Navigating Targeted Populations in New Markets Tax Credit Deals

HOST: JASON CALLAHAM: Welcome to the Tax Services Podcast. I'm Jason Callaham, senior manager on the Strategic Financing Services team, where I lead our efforts on compliance and the regulatory side of New Markets Tax Credit (NMTC) transactions.

HOST: JASON CALLAHAM: Today we're going to dive into a topic that's both powerful and often misunderstood: how a project can qualify for New Markets Tax Credits using targeted populations. NMTC deals can be very complex, especially when it comes to qualifying businesses and structuring projects that deliver both financial returns and meaningful community impact.

HOST: JASON CALLAHAM: That's why I'm joined today by Joe Hennessee, also a senior manager on our Strategic Financing Services team. Joe leads our efforts on QALICB, Qualified Active Low-Income Community Business, consulting and field structuring. Together we'll unpack nuances with targeted populations, share lessons learned from real-world experience, and offer practical advice for navigating the challenges and opportunities that come with utilizing targeted populations.


JOE HENNESSEE: Thanks for having me. I'm excited to get started.


HOST: JASON CALLAHAM: Let's start with the basics for listeners who may be newer to the New Markets Tax Credit program. Can you explain what we mean by targeted populations and why they're a priority in this program?


JOE HENNESSEE: For the typical NMTC transaction, one of the first things I evaluate is the project's address. For traditional transactions, being located in a Qualified Census Tract is the main route into an NMTC deal.

JOE HENNESSEE: But what if a project serves employees or is owned by low-income persons and sits outside a Qualified Census Tract? It's not uncommon to have unqualified tracts that still serve low-income populations. Targeted populations transactions allow qualification based on the people a project employs, serves, or who own the organization, rather than strictly on geography.


HOST: JASON CALLAHAM: That can be news to people who are new to New Markets. They often look at a map, see their project isn't in a Qualified Census Tract, and stop there.

HOST: JASON CALLAHAM: From your experience on the project side, what are the biggest challenges in aligning a project with NMTC requirements for targeted populations, especially when balancing compliance and real-world project needs?


JOE HENNESSEE: A critical aspect is access to organized, readily accessible information. Even traditional NMTC deals demand a lot of information up front, but targeted populations deals require clean, well-organized documentation to establish your route to compliance and to maintain compliance after closing.

JOE HENNESSEE: Competitiveness and preparedness matter. Regardless of whether it's a traditional or targeted populations transaction, you must present your best face to CDEs. Show that you keep organized records and respond promptly to information requests. CDEs will ask for information during the lead-up and will have regular outreach during the compliance period.

JOE HENNESSEE: Sometimes keeping good records means updating your systems and requesting new information from clients or employees. Think strategically about how to collect and make that information accessible, working with internal and external partners on the process.


HOST: JASON CALLAHAM: That's great advice for any NMTC project. Investors and CDEs will be asking for that information.

HOST: JASON CALLAHAM: We often see confusion around eligibility. If a project isn't on the map, what are common misconceptions you encounter, and how do you help businesses navigate those hurdles?


JOE HENNESSEE: The initial reaction is often: my address isn't in a Qualified Census Tract, so that's the end of the road. It's important to do a little research or reach out to a third party experienced in the space.

JOE HENNESSEE: At Cherry Bekaert we have depth of experience and can discuss secondary ways to keep an NMTC deal alive. Location nuances matter. You might be just outside geographic eligibility but still eligible through targeted populations, provided your tract's income doesn't exceed the ceiling for targeted populations eligibility.

JOE HENNESSEE: That ceiling is 120 percent of the area median income, or AMI. If your tract shows 120 percent or above, you're not eligible for targeted populations.

JOE HENNESSEE: There are three primary tests for targeted populations: ownership, revenue, and employees. The ownership test requires at least 50 percent of owners to be members of low-income households by regulation. The customer test asks whether more than 50 percent of revenues come from low-income households. The employee test requires at least 40 percent of employees to be members of low-income households by regulation.

JOE HENNESSEE: Regulators set those minimums, but the bar has been raised in practice. CDEs, responding to the CDFI Fund and competitive pressure, often expect higher thresholds, more like 60 percent for owners, customers, and employees, so the effective market standard is closer to 60-60-60.

JOE HENNESSEE: Owners should theoretically be the easiest route because there are fewer people to document, but it's uncommon to find enterprises owned or controlled by low-income individuals in these tracts. The customer route often requires collecting household income information from customers, which can be sensitive and uncomfortable.

JOE HENNESSEE: The employees test is the most commonly used route. It balances the scale of information the sponsor already has versus what must be requested from third parties. Employees typically fit between owners and customers in terms of documentation burden.

JOE HENNESSEE: Keep in mind that household status is tested on a household basis. If an employee has a spouse or other household members who earn income, that income must be included. NMTC compliance is strict about acceptable documentation. School free or reduced lunch data alone is generally not accepted. The industry has accepted HUD household income forms or household 1040s as acceptable documentation for employees, customers, or owners.

JOE HENNESSEE: A common complication for the employees test is timing. Household income is tested at hire. NMTCs aim to improve economic outcomes, so if an employee's household income rises after hire, that doesn't jeopardize the original qualification. But documenting historical household income can be difficult for long-tenured employees.

JOE HENNESSEE: Whatever route you choose, owners, customers, or employees, start early. If records are incomplete or you need additional documentation, you need time to collect it. Early preparation lets you give a confident, responsive answer when CDEs and investors request proof of compliance.


HOST: JASON CALLAHAM: When CDEs evaluate transactions, they want to know what they'll need to do and that the business has its records in order. Some CDEs may not have much muscle memory for targeted populations, so it's important to present as strong a case as possible to attract multiple CDEs to the transaction.


JOE HENNESSEE: Exactly. Some CDEs get anxious due to lack of experience with targeted populations. Presenting organized, well-documented information helps make the deal competitive.


HOST: JASON CALLAHAM: Let's shift to impact and the stories these transactions tell. When a project is designed specifically for targeted populations, how do you define success beyond financial metrics? What does meaningful impact look like in practice?


JOE HENNESSEE: Underwriting focused on people leads me to assess core human outcomes. What services or outcomes improve life for the person and the household? Is the deal about increasing access to health care, daycare, or food distribution, or is it primarily about creating employment for low-income residents?

JOE HENNESSEE: The true metric is whether the project achieves its promised outcomes. Are we producing the early childhood education spots we promised? Are we distributing the expected food? If you're achieving the core needs and happen to use targeted populations to get there, that's an ideal outcome.


HOST: JASON CALLAHAM: The story you tell is what CDEs want to see to award allocation. If you have the needs assessment and demonstrable improvements in community outcomes, CDEs will be interested regardless of whether you're using targeted populations.

HOST: JASON CALLAHAM: Is there a recent example where you successfully used targeted populations, and what made it work?


JOE HENNESSEE: We recently worked with a client in Alaska developing a youth services facility. A nationally known organization's local chapter had outgrown its space and needed a new facility for before- and after-school programs and summer programming.

JOE HENNESSEE: Alaska presents unique challenges because census tracts can be geographically large with low population densities. A few higher-income residents can skew census data and render the tract ineligible under the traditional geographic route. Despite clear local need, the geography prevented qualification through the standard route.

JOE HENNESSEE: We worked closely with an investor in the Alaska CDE to pursue a targeted populations route. It was a long process with open communication about compliance and documentation. The investor and CDE asked for additional information and suggested we provide cushions above the 60 percent thresholds.

JOE HENNESSEE: We gave ourselves time, worked through the requests, and were able to finance an NMTC transaction for a nonprofit service provider in an Alaskan tract that didn't qualify under geographic criteria. The sponsor was ecstatic, and construction was completed with plans for a ribbon-cutting to open the site for local kids.


HOST: JASON CALLAHAM: That project demonstrates the collaboration and coordination required in NMTC transactions. Anyone who's done one has been on calls with dozens of stakeholders. How do we typically work together to ensure deals meet compliance needs while driving community outcomes?


JOE HENNESSEE: Communication is essential, but so are tools that allow stakeholders to do their homework and check diligence independently. We establish organized file-sharing systems, Smartsheet, Dropbox, or Box, so CDEs and investors can access backup documents on their own timeline.

JOE HENNESSEE: Working live in a shared system builds trust through transparency and speeds the process because stakeholders aren't waiting for a single packaged delivery. Timely communication and organized systems make complex transactions more manageable.


HOST: JASON CALLAHAM: With policy shifts and legislative updates, NMTC was recently made permanent in the tax code. What should listeners keep in mind when planning future NMTC projects, especially those focused on targeted populations?


JOE HENNESSEE: Making NMTC permanent relieved some industry uncertainty about the program's future. However, administrations may emphasize different outcomes, and it's hard to predict policy preferences.

JOE HENNESSEE: My advice is to keep doing what has worked and be ready to communicate outcomes in ways that align with different stakeholders' priorities. Also, be realistic about the complexity and timeline. NMTC transactions take time. Don't wait until you need financing in a few weeks or months.

JOE HENNESSEE: Engage consultants, CDEs, and investors early. 12 to 18 months ahead is not too early. Early conversations provide feedback on lanes and channels that fit your project.


HOST: JASON CALLAHAM: So for targeted populations deals, is it fair to say it's best to find someone who's done it before and use a consultant to get you to the finish line?


JOE HENNESSEE: Yes. NMTC is complicated, and targeted populations add another layer that few in the industry have strong muscle memory for. Find professionals who have recent experience and who can connect you with experienced third-party service providers, accountants and attorneys, so you avoid paying for someone else's learning curve.


HOST: JASON CALLAHAM: Thanks, Joe. I appreciate your expertise. Targeted populations can make NMTC transactions more complex, but they are a powerful tool when used thoughtfully.

HOST: JASON CALLAHAM: That's it for this episode of the Tax Services Podcast.


ANNOUNCER: If you have questions or ideas for future topics, we'd love to hear them. Thanks for listening, and we'll see you next time.