Built on the foundation of the Tax Management Portfolios™, Bloomberg BNA Tax & Accounting is a comprehensive tax research solution designed by tax practitioners for tax practitioners.
By Lee Sheller, Esq.
DLA Piper LLP (US), Baltimore, MD
The new markets tax credit (NMTC) is a federal subsidy that can be utilized by businesses (including tax-exempt entities) with operations in low-income communities. As the economy begins to thaw and companies seek to embark on new construction projects, this subsidy may prove useful.
NMTCs were established by Congress specifically to create jobs and drive investment in low-income communities. The credit is typically utilized by a real estate developer or by a non-real estate business constructing a real estate project located in an eligible low-income community.1
Eligible low-income communities are those census tracts where the poverty rate is at least 20% or the median family income is 80% or less of statewide or metropolitan area median income. These census tracts include many inner-city neighborhoods in major cities and many rural communities throughout the United States.
Notably, the credit is notavailable for residential rental property, which is a building where 80% or more of the gross rental income comes from dwelling units.
The process of obtaining an NMTC can be quite intricate. Furthermore, the amount of NMTC is limited and must be obtained from a qualified community development entity which has been granted the ability to allocate NMTC by the Community Development Financial Institutions Fund in the Department of the Treasury. The business developing the project (the developer) accesses the credit through a complicated structure which optimally results in an investor obtaining a 39% income tax credit from the federal government on the funds the developer invested in the project, other than money which the company borrows from traditional mortgage lenders (the developer's funding). The developer's funding will typically consist of the developer's equity and other funds such as government grants and, in the case of tax-exempt developers, charitable contributions, for which the funding source does not require a mortgage on the property.
The subsidy realized by the developer, net of the costs of the transaction, will vary based on the particular facts of the development, but is typically about 20% of the developer's funding.
Transaction costs to implement an NMTC transaction can be high. Usually, the total project cost should be at least US$15 million to make using NMTCs worthwhile. Developers who have lined up most of their financing and need to fill a gap in the financing are good candidates to use the NMTC subsidy. Furthermore, developers who can demonstrate to the qualified community development entity that their project will produce a significant number of jobs or bring another compelling advantage to the community have the best chance to be allocated an NMTC subsidy.
As developers look for ways to resume construction across the country, this federal program may be a valuable addition to the set of financial considerations.
Copyright © 2011 DLA Piper. All rights reserved.
For more information, in the Tax Management Portfolios, see Maule, 597 T.M., Tax Incentives for Economically Distressed Areas, and in Tax Practice Series, see ¶3170, Other General Business Credits.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)