The New Markets Tax Credit Scheme: An Underused Opportunity for the Indian Country | Holland & Knight LLP – Natural Self Esteem

In existence since 2000, the state’s New Markets Tax Credit (NMTC) stimulus has provided gap funding and cash injections in economically distressed communities for more than two decades. However, the amount of NMTC funds benefiting Native American and tribal areas is surprisingly small. For example, in the most recent round of NMTC grants, only one domestic company was awarded NMTCs, accounting for just 0.60 percent of the funds granted. Additionally, the program has historically favored investment in urban settings over more rural locations, making investment across much of Indian land less attractive to potential funding partners.

However, changes are expected, driven in part by a new initiative from the US Treasury Department’s Community Development Financial Institutions Fund (CDFI Fund), the agency responsible for administering the NMTC program. As announced in 2021, the CDFI Fund has launched an NMTC Program Native Initiative to make major investments in Federal Indian Reservations, Off-Reservation Trust Lands, Hawaiian Home Lands, and Alaska Native Village Statistical Areas (collectively, NMTC Native Areas) that NMTC investments have been lacking in the past.

What is the New Markets Tax Credit Scheme?

The NMTC program is a Congressional tax credit incentive codified under Section 45D of the Internal Revenue Code. The program is designed to encourage investment in businesses and real estate projects in economically troubled communities and to provide more attractive credit products for low-income community businesses than what is traditionally offered in the market.

The NMTC are generated when a “qualifying equity investment,” typically from a mutual fund established by a large corporation or institutional investor, is made in one or more “qualifying community development entities” (CDEs) in exchange for a portion of the NMTCs allocated thereto the CDFI fund. The CDEs then use the funds from such investments to make one or more loans to a qualifying active low-income community venture (QALICB) operating in a low-income community. Most often, a leveraged structure is used to inject additional money into the investor, allowing for a larger “qualifying equity investment” and ultimately a larger loan to the QALICB borrower. This structure accomplishes several goals: 1) it incentivizes investment in low-income communities by large investors seeking a credit against their tax bills, 2) it reduces the cost a borrower incurs in financing a large project, and 3) it promotes more favorable credit terms for QALICB borrowers, such as B. Interest rates below market value and lower loan-to-value ratios.

The NMTC program is often successfully combined with other tax credit programs and funding sources – such as which, in connection with the NMTC program, create additional investment incentives for financial partners and can generate additional funds for a specific project. Additionally, and unique to Native CDFIs, the Native American CDFI Assistance Program (NACA program) provides financial assistance and technical assistance grants to Native CDFIs for use in projects that may also qualify for NMTCs.

How can the Indian country benefit from the new market tax credit?

Tribes and organizations serving tribal interests can participate directly in the NMTC program in the following ways.

  • First, they can get certified as a CDE, attempt to win an NMTC award, and provide loans for projects in NMTC areas. There are currently 69 native CDFIs, any of which could register for and be automatically granted CDE status. The CDFI Fund NMTC Program Native Initiative seeks to simplify the process of applying for CDE status and profit allocation for native CDFIs and other tribe-affiliated entities.
  • Second, an organization serving tribal interests can apply for NMTC funding as a QALICB borrower. No formal certification is required for this; A borrower only has to meet certain program requirements, such as: B. Operating his business in a low-income community. Funds received from NMTC loans can be used for any number of real estate development projects in NMTC indigenous lands – such as: For example, building a new community facility, grocery store, museum, school, or health center—or equipping an existing business with new materials such as machinery for a factory, medical equipment for a dentist’s office, or computer-aided design equipment for a vocational training program.

However, direct participation in the NMTC program comes with obstacles, including the large effort and resources required for mobile NMTC funding. However, tribes and tribal organizations may also benefit indirectly from increased investment in NMTC indigenous lands, as even NMTC financing from non-native investors, lenders and borrowers results in new facilities or improved operations of existing businesses in NMTC indigenous lands. Such investments can also generate a number of new construction jobs as well as permanent jobs for the new project.

A number of outlets exist for tribes and affiliated organizations wishing to invest in an NMTC project or find financial partners for their own NMTC project. The CDFI Fund’s website contains an NMTC Program States Served Database that makes each NMTC awardee searchable by the state(s) they serve. Additionally, there are organizations such as Native CDFI Network that are dedicated and focused on increasing the economic development of the Indian country as well as providing resources to those who wish to do so.

To that end, the CDFI Fund initiative hopes to encourage greater participation in the NMTC program by indigenously owned and controlled entities, as well as encourage greater investment in NMTC indigenous lands. On April 18, 2022, the CDFI Fund announced its selection of a contractor to conduct the work of the NMTC Program Native Initiative. As a selected contractor, Big Water Consulting LLC is tasked with preparing a review of historical NMTC lending practices in NMTC indigenous lands, preparing a self-assessment guide for use by indigenously owned or controlled companies, and conducting technical workshops for such companies. Such efforts aim to learn from past investments in NMTC Native Areas, to inform best practices for such future investments, and to equip and support existing and potential Native CDEs and borrowers with tools to successfully utilize the NMTC program.

It is imperative to monitor the progress of Big Water Consulting LLC as it conducts its study of NMTC investments in NMTC indigenous lands. The results of his findings, along with the anticipated release of his self-assessment guide and training materials, are expected to spur the growth of NMTC investment in NMTC indigenous lands.

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