About the New Markets Tax Credit Program: How it Works
A typical New Markets Tax Credit (NMTC) transaction involves five major parties:
- An NMTC Equity Investor (Investor)
- A Leverage Lender
- An Investment Pooling conduit (Investment Fund)
- A special purpose Community Development Entity managed by CEI Capital Management or other NMTC Allocatee
- A qualified Borrower/Project
Funding the Investment Pool
Together the Investor and Lender capitalize an Investment Fund (100% owned by the Investor) for the required project amount, plus any upper tier fees and expenses.
The Investor’s equity contribution is driven by the price paid per credit, with the Leverage Lender (in conjunction with any necessary subordinated lender(s)) making up the difference with debt capital. For example, at $0.80 per credit*, the Investor would contribute 31.2% of the required funds as equity and the Lender would supply 68.8% as debt. The higher the price paid by the Investor, the greater the equity portion, which would result in a lower blended interest rate to the Borrower and lower required debt capital. Please note that while CEI Capital Management will endeavor to assist in facilitating the proposed transaction, it shall in no way be obligated to identify, attract, or secure the NMTC equity and leverage debt necessary to effectuate a valid NMTC transaction.
Making the Qualified Equity Investment (QEI)
The Investment Fund makes a Qualified Equity Investment (QEI) into a Community Development Entity (CDE) managed by CEI Capital Management or other NMTC Allocatee, after which the Investor, as 100% owner of the Investment Pool, is eligible to receive 39% of the total QEI amount as credits toward their Federal tax liability. For example, the Investor would receive $3.9 million in New Markets Tax Credits for a $10 million QEI.
The 39% is paid out incrementally over the seven year compliance period, with 5% being paid in years one to three and 6% being paid each year thereafter (5%+5%+5%+6%+6%+6%+6=39%)
Making the Qualified Low-Income Community Investment (QLICI)
Typically on the same day as the QEI is received, but at a minimum within 12 months of receipt, the CDE must make a Qualified Low-Income Community Investment (QLICI) to the Borrower, a Qualified Active Low-Income Community Borrower (QALICB/Borrower).
The QLICI rate is generally derivative of the amount(s), interest rate(s), and term(s) of the loan(s) made to the Investment Fund, the annual asset management fees charged by the CDE manager, and annual tax and accounting costs for the CDE and Investment Fund. The QLICI loans emanating from a CEI Capital Management sub-CDE are typically* below-market rate and interest-only for the seven-year NMTC compliance period.
Utilizing the Loan Proceeds and Loan Compliance
The QALICB/Borrower must generally utilize all loan proceeds within 12-18 months of the QLICI closing date. The QALICB/Borrower will make regularly debt service payments to the CDE, who will distribute the funds back up the structure to the appropriate parties. The QALICB/Borrower is also required to regularly report to the sub-CDE on financial performance, program compliance, and project impacts.
Completing the NMTC-Compliance Period
Upon the seven-year anniversary of the QLICI date, the QALICB/Borrower should anticipate refinancing the NMTC QLICI debt.
* The situations described above are for illustration purposes only and are not a guarantee of rates or pricing.