Q: I am a prospective borrower. What other information should I know?

A: Please refer to our Borrower FAQ for more details. Then, if you would like to apply, please click on the "Application" tab on your left.

Q: What is the New Markets Tax Credit?

A: It is a program that was passed by the US Congress on December 21, 2000 as part of the Community Renewal Tax Relief Act of 2000.

• Creates a 39% tax credit for investors that place equity investments in the CDEs
• The credit is taken at the rate of 5% of the total investment in each of the first three years, and 6% in each of the final four years
• Community Development Entities (CDEs) must loan or invest in low income areas (Non-housing lending/investment only)
• Capital is invested and harvested by the CDE and not distributed for 7 years

Example:
The CDFI Fund awards a tax credit allocation of $1 million to a CDE. The CDE offers the tax credit to investors. Ten investors each invest $100,000 in return for the tax credit. How much can each investor claim as a tax credit?

The total New Market Tax Credit will be $390,000. Each investor will realize a $39,000 credit to be taken over a seven year period; $5,000 in each of the first three years and $6,000 during each of the remaining four years.

Q: Are there any New Market Tax Credits available locally?

A: Yes. The US Department of the Treasury awarded Kitsap County NMTC Facilitators I, LLC, $40 million in New Market Tax Credits to be used as incentives for businesses to invest in Bremerton, Washington. KC NMTC Facilitators I, LLC, was one of only 103 organizations nationwide, and the only organization in the Puget Sound region with an award. The $40 million award is the largest in Washington State.

Q: How many credits are available nationwide?

Q: What is a qualified CDE?

A: A Community Development Entity is a domestic corporation or partnership that:

• Has the primary mission of serving, or providing investment capital for, low-income communities or persons
• Maintains accountability to the community - community representation on the board or an advisory board
• Is certified by the U.S. Treasury Department

Q: How is the NMTC used?

A: The NMTC is used in the following ways:

• CDEs have 5 years from the date on which they enter into Allocation Agreements to exchange NMTCs for Qualified Equity Investments (QEIs)
• "Substantially All" of the cash received in exchange for the tax credits must be used to make Qualifying Low-Income Community Investments
• Throughout the credit allowance period, the CDE must maintain its status as a CDE

Additional information & definitions:

CDE Primary Mission

A CDE must be able to demonstrate that at least 60% of its activities are directed to any of the following:

• Low-income persons
• Individuals, businesses, or organizations located in low-income communities
• Organizations that principally serve low-income persons or residents of low-income communities

CDE Accountability

To ensure that CDEs maintain accountability to the residents of the Low-Income Communities they serve or expect to serve:

• The CDE must be able to demonstrate that at least 20 percent of its governing board or 20 percent of its advisory board(s) is representative of the Low-Income Communities within the selected service area

Qualified Equity Investment

• Stock in an entity that is a corporation and any capital interest in a partnership. (Equity investment could be structured in a way to have similar characteristics as debt)
• Investment is acquired at its original issue solely in exchange for cash
• Substantially all of such cash is used by the CDE to make qualified low income community investments
• Must be made within 5 year period after CDE Allocation Agreement with Treasury

Qualified Low-Income Community Investment

• Any investment in or loan to a qualified active low income community business
• Purchase of any qualified loan made by a CDE (can qualify at time selling CDE made the loan or at the time the loan is purchased from the selling CDE)
• Financial counseling and other services provided to any qualified business or resident of a low income community
• Any equity investment in or loan to any CDE, but only to the extent that the CDE in which the equity investment or loan is made uses the proceeds of the investment or loan would constitute a qualified low income community investment

What Areas Qualify as Low-Income?

• Census tracts with at least 20 percent poverty, or
• Census tracts where the median family income is below 80 percent of the area median family income (Map of Qualified Census Tracts in Bremerton)

Qualified Active Low-Income Community Business

A corporation, partnership, or sole proprietorship, or a portion of such business, that:

• At least 50% of total gross income is derived from active conduct of a qualified business within any low income community. (This requirement is met if B or C is at least 50%)
• At least 40% of the use of the tangible property is in a qualified community
• At least 40% of the services performed for the entity by its employees are in a qualified community
• No more than 5% collectibles
• No more than 5% financial property

Qualified Business Activity

• Any Trade or Business not excluded by the regulations
• Rental of improved real property allowed only if the property is not residential rental property
• Categorically excluded are: Golf course, country club, massage parlor, hot tub facility, suntan facility, race track, gambling establishment, and sale of alcoholic beverages for consumption off premises
• Farming is excluded to the extent that total assets exceed $500M

Qualification of "active, low income community business"

• In general, an entity is treated as a qualified active low income community business for the duration of the CDE's investment, if the CDE reasonably expects, at the time of investment/loan, that the entity will satisfy the requirements throughout the entire period
• Exception for control: If the CDE owns more than 33% of the business, the business must qualify throughout the period of ownership

Repayments of, or for, capital, equity or principal

• In general, amounts received by a CDE prior to the seventh year must be reinvested by the CDE in a qualified investment no later than 12 months from the date of receipt to be treated as continuously invested
• Calculation of basis is adjusted by losses
• Special rule for loans - payments of principal must be reinvested by the end of the following calendar year
• Payments received in 7th year need not be reinvested

Recapture events

• If the entity ceases to be a CDE
• If proceeds of the investment cease to be used in a manner that satisfies the substantially all requirement
• If the investment is redeemed by the CDE
• Bankruptcy of the CDE is NOT a recapture event

Recapture penalties for CDEs

• Penalty is onerous - recapture of tax credit plus non-deductible interest
• Triggered by losing CDE status or failure to use proceeds as required

Fee Structure

• Kitsap County NMTC Facilitators I, LLC will negotiate a fee for packaging and administering the New Market Tax Credits

For More Information Contact:
CDFI Fund Website: www.cdfifund.gov
Chuck Depew, Consultant, 206.419.3904
Email: Chuck Depew

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