The New Market Tax Credit Scheme: An Underutilized Opportunity for Indian Country | Holland & Knight LLP
In place since 2000, the federal New Markets Tax Credit (NMTC) incentive has provided relief funding and cash injections to economically distressed communities for more than two decades. However, the amount of NMTC funds channeled to Native Americans and tribal lands is surprisingly low. In the last round of NMTC awards, for example, only one Indigenous entity received NMTCs, representing only 0.60% of the funding awarded. Additionally, the program has historically favored investment in urban areas over more rural areas, making investment in large parts of Indian Country less attractive to potential funding partners.
However, changes are expected due, in part, to a new initiative undertaken by the US Treasury Department Community Development Financial Institutions Fund (CDFI Fund), the organization responsible for administering the NMTC program. Announced in 2021, the CDFI Fund launched an NMTC Program Indigenous Initiative to increase investments in Federal Indian Reservations, Off-Reserve Trust Lands, Hawaiian Native Lands, and Alaska Native Village Statistical Areas (collectively , NMTC Native Areas), which historically lacked NMTC investments.
What is the New Markets Tax Credit Program?
The NMTC program is a Congressional tax credit incentive codified under Section 45D of the Internal Revenue Code. The program aims to encourage investment in businesses and real estate projects located in economically distressed communities and to provide more attractive loan products to low-income community businesses than what is traditionally offered in the market.
The NMTC is generated when a “qualified equity investment”, typically from an investment fund set up by a large corporation or institutional investor, is made into one or more “qualified community development entities” (CDEs) in exchange part of the NMTC allocated from the CDFI Fund. CDEs then use the funds from these investments to make one or more loans to a Qualified Active Low-Income Community Business (QALICB) that operates in a low-income community. Most often, a leveraged structure is used to inject additional liquidity into the investor’s entity, allowing for a larger “qualified capital investment” and ultimately a larger loan to the QALICB borrower. This structure serves several purposes: 1) it creates an incentive to invest in low-income communities by large investors seeking credit for their tax bill, 2) it reduces the cost incurred by a borrower to finance a large project, and 3) it promotes more favorable lending terms for QALICB borrowers, such as below-market interest rates and lower loan-to-value ratios.
The NMTC program is often successfully combined with other tax credit programs and sources of funding – such as the Federal Historic Rehabilitation Tax Credit, Low Income Housing Tax Credit (LIHTC) , the Opportunity Zone Program, and a number of comparable state tax credit programs – which, coupled with the NMTC program, can create additional investment incentives for financial partners and can generate additional funds for a given 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 NMTC.
How can an Indian country benefit from the New Market Tax Credit?
Tribes and organizations that serve tribal interests can participate directly in the NMTC program in the following ways.
- First, they can apply to be certified as a CDE, seek to earn an NMTC allowance, and make loans to projects in NMTC indigenous areas. Currently, there are 69 indigenous CDFIs, each of which could register for CDE status and be automatically granted. The CDFI Fund’s NMTC Program Indigenous Initiative aims to facilitate the process of applying for CDE status and granting award for Indigenous CDFIs and other tribal-affiliated entities.
- Second, an organization serving tribal interests can apply for funding from NMTC as a QALICB borrower. It does not require formal certification; a borrower need only meet certain program requirements, such as operating their business in a low-income community. Funds received from NMTC loans can be used for a number of real estate development projects in NMTC Indigenous areas – such as the construction of a new community facility, grocery store, museum, school or of a health center – or can be used to equip 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 professional training program.
Direct participation in the NMTC program does, however, present obstacles, including the large amount of effort and resources required to fund mobile NMTC. However, tribes and tribal organizations can also benefit indirectly from increased investment in NMTC’s indigenous areas, as even NMTC funding from non-indigenous investors, lenders and borrowers brings new facilities or improves the operations of the NMTC. existing businesses in the indigenous areas of the NMTC. These investments can also generate a number of new construction jobs as well as permanent jobs for the new project.
For tribes and affiliated organizations looking to invest in an NMTC project or find funding partners for their own NMTC project, there are a number of outlets available. The CDFI Fund website includes a NMTC Program Serviced States Database, which allows each NMTC winner to be sought after by the state or states they serve. Additionally, organizations like the Native CDFI network exist to advocate and focus on increasing the economic development of Indian countries as well as providing resources to those who seek to do so.
To this end, the CDFI Fund initiative hopes to encourage greater participation in the NMTC program by Indigenous-owned and controlled entities, as well as promote greater investment in Indigenous NMTC areas. On April 18, 2022, the CDFI Fund announced its selection of a contractor to conduct the work for the NMTC Program Indigenous Initiative. As the chosen contractor, Big Water Consulting LLC is responsible for producing a survey of historical NMTC lending practices in NMTC Indigenous areas, creating a self-assessment guide for use by entities owned or controlled by indigenous peoples and to organize technical workshops for these entities. These efforts aim to learn from past investments in NMTC Indigenous areas to inform best practices for such investments in the future as well as to equip and support existing and potential Indigenous CDEs and borrowers with tools to successfully use the NMTC program.
It will be imperative to monitor the progress of Big Water Consulting LLC as it investigates NMTC investments in NMTC Indigenous Areas. The results of its findings, along with the planned release of its self-assessment guide and training materials, are expected to drive the growth of NMTC’s investments in NMTC’s Indigenous areas.