. To make this work, you need investors. This program is different from other tax credits in that the credit is generally generated for the investor in the upper tier rather than being earned directly by the community project.

LAUREL TINSLEY: Community development entities are designed to be place-based experts working in specific communities to help them access these incentives. That's the basic idea. If you'd like to layer in more acronyms, I can explain some of them.

HOST: Let me restate it in simpler terms. For the actual community projects, are we lending them money that they don't have to pay back if they meet all requirements and goals for the community? Is that a fair synopsis?

LAUREL TINSLEY: Yes. It's similar to the community development block grant and other funding programs where the goal is to create community benefits by the end of the compliance period. Some CDEs get repaid and then use that evergreen fund to continue investing, while many CDEs exit at the end of the seven-year compliance period and the incentive stays within the community.

LAUREL TINSLEY: The program offers flexibility, but you must disclose your plans to the CDFI Fund when you apply. If you told the CDFI Fund you would retain the subsidy and then didn't disclose it, that would jeopardize future awards.

HOST: The tax credits themselves are designed to flow to the investor or lender organizations to make participation more enticing, correct?

LAUREL TINSLEY: Correct. It helps to view it as a leveraging program. Tax credits typically produce about 20 to 30 percent of the total project costs. That portion comes from banks or investors, with the remaining capital sourced by the project through loans, equity partners, or capital campaigns for nonprofits.

LAUREL TINSLEY: Typically, 70 percent of the overall project comes from those existing sources. New Markets fills the gap — often values are depressed in low-income communities, so traditional bank financing may not be sufficient. The New Markets program provides equity to bridge that gap.

HOST: The Innovate Fund was awarded $50 million of credits out of the $5 billion total. Where does The Innovate Fund act in the communities and what types of projects might this $50 million support?

LAUREL TINSLEY: The Innovate Fund is a CDE that works within a defined service area. The Innovate Fund's $50 million award covers a four-state service area: Tennessee, Georgia, North Carolina, and South Carolina. The Innovate Fund conducts convenings, provides New Markets Tax Credit training, and works with community entities and government agencies to understand needs in that region.

LAUREL TINSLEY: The Innovate Fund's platform focuses on creating jobs for low-income individuals who have difficulty accessing quality employment. That means promoting living wages and reducing barriers to entry.

LAUREL TINSLEY: The Innovate Fund also focuses on community health by supporting organizations in education and health care to ensure access to quality services. The fund targets persistent poverty counties and regions such as parts of Appalachia that have lacked access to capital.

LAUREL TINSLEY: There are CDEs across the country, and our team works with many of them. Each organization defines its service area and mission. Some are hyper-local — for example, St. Louis has an entity focused only on the city — while others operate nationally.

LAUREL TINSLEY: CDEs may focus on various outcomes, such as minority-owned and controlled investments or Native-owned and controlled investments. It's important that the CDE's activities align with its original mission and track record, because the CDFI Fund evaluates both past performance and pipeline matching.

LAUREL TINSLEY: You can't just change focus to chase current funding trends. If an organization suddenly pivots to environmental outcomes without prior experience or data, it won't have the foundation to succeed. Successful applicants align their strategic plan, track record, and pipeline with their stated mission.

HOST: You're working on applications now and have seen many awards over the years. What factors help a CDE be successful in gaining a grant from the Treasury?

LAUREL TINSLEY: Start with being good at what you are. There is a five-year track record requirement for the CDFI Fund application. You must show what you've done historically and what you plan to do based on that track record.

LAUREL TINSLEY: If you've only done a million dollars in funding over five years, that may limit the size of award you can justify. Some organizations start small and build over time, while national organizations may already have significant volume.

LAUREL TINSLEY: Many banks now have CDEs because of Community Reinvestment Act requirements, so if a bank is already working in low-income communities it can set up a CDE to access New Markets Tax Credits as a complement to other programs.

LAUREL TINSLEY: The key is being planful. Put your plan on paper, measure progress, and be realistic about the time it takes to shift an organization’s focus.

HOST: How does Cherry Bekaert Advisory LLC help fill gaps for organizations working with New Markets and related programs?

LAUREL TINSLEY: We start with a foundation: what has the organization successfully done, where is their service area, and what were they founded to achieve? We do diligence and strategic planning to understand where they are and where they want to go.

LAUREL TINSLEY: We help identify resources and programs such as the CDFI Fund's technical assistance and financial assistance rounds, which are currently open. Those programs can support capacity building toward New Markets goals.

LAUREL TINSLEY: When we work with many organizations, we help them think through what they should be doing and where to focus. We emphasize best practices, such as underwriting projects like real loans. There is now an explicit requirement that CDEs underwrite their projects to ensure financial viability and community benefits.

LAUREL TINSLEY: Organizations need written policies and procedures, underwriting memos tailored to the program, and reliable compliance and monitoring functions. These cannot just be in someone’s head; they need to be documented so the organization can continue when people leave.

LAUREL TINSLEY: Our team assesses gaps and provides written policies and procedures, underwriting templates, compliance support, application writing, and post-award compliance services. We aim to support what is working in an organization and provide the missing pieces to build capacity and maintain compliance.