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By Liz Nickerson
A key component of the financing for the A.E. Coffin Press Lofts
initiative in New Bedford, Massachusetts, was the New Markets Tax
Credits (NMTC) program.
"We never would have gotten the Coffin Lofts project closed
without the New Markets Tax Credits," says Andrew P. Burnes,
principal of HallKeen LLC, a developer of the Bank-supported initiative.
"They provided an additional source of investment to get these
buildings renovated."
The NMTC program provides a tax incentive for community-development
lenders and the capital markets to invest in areas that have historically
experienced poor access to credit. The program is designed to bring
private investment capital to commercial enterprises in low-income
communities.
Created by passage of the Community Renewal Tax Relief Act of 2000,
the program allocates investment authority through competitive application
rounds administered by the Community Development Financial Institutions
(CDFI) Fund, a branch of the U.S. Department of the Treasury. To
date, $6 billion has been awarded to community development entities
(CDEs), and applications for an additional $2 billion are currently
being evaluated.
The NMTC program is similar to the Low Income Housing Tax Credits
(LIHTC) program in that it permits taxpayers to receive a credit
against federal income taxes for making qualified equity investments
in designated CDEs. However, unlike LIHTC, the NMTC program is based
on the amount of the investment (as loans or equity) by the taxpayer
who claims the credit, not on the cost of the asset or business
receiving the investment. The credit totals 39 percent of the investment
and is claimed over a seven-year period. Investors may not redeem
their investments in CDEs prior to the end of the seven-year credit-allowance
period.
In order to qualify for NMTC, an investment must be made in a business
in a low-income community, which is defined as a census tract with
a poverty rate of 20 percent or more, or a census tract with a median
income that does not exceed 80 percent of the statewide median income
(if located in a non-metropolitan area), or 80 percent of the metropolitan-area
median income (if located in a metropolitan area).
In addition, only equity investments in CDEs qualify for tax credits.
A CDE may be formed as a domestic corporation or partnership and
must meet three requirements: have a primary mission of providing
investment capital for qualified active businesses in low-income
communities; have a governing board or advisory board accountable
to residents of the community; and be certified by the CDFI Fund.
CDEs must use "substantially all" (at least 85 percent
of aggregate gross assets) of the invested dollars received to make
qualifying investments. These investments must fall under one of
four categories: a loan or equity investment to a qualified active
low-income community business; an equity investment in or loan to
a CDE; the purchase of a loan to a qualified business from another
CDE; or the provision of financial counseling or other services
to businesses or residents of a low-income community. A qualified
business must be located in a low-income community and have a substantial
connection to that community.
The Coffin Lofts developers say the NMTC program is especially
applicable to downtown development initiatives eligible for historic
tax credits, since the additional project equity generated by their
use increases the qualified investment upon which an allocation
of NMTC is based.
"The Coffin Lofts buildings are key historic components of
downtown New Bedford, but they were not in great condition,"
says Mr. Burnes. "The New Markets Tax Credits provided additional
resources to deal with those added costs. We were one of the first
New Markets Tax Credits projects to get underway in Massachu-setts,
and one of the pioneers nationally."
Liz Nickerson is senior community investment manager at the Federal
Home Loan Bank of Boston.
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